10-K/A 1 k01a2b.txt FORM 10-K/A #2 FOR DECEMBER 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K/A Amendment #2 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 Commission file number 0-24712 METROLOGIC INSTRUMENTS, INC. A New Jersey Corporation I.R.S. Employer Identification No. 22-1866172 90 Coles Road Blackwood, New Jersey 08012 856-228-8100 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. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of April 12, 2002 was $18,862,362 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 May 28 , 2002 there were 5,465,605 shares of Common Stock outstanding. PART I Item 1. Business Introduction This second amendment on Form 10-K/A (the "2nd Amendment") amends the Registrant's Annual Report on Form 10-K filed by the Registrant on April 16, 2002, as amended by Form 10-K/A on April 30, 2002 (filed to complete Part III), and is being filed to include in the Registrant's Annual Report on Form 10-K the opinion of the Registrant's independent auditors and to report certain updates to Item 3 of Part I, "Legal Proceedings" and changes to Item 7 of Part II, "Management's Discussion and Results of Operations." While the Company signed a definitive term sheet on May 15, 2002 with its lenders with respect to an amendment to the Company's Credit Facility, the Company has been unable to complete and execute such definitive amendment as of May 28, 2002. Because the amendment has not been executed, the Company remains in default under the terms of its Credit Facility. As a result the opinion of the Company's independent auditors for the Company's fiscal 2001 financial statements contains a going concern qualification. Metrologic Instruments, Inc. ("Metrologic" or the "Company") designs, markets, and manufactures sophisticated imaging systems using laser, holographic, vision-based technologies; high-speed automated data capture solutions, and bar code scanners. Metrologic's core technology includes the capability to scan and decode one-dimensional (linear) bar codes. In recent years, Metrologic's capabilities have expanded to include vision-based technologies providing two-dimensional bar code reading and optical character recognition-compatible image lift. Other significant products include parcel dimensioning and singulation detection devices. The Company's automatic identification products as described above serve customers in retail, commercial, manufacturing, transportation and logistics, and postal and parcel delivery industries. Metrologic's acquisition of Adaptive Optics Associates, Inc. ("AOA") in January 2001, has broadened the Company's product offering to include laser beam delivery and control products for semiconductor and fiber optic manufacturing equipment, wavefront sensor products and adaptive optics systems for certain government applications. AOA also adds significant capabilities and expertise in vision, image processing, systems integration, adaptive optics and high-end refractive optical disciplines. In addition to its extensive line of bar code scanning and vision system equipment, the Company also provides a complete line of educational laser products to schools and universities. The Company is vertically integrated; designing and manufacturing its own optics, optical coatings, magnetic and inductive electronic components and fabricated parts. The Company produced more than 435,000 finished products in 2001. Metrologic employs approximately 919 people worldwide (following a recent reduction in workforce) and sells its products in more than 100 countries through Metrologic's sales, service and distribution offices located in North and South America, Europe and Asia. The Company's principal subsidiaries include: AOA; Metrologic Instruments GmbH; Metrologic Asia (Pte) Ltd.; Metrologic do Brasil Ltda (51% joint venture); Metro (Suzhou) Technologies Co., Ltd.; Metrologic Eria Iberica, SL (51% joint venture); Metrologic Italia S.r.l.; Metrologic Eria France SA (51% joint venture); Metrologic Instruments UK Limited; and Metrologic Japan Co., Ltd. Metrologic 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: 856-228-8100; web site: www.metrologic.com. The Company's Products Metrologic bar code scanners use visible laser diodes, incorporating custom integrated circuits and surface mount components for the majority of their electronics. In addition, the Company's scanners use proprietary software, including ScanSet(R), MetroSet(R) 2, and Bits `n' Pieces(R) configuration utilities and ScanSelect(R) and MetroSelect(R) bar code configuration booklets via bar code menus, 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 algorithms provide the capability of high speed and aggressive decoding. The Company's scanners interface into most computers, programmable logic controllers, point-of-transaction devices (e.g., cash registers), mobile computing terminals and internet-ready appliances. Laser bar code scanners are the Company's predominant products and accounted for 72.4%, 89.7%, and 92.7% of the Company's sales in 2001, 2000, and 1999, respectively. The following laser bar code scanners have historically accounted for a substantial portion of the Company's product revenues. Retail Scanners: Hand-held Since November 2001, the Company has offered the MS5145 Eclipse(TM) mid-level hand-held scanner. Designed and developed by Metro (Suzhou) Technologies Co., Ltd., Eclipse's reduced-size form factor, feature set and price point is designed to penetrate the demanding worldwide retail marketplace. Eclipse incorporates Metrologic's patented CodeGate(R) data transmission technology for total operator control of scanned barcodes. Since January 2000, the Company has offered the Voyager(R) series of single-line hand-held bar code scanners. These scanners are equipped with the Company's patented automatic trigger technology; the MS9540 VoyagerCG(R) expanded on this technology with Metrologic's CodeGate data transmission. The combined technologies allow the Company to compete head-to-head in applications previously dominated by manually triggered scanners. These applications include retail point-of-sale, menu-scanning, document processing, library, pharmaceutical, pcb work-in-process, coupon processing and inventory. Since January 2000, the Company has offered the MS6220 Pulsar(R) single-line hand-held bar code scanner. This scanner represents the Company's entry-level product and is designed to compete with low-cost Charged Coupled Devices (CCD's). The product features the high-speed and accuracy of laser scanner with the working range and cost of a typical CCD. The product is marketed for use in large-retail applications. Since September 1996, the Company has offered the MS6720 Omnidirectional hand-held bar code scanner. This product is designed for use as both a hand-held as well as a fixed scanner for applications such as specialty stores, do-it-yourself stores, convenience stores and pharmacies. Since February 1996, the Company has offered the MS6130 Wireless, hand-held bar code scanner. This product is equipped with the patented automatic trigger and can be used in a wide variety of applications including point-of-sale, warehouse and inventory. Since 1990, the Company has offered a wide variety of hand-held bar code scanners incorporating a patented infrared sensor and control scheme for automatically triggering a bar code scanner. This unique invention allows the user to simply present bar codes to the product without the need to manually activate the scanner. Retail Scanners: Fixed Projection In January 2002, the Company introduced the MS7320 InVista(TM) with shipments beginning in the first quarter 2002. The InVista is a fixed omnidirectional laser bar code scanner including an integrated Electronic Article Surveillance (EAS) deactivation antenna, firmware updates via Flash ROM, field replaceable window, user-replaceable cables and an auxiliary port for adding peripherals as standard features. The MS7320 is designed to meet the demands of grocery store, supermarket, convenience store, and specialty store environments. In January 2002, the Company introduced the MS7600 Series Horizon(TM) with shipments beginning in the first quarter of 2002. The Horizon is Metrologic's next generation of in-counter scanners. These scanners produce a dense omnidirectional scan pattern helping to provide fast, efficient throughput. Horizon is available with either a stainless steel or a high impact plastic top plate, both models come standard with an integrated EAS deactivation antenna, durable die-cast construction, firmware updates via Flash ROM, field replaceable window, user-replaceable cables and an auxiliary port for adding peripherals as standard features. The MS7600 Series is designed for use in grocery store, supermarket, retail and coupon redemption applications. In January 2001, the Company introduced the MS7220 ArgusScan(TM), fixed omnidirectional bar code scanner. For use in point-of-sale applications such as grocery, pharmacy and specialty applications such as libraries and document processing. The MS7220 ArgusScan's features include multiple mounting options, a hand-held scanner port and multiple interfaces. In January 2001, the Company introduced the MS6520 Cubit(R) fixed, mini-omnidirectional bar code scanner. This product is the Company's entry-level offering and is equipped with a durable housing for use in harsh environments and many point-of-sale applications including convenience, apparel and specialty stores. Since October 1998, the Company has offered the MS7120 Orbit(R) mini-omnidirectional bar code scanner. This product offers the high-speed and performance of higher-end products, in a unique, ergonomic housing without taking up valuable counterspace in convenience, apparel, liquor and specialty stores. The MS7120 is designed as a fixed presentation scanner, but its contoured housing allows it to be picked up for scanning bulky or heavy items. Since September 1990, the Company has offered the MS700i Series of high performance fixed projection scanners. By projecting an omnidirectional pattern at high speeds, the MS700 is capable of reading bar codes in different orientations and angles. The product is sold for use in applications requiring high-speed, high-volume scanning, such as grocery stores, magazine distribution and processing centers and discount warehouses. Since 1985, the Company has offered in-counter Slot scanners. Since 1991, the Company has offered the MS860 Mini-Slot(R) scanner for use in supermarkets. The MS860 can be mounted easily into countertops and integrated into scales for high-volume in-counter scanning applications. Original Equipment Manufacturer (OEM) Scanners Since March 1999, the Company has offered the IS6520 Cubit line of omnidirectional bar code scanning engines. This product is used in OEM applications such as time/attendance, kiosks, price-lookup and reverse vending. The scanner was designed with a high-speed automatic scanning system in a small, easy-to-mount housing. Since August 1994, the Company has offered the IS4120 ScanQuest(R) single-line scan engine. The IS4120 is enclosed in a small metal housing that protects the optical and electronic components that are typically exposed in competitive type offerings. The product is equipped with a patented automatic trigger and is used in applications such as mass-storage devices, kiosks, blood analyzation devices and as the scanning component of a bar code scanner. Industrial Scanners Since February 2001, the Company has offered its iQ high-speed camera-based industrial imaging systems, which are the predominant systems sought by companies in the parcel postal handling industries. The iQ180 is an all-in-one information acquisition system that offers linear and two-dimensional bar code reading, OCR-compatible image lift, parcel dimensioning, and speed detection in a single, self-contained unit. Applications include revenue recovery, transportation logistics and route planning. Since 1996, the Company has offered its HoloTrak(R) line of holographic scanners, which utilize Metrologic's proprietary holographic technology, offering increased scanning performance at a more affordable price than similar fixed industrial-use omnidirectional scanners. HoloTrak's many different models are used by manufacturers, distribution centers and parcel handling companies to track work-in-process, assist with truckload planning and perform a variety of related applications. The HoloTrak family contains the IS8000 Series for walk-under and moderate speed conveyor applications and the C Series for high-speed, high volume conveyor applications, in addition to fully automated scanning tunnels that offer optional weighing, dimensioning and parcel tracking capabilities. Since 1991, the Company has offered its TECH Series of close-range industrial scanners. Designed to withstand the rigors associated with equipment used in industrial environments, and capable of being mounted in any orientation, TECH Series scanners are generally used in conveyor belt or other industrial applications requiring automated scanning capability. There are three models, each offering a different depth-of-field. Portable Data Terminal Since September 2001, the Company has marketed ScanPal(R)2 a high performance, entry level, batch portable data terminal (PDT) with integrated bar code scanner. ScanPal 2 is suited for a diverse range of applications such as inventory/stock control, parts tracking, shipping/receiving, and price checking. Markets including retail, healthcare, manufacturing, and warehousing are among those typically using PDT's. Price Verifier Since November 2001, the Company has offered the ScanVue(R) that brings full-color graphical advertising and customer entertainment to an automated in-store price check system. ScanVue has features such as a bright color LCD screen, accurate price verification, a variety of mounting options and customization options. The ScanVue provides the retailer with an opportunity to increase consumer spending while at the same time receive revenue from suppliers by charging for advertising space. ScanVue is appropriate for any retail application including department stores, specialty stores, supermarkets, home improvement centers and automotive stores. Adaptive Optics Associates Product Line AOA's capabilities are organized into two distinct strategic initiatives of Industrial Scanning Systems and Optical Systems. Leadership responsibility for these entities is based at Adaptive Optics Associates, in Cambridge, MA. Industrial Scanning Systems includes the industrial products and systems, including the HoloTrak holographic laser scanners, that were previously organized, developed, marketed and sold by Metrologic prior to the acquisition of AOA. Certain of the development and sales efforts will remain at the Blackwood, NJ facility under the direction of AOA. Industrial Scanning Systems Since 1994, Industrial Scanning has provided custom designed products and worldwide field service for specialized scanning, dimensioning, and sortation control systems to Industrial Scanning customers. Since February 2001, the Company has offered its iQ high-speed camera-based industrial imaging systems. Imaging systems are rapidly becoming the predominant systems sought by companies in the industrial parcel and postal handling industries. The iQ180 is an all-in-one information acquisition system that offers linear and two dimensional bar code reading, OCR-compatible image lift, parcel dimensioning, and speed detection in a single, self-contained unit. Applications include revenue recovery, transportation logistics, and route planning. Since 1996, the Company has offered its HoloTrak line of holographic scanners, which utilizes Metrologic's proprietary holographic technology, offering increased scanning performance at a more affordable price than similar fixed industrial-use omnidirectional scanners. HoloTrak's many different models are used by manufacturers, distribution centers, and parcel handling companies to track work-in-process, assist with truckload planning, and perform a variety of related applications. The HoloTrak family contains the IS8000 Series for walk-under and moderate speed conveyor applications and the C Series for high-speed, high volume conveyor applications, in addition to fully automated scanning tunnels that offer optional weighing, dimensioning, and parcel tracking capabilities. Since 1991, the Company has offered its TECH Series of close-range scanners. Designed to withstand the rigors associated with equipment used in industrial environments, and capable of being mounted in any orientation, TECH Series scanners are generally used in conveyor belt or other industrial applications requiring automated scanning capability. There are three models, each offering a different depth-of-field. Optical Systems Since 1998, Optical Systems has offered the Wavescope(R) wave front sensing product line. Wavescope is a product used to measure optical aberrations and has applications in atmospheric adaptive optics, retinal imaging, and laser communications. There are various versions depending on the application. Since 1990, Optical Systems has offered Monolithic Lenslet Modules (MLM), arrays of micro lenses, with applications in atmospheric adaptive optics, retinal imaging, and laser communications. Various MLMs are offered including standard models as well as custom designed versions. Since 1996, Optical Systems has provided laser beam delivery systems dedicated to the high quality transport and conditioning of light from its laser source to its ultimate destination at a tool. These beam delivery systems are custom designed according to a variety of specifications including wavelength. Since 1998, Optical Systems has provided opto mechanical and electro-optical design and production services for specialized systems that have both government and commercial applications and include tactical missile defense, fiber communications, metrology, atmospheric adaptive optics, retinal imaging, and laser communications. Research and Product Development The Company conducts its own engineering programs for the purposes of developing new products, developing derivations of existing products, improving its existing products' reliability, ergonomics, and performance and reducing material, manufacturing and support costs. The Company is engaged in continuous development programs in the areas of optics, holography, electronic imaging, image processing, electronics, software, mechanics and automated manufacturing methods. The Company's research and development organization is made up of Advanced Development, New Product Development and Optical Systems R&D. During 2001, the Company continued to refine the roles and organizations of Advanced Development and New Product Development and separated the management of the respective personnel. Advanced Development is responsible for driving technological breakthroughs and working on technologies, products and processes not already marketed by the company. New Product Development is responsible for the structured engineering and development required for timely introduction of new products to the market. Advanced Development efforts for the year 2001 were focused on the development of vision-based technologies for the iQ series of products, advancing and miniaturizing iQ laser illumination for use in products beyond iQ180, upgrading technology in existing products and cost reductions. New Product Development efforts for the year 2001 were focused in the following areas: product introductions including the MS5145 Eclipse, MS7220 ArgusScan, MS6520 Cubit enhancements, USB interface converter, QTrace(TM) parcel dimensioner, QTroller(TM) industrial command center and iQ180 3D image acquisition system; Metrologic's point-of-sale bar code scanners' support of Checkpoint's(R) Electronic Article Surveillance system. Optical Systems R&D efforts for the year 2001 were focused on new software release for Wavescope adding additional user capability; and manufacturability improvements for the laser Beam Delivery System. During 2001, 2000, and 1999, the Company incurred expenses of approximately $6.5 million, $5.0 million, and $4.3 million, respectively, on costs associated with research and development. Sales and Marketing The Company sells its products through distributors, value-added resellers ("VARs"), 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 the Company's European customers. During 2001, the Company worked on strategies and logistics to relocate Metrologic's offices in Brazil and Singapore. These facilities will be newer, larger, and have the capability to expand Metrologic's manufacturing capacity. In March 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 1999 and remains the exclusive sales office for the Company's South American customers outside of Brazil. In July 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 November 1998, the Company established Metrologic Instruments Italia, S.r.l. to serve the Italian market. In February 1999, the Company established an engineering and manufacturing facility, Metro (Suzhou) Technologies Co., Ltd., located near Shanghai, China. In January 2000, the Company completed a joint venture agreement providing for a 51% equity interest in Metrologic Eria Iberica SL, ("MEI") located in Madrid, Spain, to exclusively serve the Iberian market. In March 2002, MEI received a notice from the minority shareholders of their intent to sell their collective 49% interest in MEI. Under the Shareholder's Agreement, the majority shareholder has a 12-month period in which to find a buyer or negotiate a purchase price for the 49% interest, with a default minimum. In February 2000, the Company established Metrologic Instruments UK Limited to better serve the northern European territories of the UK, Scandinavia and Benelux. In July 2000, the Company completed a joint venture agreement providing for a 51% equity interest in Metrologic Eria France SA, located in Roissy, France, just outside of Paris to exclusively serve the French market. On December 22, 2000, Metrologic initiated the acquisition of Adaptive Optics Associates, Inc. (AOA); the acquisition was completed on January 8, 2001. In January 2001, the Company established a sales, service and distribution office, Metrologic Japan Co., Ltd., in Tokyo, Japan. The Japanese office, working with Metrologic's Singapore office and Chinese facility, provides customers throughout Asia with rapid responses to questions, prompt delivery of products, and on-site customer service. 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 following table sets forth certain information as to the Company's sales by geographical location: (amounts in thousands) Year Ended December 31, -------------------------------- 2001 2000 1999 ---- ---- ---- North America $26,505 $36,716 $33,698 AOA 24,259 - - Europe 46,990 36,436 33,906 Rest of World 15,934 18,732 12,499 -------- ------- ------- Total $113,688 $91,884 $80,103 ======== ======= ======= Most of the Company's product sales in Western Europe, Brazil and Asia are billed in foreign currencies and are subject to currency exchange rate fluctuations. A significant percentage of the Company's products are manufactured in the Company's U.S. facility in 2001, and therefore, sales and results of operations are affected by fluctuations in the value of the U.S. dollar relative to foreign currencies. In addition, manufacture of the Company's POS products in its Suzhou, China facility is expected to increase in 2002, which will partially mitigate the profit impact of foreign exchange rate fluctuation with reduced labor costs in the Company's POS scanners. Accordingly, in 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. Backlog As of December 31, 2001, the Company had approximately $9.1 million in backlog orders. All such backlog orders are anticipated to be filled prior to December 31, 2002. As of December 31, 2000, the Company had approximately $3.3 million in backlog orders, of which substantially all were filled during the 2001 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. Competition The bar code scanning industry is highly competitive. The Company's scanners compete primarily with those produced by US manufacturers Accu-Sort Systems, Inc., Microscan Systems, Inc., NCR Corporation, PSC, Inc., Symbol Technologies, Inc., Intermec (Unova), Hand Held Products, Inc. (a Welch Allyn affiliate); European manufacturers Datalogic, Inc. located in Italy, Sick AG and Vitronics located in Germany; and Asian manufacturers Nippondenso ID Systems, Opticon, Inc., Densei and many others. While many of the Company's competitors are 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, value, 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 133 issued U.S. patents, which expire between 2003 and 2017, and 27 foreign patents, which expire between 2005 and 2015. In addition, 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), Bits 'n' Pieces(R), Codegate(R), Concert(R), Cubit(R), HandSet(R), HoloTrak(R), HoloSet(R), HoloTunnel(R), Mini-Slot(R), MetrOPOS(R), MetroSelect(R), MetroSet(R), Liberty(R), Orbit(R), OmniQuest(R), Penta(R), Pulsar(R), ScanGlove(R), ScanKey(R), ScanPal(R), ScanQuest(R), ScanSet(R), Tech 7(R), Tech 8(R), Tech 10(R), VarSide(R) and Voyager(R). The Company also has several registered trademarks in foreign countries. The Company has filed additional trademark and service mark applications including ArgusScan(TM), Horizon(TM), InVista(TM), iQ(TM), QTrace(TM), QTrak(TM), QTroller(TM), SensiTrak(TM), SimulTrak(TM), Stratos(TM), and VoyagerCG(R) 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 another $1 million in quarterly installments of $125,000 over the subsequent two years ended November, 1998. In December 1998, 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 April 1999, the Company and Symbol executed a second amendment to the Symbol Agreement to provide for additional patent licenses for some of its existing products. On November 1, 1999, the Company and Symbol signed a third amendment to the Symbol Agreement. Under the terms of the amended agreement, the Company obtained a royalty-bearing license for certain of its new products under Symbol's laser scanning patents, and Symbol obtained a royalty-bearing license for its products under certain of the Company's patents. Under the terms of the amendment, both parties will make recurring periodic royalty payments to each other, effective on the date of signing the third amendment. In connection with the settlement of a December 1993 patent lawsuit with Symbol, the Company agreed to make payments to Symbol through December 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. The final payment in connection with the settlement was made in August 1999. For additional information concerning the settlement, see Note 9 of the Notes to Consolidated Financial Statements. The parties have been discussing further amendments to the Symbol Agreement which would cover current and future products of the Company and Symbol. During these discussions, the Company had elected to make certain royalty payments with respect to certain of its new products based on a provisional understanding between the parties; however, at this point the parties have not reached any agreement to further amend the Symbol Agreement. On May 3, 2002, the Company was served with a lawsuit that was filed on April 12, 2002 by Symbol Technologies, Inc. ("Symbol") in the United States District Court for the Eastern District of New York alleging that the Company is in breach of the terms of the License Agreement between Symbol and the Company (the "Agreement"). The Complaint seeks a declaratory judgment from the Court that the Company is in breach of the Agreement and that Symbol is not in breach of the Agreement. Under the Agreement the Company had until May 28, 2002 to cure any breach by making a payment of the royalties for the Fourth Quarter of 2001 that have been withheld pending the resolution of a dispute between the parties regarding which products are covered by the Agreement and the amount of royalties owed by each party. The Company has made this payment. However, on May 28, 2002, the Company received a notice that Symbol had not yet received the payment and therefore was terminating the Agreement. As the Company had made its payment within the cure period, the Company believes any assertion of a material breach is incorrect. The Company has not yet filed its answer to the complaint. The Company also received a notification from Symbol that Symbol was electing additional licenses under the Agreement. Manufacturing and Suppliers The Company manufactures its products at its Blackwood and Thorofare, New Jersey and Suzhou, China facilities. The manufacturing facilities are vertically integrated enabling the Company to quickly adapt and enhance its products and services to meet specific customer requirements. This capability reduces the length of its new product development cycle, speeds the integration of new products into manufacturing, and reduces the overall value stream time. Product quality assurance is achieved by sound product designs, by extensive final and in-process testing, and 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. Currently, the Company 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. 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 April 12, 2002, the Company had approximately 919 full-time employees worldwide. 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 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 building is approximately 113,000 square feet and 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, 2001 is approximately $76,500 per month and increases annually at a rate of 4.5%, excluding taxes and insurance. Under the terms of the proposed Amendment to the Credit Facility, no rental payments would be paid to Mr and Mrs. Knowles during the term of the Amendment. The Company's subsidiaries each lease office space from third parties. AOA's future minimum lease payments required under its lease agreement as of December 31, 2001 are $1,380 in 2002, $1,363 in 2003, $1,394 in 2004, $1,386 in 2005, $1,362 in 2006 and $4,831 thereafter. Item 3. 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 either individually or in the aggregate 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. On 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 wherein 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 (the "CAFC") agreed to hear the appeal. Oral argument on this issue was heard by the CAFC on October 4, 2001. On January 24, 2002, the CAFC reversed the decision by the lower court and confirmed the continued existence of the prosecution laches defense. In response, the Lemelson Partnership filed a Petition for Rehearing En Banc with the CAFC on February 6, 2002, and the Auto ID companies filed a response to the petition on February 22, 2002. The Petition was denied by the CAFC on March 20, 2002. 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. On October 25, 2000, the Lemelson Partnership filed its opposition to the above motion and also filed a motion for partial summary judgment that many of the claims of the Lemelson Partnership's patents satisfy the written description requirement. On July 12, 2001, the District Court denied the motions of both the Auto ID companies and the Lemelson Partnership, holding that there are genuine issues regarding material facts which preclude the granting of summary judgment for either party. 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 in his dealings before the United States Patent and Trademark Office in obtaining the patents in suit. On June 19, 2001, the Lemelson Partnership filed its opposition to the motion as well as a cross-motion for summary judgment that no inequitable conduct occurred. A hearing on this motion was held on November 9, 2001. In its decision, the District Court denied the motions of both the Auto ID companies and the Lemelson Partnership, holding that there are genuine issues regarding material facts which preclude the granting of summary judgment for either party. On July 25, 2001 the Court entered an order setting a schedule that concludes with a trial date set for August 2002. On August 1, 2001, the Auto ID companies filed another motion for partial summary judgment arguing that the Lemelson Partnership is not entitled, as a matter of law, to rely on a now-abandoned Lemelson patent application filed in 1954 to provide a filing date or disclosure for the claims of the patents-in-suit. Oral argument on the motion was heard on November 9, 2001. Again the District Court denied the motion of the Auto ID companies, holding that there are genuine issues regarding material facts which preclude the granting of summary judgment for either party. B. Metrologic v. PSC Inc. 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. 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 now in the final stages of discovery. On February 28, 2002, the court set a date for a Markman hearing in June 2002. C. Symbol Technologies, Inc. v. Metrologic On May 3, 2002, the Company was served with a lawsuit that was filed on April 12, 2002 by Symbol Technologies, Inc. ("Symbol") in the United States District Court for the Eastern District of New York alleging that the Company is in breach of the terms of the License Agreement between Symbol and the Company (the "Agreement"). The Complaint seeks a declaratory judgment from the Court that the Company is in breach of the Agreement and that Symbol is not in breach of the Agreement. Under the Agreement the Company had until May 28, 2002 to cure any breach by making a payment of the royalties for the Fourth Quarter of 2001 that have been withheld pending the resolution of a dispute between the parties regarding which products are covered by the Agreement and the amount of royalties owed by each party. The Company has made this payment. However, on May 28, 2002, the Company received a notice that Symbol had not yet received the payment and therefore was terminating the Agreement. As the Company had made its payment within the cure period, the Company believes any assertion of a material breach is incorrect. The Company has not yet filed its answer to the complaint. 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. Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Registrant The executive officers of the Company as of May 28, 2002 are as follows: Name Age Position ---------------- --- ------------------------------------------------- C. Harry Knowles* 73 Chairman of the Board and Chief Executive Officer Janet H. Knowles* 60 Director, Vice President, Administration, Secretary and Treasurer Thomas E. Mills IV 42 Director, President, Chief Operating Officer, and Chief Financial Officer Dale M. Fischer 61 Vice President, International Sales Benny A. Noens 55 Vice President, European Sales, and Managing Director, Metrologic Instruments GmbH John L. Patton 56 Director, Human Resources Joseph Sawitsky 39 Vice President, Manufacturing Mark C. Schmidt 31 Vice President, Marketing Nancy A. Smith 35 Vice President, General Counsel Jeffrey Yorsz 44 Vice President, Industrial Systems ----------------------------------- * Mr. and Mrs. Knowles are husband and wife. The Company's executive officers are elected annually by the Board of Directors following the annual meeting of shareholders and serve at the discretion of the Board of Directors. C. Harry Knowles is the founder of the Company and has been Chairman of the Board of Directors since the Company's inception in 1969. Mr. Knowles served as President of the Company from its inception through 1982 and from 1985 until 1999. He has served as 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, became President of the Company on February 9, 2000, 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 1999, 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. 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. 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 a division of 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 Wahls 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. Joseph Sawitsky has served as the Company's Vice President, Manufacturing since November 1999. He joined Metrologic in 1998 as the Production Manager. After serving in the Nuclear Submarine Force, he worked at ICI Composites from 1990 to 1994 and manufactured specialty polymer materials for the aerospace and industrial markets. From 1994 to 1998 he held several positions with Zenith Electronic Corporation making consumer electronic equipment. Mark C. Schmidt has served as the Company's Vice President, Marketing since November 1999. He has been employed by Metrologic since 1992, most recently in the position of Marketing Manager. During his tenure, Mr. Schmidt has progressed from Optical Engineer to the position of POS Product Manager in 1995, and Marketing Manager in 1997. Mr. Schmidt earned a B.S. from Rowan University where he graduated summa cum laude in 1993. Nancy A. Smith has served as the Company's Corporate Counsel and patent attorney since 1996. Ms. Smith now serves as the Company's Vice President, General Counsel. Prior to joining Metrologic, Ms. Smith was employed as a patent attorney for a private law firm in Baltimore, Maryland. Ms. Smith earned her law degree from the University of Baltimore, where she graduated magna cum laude in 1994. Jeffrey Yorsz has served as the Vice President, Industrial Systems since March 2002. Mr. Yorsz also serves as President and General Manager of Adaptive Optics Associates, Inc. , a wholly owned subsidiary of Metrologic Instruments, Inc., since its acquisition in January 2001. He joined AOA as an engineer in 1984 and has held prior positions of Manager of Electrical Engineering and Assistant General Manager of the company. Mr. Yorsz earned an E.E., B.S. and M.S. in Electrical Engineering as well as a B.S. in Management, from M.I.T. 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's National Market System under the symbol "MTLG." The following table sets forth, for the indicated periods, the high and low sales prices of the Company's Common Stock as reported by NASDAQ: High Low ---- ---- January to March 2000 $ 19.00 $ 12.06 April to June 2000 $ 18.00 $ 13.63 July to September 2000 $ 17.50 $ 8.75 October to December 2000 $ 10.13 $ 5.06 January to March 2001 $ 11.63 $ 7.00 April to June 2001 $ 10.50 $ 7.95 July to September 2001 $ 10.20 $ 5.85 October to December 2001 $ 13.40 $ 6.00 On May 28, 2002 there were 150 shareholders 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. The Company has not paid any cash dividends on our common stock during the past two years and does not intend to do so in the 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, 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- Statement of Operations Data: Sales $ 53,495 $ 65,641 $ 80,103 $ 91,884 $ 113,688 Cost of sales 33,240 39,698 46,710 55,394 83,527 --------- -------- --------- --------- --------- Gross profit 20,255 25,943 33,393 36,490 30,161 Selling, general and administrative expenses 12,087 15,537 21,331 26,314 32,554 Research and development expenses 3,359 4,157 4,327 4,975 6,563 Severance costs - - - 160 - --------- -------- --------- --------- -------- Operating income (loss) 4,809 6,249 7,735 5,041 (8,956) Other (expense) income, net (156) 456 (202) (878) (3,596) --------- -------- --------- --------- -------- Income (loss) before provision (benefit) for income taxes 4,653 6,705 7,533 4,163 (12,552) Provision (benefit) for income taxes 1,673 2,212 2,636 1,426 (4,775) --------- -------- --------- --------- --------- Net Income (loss) $ 2,980 $ 4,493 $ 4,897 $ 2,737 $ (7,777) ========= ======== ========= ========= ========= Basic earnings (loss) per share Weighted average shares outstanding used in computing basic EPS 5,330,596 5,391,797 5,412,564 5,438,553 5,457,806 ========= ========= ========= ========= ========= Basic earnings (loss) per share $ 0.56 $ 0.83 $ 0.90 $ 0.50 $ (1.42) ========= ========= ========= ========= ========= Diluted earnings (loss) per share Weighted average shares outstanding used in computing diluted EPS 5,447,277 5,512,758 5,460,194 5,557,992 5,457,806 ========= ========= ========= ========= ========= Diluted earnings (loss) per share $ 0.55 $ 0.82 $ 0.90 $ 0.49 $ (1.42) ======== ========= ========= ========= ========= Year Ended December 31, 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- Balance Sheet Data: Cash and cash equivalents $ 13,096 $ 10,684 $ 6,970 $ 2,332 $ 557 Working capital $ 18,599 $ 21,496 $ 23,659 $ 41,572 $ 2,355 Total assets $ 38,458 $ 46,296 $ 56,673 $ 81,823 $ 87,606 Long-term debt $ 1,496 $ 2,608 $ 3,414 $ 25,334 $ 11,135 Other long-term obligations $ 1,329 $ 676 $ 588 $ 1,094 $ 1,508 Total liabilities $ 13,557 $ 16,295 $ 22,129 $ 46,060 $ 61,345 Common stock $ 54 $ 54 $ 54 $ 54 $ 55 Total shareholders' equity $ 24,901 $ 30,001 $ 34,544 $ 35,763 $ 26,261 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General As previously reported in periodic reports filed with the Securities and Exchange Commission, the Company is in default under the terms of its Credit Facility. While the Company has executed a definitive term sheet with respect to an amendment to the Credit Facility, such amendment has not been finalized. As a result, the report of the Company's independent auditors for the Company's fiscal 2001 financial statements contains a going concern qualification. See "Liquidty and Capital Resources." Metrologic Instruments, Inc. and its subsidiaries (collectively, the "Company") design, manufacture and market bar code scanning and high-speed automated data capture solutions using laser, holographic and vision-based technologies. The Company offers expertise in 1D and 2D bar code reading, optical character recognition, image lift, and parcel dimensioning and singulation detection for customers in retail, commercial, manufacturing, transportation and logistics, and postal and parcel delivery industries. Additionally, through its wholly-owned subsidiary, Adaptive Optics Associates, Inc. ("AOA"), is engaged in developing, manufacturing, marketing and distributing custom optical systems which include precision laser beam delivery, high speed imaging control and data processing, industrial inspection, and scanning and dimensioning systems for the aerospace and defense industry in the United States and Canada. The Company's products are sold in more than 100 countries worldwide through the Company's sales, service and distribution offices located in North and South America, Europe and Asia. 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: The Company's ability to enter into an amendment to its current credit agreement; the Company's ability to refinance its Credit Facility and term note on acceptable terms with new banks; the Company's ability to maintain the listing of its common stock on the Nasdaq Stock Market; the Company's ability to receive an unqualified audit opinion from its independent auditors; reliance 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; 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 and potential outcomes of legal proceedings or assertions by or against the Company relating to intellectual property rights and licenses, the Company's ability to successfully negotiate and amend its licensing agreement with Symbol Technologies; the Company's ability to be successful in its litigation; the Company's ability to successfully defend against challenges to its patents; the ability of competitors to avoid infringement of the Company's patents; the ability of the Company to develop products which avoid infringement of third parties' patents; 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 price and payment schedule the Company is able to negotiate for the shares in its subsidiary, Metrologic Eria Iberica; the effects of and changes in trade, monetary and fiscal policies, laws; the ability of the Company to integrate AOA with other Company subsidiaries, and realize anticipated impact on results of operations; ; 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 Euro, Singapore Dollar, Brazilian Real, and British Pound affecting the Company's results of operations; the economic slowdown of foreign nations other than those using 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; 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. Critical Accounting Policies The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, asset impairment, intangible assets and derivative instrument valuation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Note 2 to the Company's consolidated financial statements "Accounting Policies" summarizes each of its significant accounting policies. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue Recognition. Revenue related to sales of the Company's products and systems is generally recognized when products are shipped or services are rendered, the title and risk of loss has passed to the customer, the sales price is fixed or determinable, and collectibility is reasonably assured. The Company accrues related product return reserves and warranty expenses at the time of sale. Additionally, the Company records estimated reductions to revenue and charges to sales, general and administrative expenses for customer programs and incentive offerings including special pricing agreements, price protection, promotions and other volume-based incentives. The Company recognizes revenue and profit as work progresses on long term contracts using the percentage of completion method, which relies on estimates of total expected contract revenue and costs. Recognized revenues and profits are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Bad Debt. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory writedowns may be required. Long-Lived Assets. The Company assesses the impairment of its long-lived assets, including property, plant and equipment, identifiable intangible assets and software development costs whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include significant changes in the manner of our use of the acquired asset, changes in historical or projected operating performance and significant negative economic trends. Research and Development/Software Development Costs. The Company expenses all research and development costs as incurred. Research and development expenses may fluctuate due to the timing of expenditures for the varying states of research and product development and the availability of capital resources. The Company capitalizes costs incurred for internally developed product software where economic and technological feasibility has been established and for qualifying purchased product software. The Company assesses the recoverability of its software development costs against estimated future revenue over the remaining economic life of the software. Results of Operations Most of the Company's product sales in Western Europe, Brazil and Asia are billed in foreign currencies and are subject to currency exchange rate fluctuations. A significant percentage of the Company's products are manufactured in the Company's U.S. facility in 2001, and therefore, sales and results of operations are affected by fluctuations in the value of the U.S. dollar relative to foreign currencies. In addition, manufacture of the Company's POS products in its Suzhou, China facility is expected to increase in 2002, which will partially mitigate the profit impact of foreign exchange rate fluctuation with reduced labor costs in the Company's POS scanners. Accordingly, in 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. Year Ended December 31, 2001 Compared with Year Ended December 31, 2000 (amounts in thousands except per share information) Sales increased 23.7% to $113,688 in 2001 from $91,884 in 2000, principally as a result of the addition of sales of AOA. Sales in 2001 were adversely affected by lower industrial scanner volume and 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 3.3% and 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 2.6% as compared to 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 $62,924 (55% of total sales) in 2001 and $55,168 (60% of total sales) in 2000. Three customers accounted for 6.7%, 5.6% and 5.0%, respectively, of the Company's revenues in 2001. Two customers accounted for 7.7% and 5.2%, respectively, of the Company's revenues in 2000. Cost of sales increased 50.8% to $83,527 in 2001 from $55,394 in 2000, while costs of sales as a percentage of sales increased to 73.5% from 60.3%. In addition to the increased costs of sales associated with the acquisition of AOA, cost of sales for 2001 included $10,040 of special charges and other costs that are not expected to recur in subsequent years as follows: $4,500 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; $3,500 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; $1,000 of costs associated with inventory deemed to be obsolete at March 31, 2001; and $1,000 of costs associated with the expensing of floor stock inventory that had been previously capitalized by the Company. Further, cost of sales as a percentage of sales during the year ended December 31, 2001 was negatively impacted by lower average unit selling prices due substantially to 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 23.7% to $32,554 in 2001 from $26,314 in 2000 and remained constant as a percentage of sales at 28.6%. 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 charges for uncollectible accounts receivable. Research and development ("R&D") expenses increased 31.9% to $6,563 in 2001 from $4,975 in 2000, and increased as a percentage of sales to 5.8% from 5.4%. The increase in R&D expenses is due primarily to the addition of AOA expenses. Other income/expenses reflect net other expenses of $3,506 in 2001 compared to $878 in 2000. Net other expenses for 2001 reflect higher net interest due to the acquisition of AOA and associated debt. Net loss was $7,777 in 2001 compared with net income of $2,737 in 2000. Net loss reflects a 38% effective income tax rate for 2001 compared to 34% for 2000. The increased effective income tax rate resulted from a higher effective state tax rate of AOA. As a result of the net operating losses incurred in 2001 an income tax receivable of $4,600 has been recorded as a result of the net operating losses to previous years in which the Company reported taxable income. The increase in the value of the U.S. dollar relative to other foreign currencies compared to 2000 negatively affected diluted earnings per share by approximately $.22 per share. Year Ended December 31, 2000 Compared with Year Ended December 31, 1999 (amounts in thousands except per share information) Sales increased 14.7% to $91,884 in 2000 from $80,103 in 1999, principally as a result of the continued increase in sales of the Company's point-of-sale ("POS") products and increased sales and marketing efforts. The increase in sales volume in 2000 was offset by lower average unit selling prices on the Company's POS products compared to the corresponding period in 1999, and reflected unfavorable foreign currency exchange fluctuations. The increase in the value of the U.S. dollar relative to other foreign currencies compared to 1999 negatively affected the recorded U.S. dollar value of European operation sales by approximately 15.6% and consolidated sales by 13.4%. International sales accounted for $55,168 (60% of total sales) in 2000 and $46,405 (57.9% of total sales) in 1999. Two customers accounted for 7.7% and 5.2%, respectively, of the Company's revenues in 2000. Two customers accounted for 5.9% and 5.1%, respectively, of the Company's revenues in 1999. Cost of sales increased 18.6% to $55,394 in 2000 from $46,710 in 1999, while costs of sales as a percentage of sales increased to 60.3% from 58.3%. The increase in cost of sales as a percentage of sales was due primarily to lower average unit selling prices primarily resulting from unfavorable foreign exchange fluctuations as well as increased costs resulting from a limited supply of electronic components purchased from vendors. Selling, general and administrative expenses increased 23.4% to $26,314 in 2000 from $21,331 in 1999 and increased as a percentage of sales to 28.6% from 26.6%. The increase in SG&A expenses was due to: (i) increased marketing efforts, which include costs associated with the Company's Concert(R) Program, a business partner program used to market and promote the Company's products; and (ii) expenses in connection with new European joint ventures. Research and development expenses increased 15% to $4,975 in 2000 from $4,327 in 1999, and stayed the same as a percentage of sales at 5.4%. The increase is due to increased research and development efforts of new POS and industrial products and engineering enhancements to existing products. Severance costs of $160 for the year ended December 31, 2000 were due to the elimination of certain senior management positions resulting from planned redundancies. Other income/expenses reflect net other expenses of $878 in 2000 compared to $202 in 1999. Net other expenses in 2000 reflects higher interest expense, lower interest income and foreign currency transaction gains as compared to foreign currency transaction losses in 1999. Net income decreased 44.1% to $2,737 in 2000 from $4,897 in 1999. Net income reflects a 34% effective income tax rate for 2000 compared to 35% in 1999. The increase in the value of the U.S. dollar relative to other foreign currencies compared to 1999 negatively affected diluted earnings per share by approximately $0.42 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 decreased approximately 94.3% to $2,355 as of December 31, 2001 from $41,572 as of December 31, 2000. The Company's working capital was impacted due 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 and term note. In addition, the Company has reclassified its bank debt to current liabilities in connection with the Company's default on certain covenants contained within the credit facility. The Company's operating activities provided net cash of $15,357 in 2001 compared with net cash used of $16,320 for 2000. Net cash provided in operating activities for 2001 resulted primarily from reductions in accounts receivable and inventory plus non-cash charges, offset by decreases in accrued expenses. In connection with the acquisition of 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 December 31, 2001, the balance outstanding was $18,000. In connection with the Credit Facility, the Company secured a $25,000 revolving credit line, which expires in January 2006. 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. The Company has granted a security interest in its assets and properties to the primary bank in favor of the banks as security for borrowings under the Credit Facility. As of December 31, 2001, the balance outstanding was $11,433. Under the Credit Facility, 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. As reflected in the Company's prior periodic reports filed with the Securities and Exchange Commission, the Company and its primary bank have been in discussions with respect to modifying the Credit Facility. On May 15, 2002, the Company reached an agreement in principle with its lenders and executed a term sheet as to the terms of an amendment to the Credit Facility, which management believes will allow for sufficient time for the Company to seek more competitive credit financing. The Company and the lenders are currently negotiating the final terms and conditions of the definitive agreements to document the amendment, and expect to sign an amendment shortly. The key terms of the amendment would include the waiver of all existing defaults and the withdrawal by the banks of a notice of default and an increase in the interest under the Credit Facility. Additionally the amended Credit Facility would expire on May 31, 2003. The Company has remaining term debt outstanding of $18,000 which is classified as short-term on its balance sheet dated December 31, 2001. While management currently believes that it will be successful in finalizing the amendment, there can be no assurance that amendment will be finalized shortly, if at all. The Company remains in default under the terms of its Credit Facility until execution of the amendment. Under the terms of the Credit Facility, the Company's current lenders have the authority to declare all of the debt under the Credit Facility to be immediately due and payable, and cease making additional funds available under the Credit Facility. Currently, the Company has insufficient liquid assets to satisfy the full amount of the debt under the Credit Facility. If the Company is unable to execute an agreement with its primary bank with respect to the amendment and its current lenders decide to declare the debt immediately due and payable, the Company would be forced to sell Company assets in order to generate sufficient cash to repay the debt. While management currently believes that any sale of Company assets would generate sufficient cash to repay the debt, there can be no assurance that such sales could be made in a timely manner or that such sales would generate adequate amounts of cash to repay the Company's debt. If the Company is not able to generate sufficient cash to repay the debt, the banks could take possession of the collateral pledged as security for the debt under the Credit Facility and otherwise exercise the remedies available to them under the Credit Facility. In April 2002, in order to reduce debt and increase future profitability, the Company implemented a workforce reduction and identified additional cost reductions that provided for annualized savings of approximately $3,000 in overhead and operating expenses, and additional reductions in direct costs. 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 $0 in 2002, $9,000 in 2003 and $1,000 in 2004 and 2005. Interest rates are fixed at 10%. Property, plant & equipment expenditures were $2,208 and $3,479 in 2001 and 2000, respectively. During 2001, the Company continued expenditures related to manufacturing automation and capacity expansion. The Company's current plan 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; and (iii) additional Company facilities. 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, and the Chinese renminbi. In an effort to mitigate the financial implications of the volatility in the exchange rate between the Euro and the U.S. dollar, 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 sales to the Company's German subsidiary and (ii) Euro based loans, which act as a partial hedge against outstanding intercompany receivables and the net assets of its European subsidiary, which are denominated in Euros. 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's 51% joint venture interests in Metrologic Eria Iberica and Metrologic Eria France contain options for the Company to purchase the remaining 49% minority interests. The purchase option is calculated based on a twelve month multiple of sales. In March 2002, the minority shareholders in Metrologic Eria Iberica provided notice of their intent to sell their 49% interests and the purchase price is estimated at $4,570. Disclosures about Contractual Obligations and Commercial Commitments Less than 1 1-3 4-5 After Contractual Obligations Total Year Years Years 5 Years ----------------------- ----- ---- ----- ----- ----- Long-Term Debt* 29,165 18,092 11,073 - - Capital Lease Obligations 131 107 24 - - Operating Leases 14,278 2,369 5,496 4,975 1,438 Option to purchase minority interest in joint venture 4,570 - 4,570 - - Total Contractual Cash Obligations $ 48,144 $20,568 $ 21,163 $4,975 $ 1,438 ========= ======= ======== ====== ======== *All of the Company's borrowings under its term note with its primary bank have been classified as current liabilities on the Company's balance sheet dated December 31, 2001. See "Liquidity and Capital Resources" and Note 6 to the Company's consolidated financial statements. Total Less Amounts than 1 1-3 4-5 Over 5 Other Commercial Commitments Committed Year Years Years Years ---------------------------- --------- ---- ----- ----- ----- Lines of Credit** 11,433 11,433 - - - ------ ------ ** All of the Company's borrowings under its term note with its primary bank have been classified as current liabilities on the Company's balance sheet dated December 31, 2001. See "Liquidity and Capital Resources" and Note 6 to the Company's consolidated financial 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 were made in the Euro, and parties could 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 introduced Euro notes and coins and withdrew all legacy currencies. The Euro conversion may affect cross-border competition by creating cross-border transparency. The Company continues to evaluate its pricing/marketing strategy in order to insure that it remains competitive in a broader European market. Item 7a - Quantitative and Qualitative Disclosures about Market Risk (amounts in thousands) 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 could have had an impact of approximately $300 on the net earnings of the Company. 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 Euro, thereby mitigating the Company's risk that would otherwise result from changes in exchange rates. Principal transactions hedged are intercompany sales and payments. 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 operations. A large percentage of the Company's foreign sales are transacted in foreign 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 Euro could have had an impact of $1,098 on the net earnings of the Company. Actual results may differ. The Company is subject to risk from fluctuations in the value of the Euro relative to the U.S. dollar for its European subsidiary, which uses the Euro as its 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, 2001, the Company had translation exposure. The potential effect on other comprehensive income (loss) resulting from a hypothetical 10% change in the quoted Euro rate amounts to $717. Actual results may differ. Item 8. Financial Statements and Supplementary Data Index Pages Report of Ernst & Young LLP, Independent Auditors F-1 Consolidated Balance Sheets at December 31, 2001 and 2000 F-2 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001, 2000 and 1999 F-3 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 2001, 2000 and 1999 F-4 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001, 2000 and 1999 F-5 Notes to Consolidated Financial Statements F-6 Supplementary Data F-23 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. F-25 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, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Metrologic Instruments, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. 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. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company is in default of certain provisions of its credit facility with its banks. The Company has entered into a term sheet with its banks that provides, among other considerations, for a waiver of such events of defaults upon the signing of the definitive amendment to the credit facility; however, the definitive amendment has not been executed as of May 28, 2002. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The 2001 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/Ernst & Young LLP Philadelphia, Pennsylvania May 28, 2002 Metrologic Instruments, Inc. Consolidated Balance Sheets (amounts in thousands except share data) December 31, 2001 2000 ---- ---- Assets Current assets: Cash and cash equivalents $ 557 $ 2,332 Restricted cash 3,200 - Accounts receivable, net of allowance of $422 and $655 in 2001 and 2000, respectively 20,401 26,593 Income tax refund receivable 4,600 - Inventory 18,385 26,898 Deferred income taxes 1,535 1,356 Other current assets 2,379 4,025 --------- -------- Total current assets 51,057 61,204 Property, plant and equipment, net 13,776 10,459 Patents and trademarks, net of amortization of $1,239 and $970 in 2001 and 2000, respectively 4,062 3,013 Holographic technology, net of amortization of $598 and $482 in 2001 and 2000, respectively 484 600 Advance license fee, net of amortization of $588 and $471 in 2001 and 2000, respectively 1,412 1,529 Goodwill, net of amortization of $1,533 and $220 in 2001 and 2000, respectively 15,249 4,317 Deferred income taxes 701 - Other assets 865 701 -------- -------- Total assets $ 87,606 $ 81,823 ======== ======== Liabilities and shareholders' equity Current liabilities: Current portion of lines of credit $ 11,433 $ 174 Current portion of notes payable 18,163 2,531 Accounts payable 6,930 5,188 Accrued expenses 12,176 11,739 -------- -------- Total current liabilities 48,702 19,632 Lines of credit, net of current portion - 17,689 Notes payable, net of current portion 11,135 7,645 Deferred income taxes 951 565 Other liabilities 557 529 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; 5,463,382 and 5,451,092 shares issued and outstanding in 2001 and 2000, respectively 55 54 Additional paid-in capital 17,634 17,562 Retained earnings 12,926 20,703 Accumulated other comprehensive loss (4,354) (2,556) -------- -------- Total shareholders' equity 26,261 35,763 -------- -------- Total liabilities and shareholders' equity $ 87,606 $ 81,823 ======== ======== See accompanying notes. Metrologic Instruments, Inc. Consolidated Statements of Operations (amounts in thousands except share and per share data) Year ended December 31, 2001 2000 1999 ---- ---- ---- Sales $ 113,688 $ 91,884 $ 80,103 Cost of sales 83,527 55,394 46,710 --------- --------- --------- Gross profit 30,161 36,490 33,393 Selling, general and administrative expenses 32,554 26,314 21,331 Research and development expenses 6,563 4,975 4,327 Severance costs - 160 - --------- --------- --------- Operating (loss) income (8,956) 5,041 7,735 Other income (expenses) Interest income 174 257 402 Interest expense (4,064) (1,482) (262) Foreign currency transaction gain (loss) 432 530 (342) Other, net (138) (183) - --------- --------- --------- Total other expenses (3,596) (878) (202) --------- --------- --------- (Loss) income before provision for income taxes (12,552) 4,163 7,533 (Benefit) provision for income taxes (4,775) 1,426 2,636 --------- --------- --------- Net (loss) income $ (7,777) $ 2,737 $ 4,897 ========= ========= ========= Basic (loss) earnings per share Weighted average shares outstanding 5,457,806 5,438,553 5,412,564 ========= ========= ========= Basic (loss) earnings per share (1.42) 0.50 0.90 ========= ========= ========= Diluted (loss) earnings per share Weighted average shares outstanding 5,457,806 5,438,553 5,412,564 Net effect of dilutive securities - 119,439 47,630 --------- --------- --------- Total shares outstanding used in computing diluted earnings per share 5,457,806 5,557,992 5,460,194 ========= ========= ========= Diluted (loss) earnings per share (1.42) 0.49 0.90 ========= ========= ========= See accompanying notes. Metrologic Instruments, Inc. Consolidated Statements of Shareholders' Equity (amounts in thousands) Balances, January 1, 1999 $ 54 $ 16,933 $ 13,069 $ (55) $ 30,001 Comprehensive loss: Net income - - 4,897) - 4,897 loss - foreign currency translation adjustment - - - (504) (504) Total comprehensive loss - - - - 4,393 Exercise of stock options - 39 - - 39 Stock issued through employee stock purchase plan - 111 - - 111 ------ --------- -------- --------- --------- Balances, December 31, 1999 $ 54 $ 17,083 $ 17,966 $ (559) $ 34,544 Comprehensive loss: Net income - - 2,737 - 2,737 Other comprehensive loss - foreign currency translation adjustment - (45) - (1,997) (2,042) Total comprehensive loss - - - - 695 Exercise of stock options - 324 - - 324 Stock issued through employee stock purchase plan - 72 200 - 200 ------ --------- -------- --------- --------- Balances, December 31, 2000 $ 54 $ 17,562 $ 20,703 $ (2,556) $ 35,763 Comprehensive loss: Net loss - - (7,777) - (7,777) Other comprehensive loss - foreign currency translation adjustment - - - (1,798) (1,798) Total comprehensive loss - - - - (9,575) Exercise of stock options - - - - - Stock issued through employee stock purchase plan 1 72 - - 73 Balances, December 31, 2001 $ 55 17,634 $ 12,926 $ (4,354) $ 26,261 ====== ========= ======== ========= ========= See accompanying notes. Metrologic Instruments, Inc. Consolidated Statements of Cash Flows (amounts in thousands) Year ended December 31, 2001 2000 1999 ---- ---- ---- Operating activities Net (loss) income $ (7,777) $ 2,737 $ 4,897 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation 3,019 1,957 1,309 Amortization 2,044 594 431 Deferred income taxes (4,572) (507) 343 Loss on disposal of property 143 112 - Changes in operating assets and liabilities: Accounts receivable 10,089 (4,187) (7,815) Inventory 12,024 (11,628) (4,494) Other current assets 1,844 (2,816) (120) Other assets 86 217 (157) Accounts payable 604 (3,457) (414) Accrued expenses (2,176) 615 3,029 Accrued legal settlement - - (688) Other liabilities 29 43 - --------- --------- --------- Net cash provided by (used in) operating activities 15,357 (16,320) (3,679) Investing activities Purchase of property, plant and equipment $ (2,208) $ (3,479) $ (3,886) Patents and trademarks (1,317) (750) (884) Increase in restricted cash (3,200) - - Cash paid for purchase of business, net of cash acquired (10,393) (3,677) - Other intangibles (253) (284) - --------- --------- -------- Net cash used in investing activities (17,371) (8,190) (4,770) Financing activities Proceeds from exercise of stock options and employee stock purchase plan $ 73 $ 479 $ 150 Principal payments on notes payable (12,649) (1,287) (860) Proceeds from issuance of notes payable 9,239 7,002 2,458 Net proceeds from line of credit 4,743 14,811 3,050 Capital lease payments (80) (106) (115) --------- --------- -------- Net cash provied by investing activities 1,326 20,879 4,683 Effect of exchange rates on cash (1,087) (1,027) 52 --------- --------- -------- Net decrease in cash and cash equivalents (1,775) (4,638) (3,714) Cash and cash equivalents at beginning of year 2,332 6,970 10,684 --------- --------- -------- Cash and cash equivalents at end of year $ 557 $ 2,332 $ 6,970 ========= ========= ======== Supplemental Disclosure Cash paid for interest 3,913 1,448 273 ========= ========= ======== Cash paid for income taxes 112 1,243 1,875 ========= ========= ======== Tax benefit from exercise of stock options $ - $ 120 $ - ========= ========= ======== See accompanying notes. Metrologic Instruments, Inc. Notes to Consolidated Financial Statements December 31, 2001 (Dollars in Thousands) 1. Business Metrologic Instruments, Inc. and its subsidiaries (collectively, the "Company") design, manufacture and market bar code scanning and high-speed automated data capture solutions using laser, holographic and vision-based technologies. The Company offers expertise in 1D and 2D bar code reading, optical character recognition, image lift, and parcel dimensioning and singulation detection for customers in retail, commercial, manufacturing, transportation and logistics, and postal and parcel delivery industries. Additionally, through its wholly-owned subsidiary, Adaptive Optics Associates, Inc. ("AOA"), the Company is engaged in developing, manufacturing, marketing and distributing custom optical systems which include precision laser beam delivery, high speed imaging control and data processing, industrial inspection, and scanning and dimensioning systems for the aerospace and defense industry in the United States and Canada. The Company's products are sold in more than 100 countries worldwide through the Company's sales, service and distribution offices located in North and South America, Europe and Asia. Going Concern In connection with the acquisition of 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 and a $25,000 revolving credit line expiring in January 2006. Under the Credit Facility, the Company is subject to affirmative and negative covenants. The Company has granted a security interest in its assets and properties to the primary bank in favor of the banks as security for borrowings under the Credit Facility. The Company is currently in default of certain provisions contained in the Credit Facility. As reflected in the Company's prior periodic reports filed with the Securities and Exchange Commission, the Company and its primary bank have been in discussions with respect to modifying the Credit Facility. On May 15, 2002, the Company reached an agreement in principle with its lenders and executed a term sheet as to the terms of an amendment to the Credit Facility, which management believes will allow for sufficient time for the Company to seek more competitive credit financing. The Company and the lenders are currently negotiating the final terms and conditions of the definitive agreements to document the amendment, and expect to sign an amendment shortly. The key terms of the amendment would include the waiver of all existing defaults and the withdrawal by the banks of a notice of default and an increase in the interest rate under the Credit Facility. Additionally the amended Credit Facility would expire on May 31, 2003. The Company has remaining term debt outstanding of $18,000 which is classified as short-term on its balance sheet dated December 31, 2001. While management currently believes that it will be successful in finalizing the amendment, there can be no assurance that amendment will be finalized shortly, if at all. The Company remains in default under the terms of its Credit Facility until execution of the amendment. Under the terms of the Credit Facility, the Company's current lenders have the authority to declare all of the debt under the Credit Facility to be immediately due and payable, and cease making additional funds available under the Credit Facility. Currently, the Company has insufficient liquid assets to satisfy the full amount of the debt under the Credit Facility. If the Company is unable to execute an agreement with its primary bank with respect to the amendment and its current lenders decide to declare the debt immediately due and payable, the Company would be forced to sell Company assets in order to generate sufficient cash to repay the debt. While management currently believes that any sale of Company assets would generate sufficient cash to repay the debt, there can be no assurance that such sales could be made in a timely manner or that such sales would generate adequate amounts of cash to repay the Company's debt. If the Company is not able to generate sufficient cash to repay the debt, the banks could take possession of the collateral pledged as security for the debt under the Credit Facility and otherwise exercise the remedies available to them under the Credit Facility. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, because the Company is in default of its Credit Facility with its banks, there is substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. The independent auditor's report included in this amendment to the Company's Form 10-K/A has been modified to include an explanatory paragraph regarding these matters. Although the Company has entered into a term sheet which provides for the waiver of the events of default, the retraction of the letters of default, and sufficient time for the Company to obtain alternative financing, the definitive amendment to the Credit facility has not been executed as of the filing date of this amendment to the Company's Form 10-K/A for the year ended December 31, 2001. While the Company believes that the amendment to the Credit Facility will be executed imminently, the Company has decided to file this amendment to its Form 10-K on May 28, 2002 to comply with NASDAQ listing requirements. Management believes these actions and plans and the amendment to the Credit Facility are sufficient to provide the Company with the ability to continue as a going concern. When such amendment is executed and the Company is able to obtain an unqualified audit report from its independent auditors, the Company will file another amendment to its Form 10-K for the year ended December 31, 2001. Further, the portion of the debt that is anticipated to mature after December 31, 2002 will be reclassified as long-term on the December 31, 2001 balance sheet upon the signing of the amendment. In April 2002, in order to reduce debt and increase future profitability, the Company implemented a workforce reduction and identified additional cost reductions that provided for annualized savings of approximately $3,000 in overhead and operating expenses, and additional reductions in direct costs. 2. Accounting Policies Basis of Consolidation The accompanying consolidated financial statements include the accounts of Metrologic Instruments, Inc., and its domestic and foreign subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Product sales revenue and any offsetting sales incentives are recognized upon the transfer of title to goods, which is generally upon shipment of products. Amounts charged to customers for shipping and handling are included in sales. Shipping and handling amounts incurred by the Company are included in cost of sales. Revenue Recognition - Contracts Revenue is recognized on a percentage of completion basis (generally using the cost-to-cost method) for long-term contracts and upon delivery for short-term contracts. Cost and profit estimates are reviewed periodically as work progresses, and adjustments to revenue recognized, if needed, are reflected in the period in which estimates are revised. Provisions for estimated losses, if any, on uncompleted contracts are made in the periods in which such losses become probable and can be reasonably estimated. 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 5 to 7 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. Holographic Technology Holographic Technology resulted from the acquisition of Holoscan, Inc. on March 1, 1996 and is being amortized over ten years. The Company was required to pay the former shareholders of Holoscan, Inc. $194 in 1998, which was based on sales of certain holographic laser scanners. Such amounts were considered additions to holographic technology and are being amortized over the remainder of the ten-year period. Software Development Costs Costs incurred in the research and development of new software embedded in products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional development costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed ("SFAS 86"). Capitalization ceases when the product is available for general release to customers. Internal Use Software Effective for fiscal years beginning after December 15, 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires all costs related to the development or purchase of internal use software, other than those incurred during the application development stage, to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software. The Company adopted SOP 98-1 on January 1, 1999 and has capitalized $1,781 of software obtained for internal use through December 31, 2001. Capitalized software costs are amortized on a straight-line basis over seven years. Amortization related to the capitalized software was $265 and $308 for the year ended December 31, 2001 and 2000, respectively. Goodwill Goodwill represents the excess of the cost of businesses acquired over the fair value of the related net assets at the date of acquisition. Goodwill is amortized using the straight-line method over their expected useful lives of 10 to 20 years. Long-Lived Assets The Company evaluates impairment of its intangible and other long-lived assets, including goodwill, in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121"). In making such determination, management compares the estimated future cash flows, on an undiscounted basis, of the underlying operations or assets with their carrying value to determine if any impairment exists. If an impairment exists, any adjustment is determined by comparing the carrying amount to the fair value of the impaired asset. The Company considers all impaired assets "to be held and used" until such time as management commits to a plan to dispose of the impaired asset. At that time, the impaired asset is classified as "to be disposed of" and is carried at its fair value less its cost of disposal. Advance License Fee The Company capitalized an advance license fee of $2,000 in December 1996. The advance license fee is being amortized on a straight-line basis over the 17-year life of the cross-licensing agreement. Foreign Currency Translation The financial statements of Metrologic's foreign subsidiaries 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, if dilutive. Concentrations of Credit Risk The Company has operations, subsidiaries and affiliates in the United States, Europe, Asia and South America. The Company performs ongoing credit evaluations of its customers' financial condition, and except where risk warrants, requires no collateral. The Company may require, however, letters of credit or prepayment terms for those customers in lesser developed countries. Short-term cash investments are placed with high credit quality financial institutions or in short-term high quality debt securities. The Company limits the amount of credit exposure in any one institution or single investment. Accounting for Stock Options The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for stock options. Under APB 25, if the exercise price of the Company's stock options equals or exceeds the market price of the underlying common stock on the date of grant, no compensation expense is recognized. 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." Derivative Financial Instruments On January 1, 2001 the Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS No. 133 requires the recognition of all derivative instruments as either assets or liabilities in the consolidated balance sheet measured at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies as a hedge of future cash flows. For derivatives qualifying as cash flow hedges, the effective portion of changes in fair value of the derivative instrument is recorded as a component of other comprehensive income and reclassified to earnings in the same period during which the hedged transaction affects earnings. Any ineffective portion (representing the remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged transaction) is recognized in earnings as it occurs. There was no cumulative effect recognized for adopting this accounting change. The Company formally designates and documents each derivative financial instrument as a hedge of a specific underlying exposure as well as the risk management objectives and strategies for entering into the hedge transaction upon inception. The Company also assesses whether the derivative financial instrument is effective in offsetting changes in the fair value of cash flows of the hedged item. The Company recognized no gain or loss related to hedge ineffectiveness in 2001. The Company also utilizes derivative financial instruments to hedge the risk exposures associated with foreign currency fluctuations for payments from the Company's international subsidiaries denominated in foreign currencies. These derivative instruments are designed at either fair value or cash flow hedges, depending on the exposure being hedged, and have maturities of less than one year. Gains and losses on these derivative financial instruments and the offsetting losses and gains on hedged transactions are reflected in the Company's statement of operations. The Company does not use these derivative financial instruments for trading purposes. At December 31, 2001, the Company had $1,156 in forward exchange contracts outstanding and their fair value was not materially different. Impact of Recently Issued 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. 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. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121," Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a "Disposal of a Segment of a Business." FAS 144 is effective for fiscal years beginning after December 15, 2001. The Company will adopt FAS 144 as of January 1, 2002 and it has not determined the effect, if any, the adoption of FAS 144 will have on the Company's financial position and results of operations. 3. Inventory Inventory consists of the following: December 31, 2001 2000 ---- ---- Raw materials $ 7,271 $ 9,694 Work-in-process 4,144 6,380 Finished goods 6,970 10,824 $ 18,385 $ 26,898 ====== ====== 4. Property, Plant and Equipment Property, plant and equipment consists of the following: December 31, 2001 2000 ---- ---- Buildings and improvements $ 5,299 $ 3,079 Machinery and equipment 17,918 14,126 Capitalized internal use software 1,781 1,747 Capitalized software development costs 359 496 25,357 19,448 Less accumulated depreciation 11,581 8,989 ------ ------ $ 13,776 $ 10,459 ====== ====== Machinery and equipment included $487 under capital leases as of December 31, 2001 and 2000. Accumulated depreciation on these assets was $351 and $292 as of December 31, 2001 and 2000, respectively. 5. Accrued Expenses Accrued expenses consist of the following: December 31, 2001 2000 ---- ---- Accrued royalties $ 836 $ 1,419 Accrued compensation 3,052 3,321 Accrued commissions 837 876 Accrued professional fees 1,456 662 Product warranty 443 1,216 Accrued marketing and sales promotions 1,503 940 Deferred income taxes 522 - Other 3,527 3,305 $12,176 $ 11,739 ======= ======== 6. Debt Credit Facility In connection with the acquisition of AOA on January 8, 2001, the Company entered into a $45,000 credit facility with its primary bank, as agent 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 December 31, 2001, the balance outstanding was $18,000. In connection with the Credit Facility, the Company secured a $25,000 revolving credit line, which expires in January 2006. 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. The Company has granted a security interest in its assets and properties to the primary bank in favor of the banks as security for borrowings under the Credit Facility. As of December 31, 2001, the balance outstanding was $11,433. Under the Credit Facility, 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. Under the Credit Facility, the Company is subject to affirmative and negative covenants. As reflected in the Company's prior periodic reports filed with the Securities and Exchange Commission, and as updated in Note 1, the Company and its primary bank have been in discussions with respect to modifying the Credit Facility. On May 15, 2002, the Company reached an agreement in principle with its lenders and executed a term sheet as to the terms of an amendment to the Credit Facility, which management believes will allow for sufficient time for the Company to seek more competitive credit financing. The Company and the lenders are currently negotiating the final terms and conditions of the definitive agreements to document the amendment, and expect to sign an amendment shortly. The key terms of the amendment would include the waiver of all existing defaults and the withdrawal by the banks of a notice of default and an increase in the interest rate under the Credit Facility. Additionally the amended Credit Facility would expire on May 31, 2003. The Company has remaining term debt outstanding of $18,000 which is classified as short-term on its balance sheet dated December 31, 2001. While management currently believes that it will be successful in finalizing the amendment, there can be no assurance that amendment will be finalized shortly, if at all. The Company remains in default under the terms of its Credit Facility until execution of the amendment. Under the terms of the Credit Facility, the Company's current lenders have the authority to declare all of the debt under the Credit Facility to be immediately due and payable, and cease making additional funds available under the Credit Facility. Currently, the Company has insufficient liquid assets to satisfy the full amount of the debt under the Credit Facility. If the Company is unable to execute an agreement with its primary bank with respect to the amendment and its current lenders decide to declare the debt immediately due and payable, the Company would be forced to sell Company assets in order to generate sufficient cash to repay the debt. While management currently believes that any sale of Company assets would generate sufficient cash to repay the debt, there can be no assurance that such sales could be made in a timely manner or that such sales would generate adequate amounts of cash to repay the Company's debt. If the Company is not able to generate sufficient cash to repay the debt, the banks could take possession of the collateral pledged as security for the debt under the Credit Facility and otherwise exercise the remedies available to them under the Credit Facility. Notes payable consist of the following: December 31, 2001 2000 ---- ---- Term note (a) $ 18,000 $ - Subordinated promissory notes (b) 11,000 - Term note (c) - 247 Fixed asset term notes payable (d) - 1,898 Fixed asset line of credit (e) - 2,400 Notes payable-shareholders (f) - 112 Capital lease obligations (g) 131 205 Fixed asset line of credit (h) - 682 Acquisition loan note (i) - 4,615 Other 167 17 ------ ------ 29,298 10,176 Less: current maturities 18,163 2,531 ------ ------ $ 11,135 $ 7,645 ====== ====== (a) Under the terms of the Credit Facility, the Company secured a $20,000 term loan. A binding term sheet for an amendment to the Credit Facility in May 2002 calls for remaining maturities of $10,800 in 2002 and $7,200 in 2003. Interest is payable quarterly and bears interest at a variable euro rate (3.35% at December 31, 2001) plus 3.75% and at prime rate 4.75%) plus 2.25%. As of December 31, 2001, the entire amount has been classified as current due to the existence of events of default that have not been cured subsequent to year end, and in April 2002 pursuant to the Credit Facility, the Primary Bank increased the interest rate of this term note by 2% per annum. (b) 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 $0 in 2002, $9,000 in 2003 and $1,000 in 2004 and 2005. Interest rates are fixed at 10%. As a result of the events of default mentioned above, no payments of principal or interest can be made on these subordinated promissory notes until such time that the events of default are cured. (c) In December 1996, under an Amended and Restated Loan & Security Agreement dated November 1995 with its primary bank, as amended (collectively, 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 Euro based loan. This note was repaid in January 2001, with the proceeds from the Credit Facility. (d) During 1998, in connection with the Bank Agreement, the Company entered into a U.S. dollar denominated line of credit and a Euro 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 the variable Euro-Rate, as defined, plus 1.5%. As of December 31, 1998, the Company converted the Euro 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 was converted into a term note payable in 54 equal monthly installments. This note was repaid in January 2001, with the proceeds from the Credit Facility. (e) In August 1999, in connection with the Bank Agreement, the Company entered into a U.S. dollar denominated line of credit for the purpose of purchasing fixed assets. This line of credit was repaid in January 2001, with the proceeds from the Credit Facility. (f) Note payable - shareholders was due and repaid in September 2001. (g) The Company has capitalized lease agreements for equipment which are payable through 2002 at an interest rate of 9.2%. (h) In July 2000, in connection with the Bank Agreement, the Company entered into a U.S. dollar denominated line of credit for the purpose of purchasing fixed assets. The line of credit was converted into a term note on July 31, 2000 payable in equal consecutive monthly installments, not to exceed 5 years. This note was repaid in January 2001, with the proceeds from the Credit Facility. (i) In July 2000, in connection with the Bank Agreement, the Company entered into a U.S. dollar denominated Acquisition Loan Note for the purpose of the acquisition of other companies. This note was repaid in January 2001, with the proceeds from the Credit Facility. The minimum annual principal payments of notes payable and capital lease obligations at December 31, 2001 are: 2002 $ 18,163 2003 9,097 2004 1,035 2005 1,003 ----- $ 29,298 ====== 7. 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, 2001 2000 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 1,471 $ - Reserves on current assets 476 467 Inventory capitalization 108 329 Warranty reserve 50 270 Other accrued expenses 131 290 ----- ----- 2,236 1,356 ----- ----- Deferred tax liability: Advance license fee 563 565 Unrealized gain on foreign currency 723 - Depreciation and amortization 187 - ----- ----- 1,473 565 ----- ----- Net deferred tax asset $ 763 $ 791 ===== ===== Significant components of the provision for income taxes are as follows: Year ended December 31, 2001 2000 1999 ---- ---- ---- Current: Federal $ (5,269) $ 1,608 $ 2,160 Foreign 354 194 (17) State 32 131 150 Total current (4,883) 1,933 2,293 Deferred: Federal (166) (445) 244 State 274 (62) 99 Total deferred 108 (507) 343 (Benefit) provision for income taxes $ (4,775) $ 1,426 $ 2,636 The effective income tax rate of 38.0%, 34.25% and 35.0% for the years ended December 31, 2001, 2000, and 1999, 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 and state and foreign taxes. A reconciliation between the statutory provision and the provision for financial reporting purposes is as follows: December 31, 2001 2000 1999 ---- ---- ---- Statutory federal tax (benefit) provision $ (4,268) $ 1,415 $ 2,561 State income taxes, net of federal income tax benefit (443) 45 165 Foreign income taxes (193) (86) (349) Other 129 52 259 (Benefit) provision for income taxes $ (4,775) $ 1,426 $ 2,636 The Company has federal net operating loss carryforwards of $15,800, of which $15,300 will be carried back to years 1996-2000. The federal net operating loss carryforwards expire beginning in 2021. The Company has state net operating loss carryforwards of $9,198 and they generally begin to expire beginning in 2008. 8. Related Party Transactions The Company's principal shareholder, Chairman, 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 these related parties were approximately $869, $832, and $796 for the years ended December 31, 2001, 2000, and 1999, respectively. The lease for the real estate was renewed in March 1999 and expires in March 2004. Future minimum lease payments required under the lease are approximately $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 and CEO. In 2000, the seventh installment of the seven-year notes was paid to the principal shareholder in the amount of $121, which included $9 of interest. Other current assets include a loan receivable from the Company's Vice President, Administration, Secretary, Treasurer and director of $75 due in February 2002. The Company incurred expenses of $73, $49, and $42 for tax services rendered by a firm during the years ended December 31, 2001, 2000, and 1999, respectively. A partner in this firm is a shareholder and director of the Company. 9. Commitments & Contingencies Operating Leases The Company has entered into operating lease agreements with unrelated companies to lease manufacturing and office equipment and office space and vehicles for its foreign subsidiaries. Future minimum lease payments required under the lease agreements as of December 31, 2001 are $2,369 in 2002, $2,037 in 2003, $1,846 in 2004, $1,613 in 2005, $1,437 in 2006 and $4,976 thereafter. Rental expenses paid to third parties for 2001, 2000, and 1999 were approximately $2,318, $727 and $403, 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 "Agreement") for which the Company and Symbol pay royalties to each other under certain circumstances effective January 1, 1996. In connection with the Agreement, the Company paid Symbol an advance license fee of $1,000 in December 1996 and another $1,000 in quarterly installments of $125 over the subsequent two years ended December 1998. The Company has amended the Agreement providing for additional patent licenses whereby the Company and Symbol make recurring periodic royalty payments. Royalty expense under the Symbol Agreement amounted to $4,032, $3,761, and $3,343, in 2001, 2000, and 1999, respectively. The parties have been discussing further amendments to the Symbol Agreement which would cover current and future products of the Company and Symbol. During these discussions, the Company had elected to make certain royalty payments with respect to certain of its new products based on a provisional understanding between the parties, however, at this point the parties have not reached any agreement to further amend the Agreement. On May 3, 2002, the Company was served with a lawsuit that was filed on April 12, 2002 by Symbol in the United States District Court for the Eastern District of New York alleging that the Company is in breach of the terms of the Agreement. The Complaint seeks a declaratory judgment from the Court that the Company is in breach of the Agreement and that Symbol is not in breach of the Agreement. Under the Agreement the Company had until May 28, 2002 to cure any breach by making a payment of the royalties for the Fourth Quarter of 2001 that have been withheld pending the resolution of a dispute between the parties regarding which products are covered by the Agreement and the amount of royalties owed by each party. The Company has made this payment. However, on May 28, 2002, the Company received a notice that Symbol had not yet received the payment and therefore was terminating the Agreement. As the Company had made its payment within the cure period, the Company believes any assertion of a material breach is incorrect. The Company has not yet filed its answer to the complaint. The Company also received a notification from Symbol that Symbol was electing additional licenses under the Agreement. In March 2002, the Company received a notice from the minority shareholders of their intent to sell their 49% interest in Metrologic Eria Iberica ("MEI"). Under the Shareholder's Agreement, the majority shareholder has a 12-month period in which to find a buyer or negotiate a purchase price for the 49% interest, with a default minimum. The option to purchase the minority interest in MEI is approximately $4,570 and would be payable in 2003. 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. 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 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. On 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 wherein 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 (the "CAFC") agreed to hear the appeal. Oral argument on this issue was heard by the CAFC on October 4, 2001. On January 24, 2002, the CAFC reversed the decision by the lower court and confirmed the continued existence of the prosecution laches defense. In response, the Lemelson Partnership filed a Petition for Rehearing En Banc with the CAFC on February 6, 2002, and the Auto ID companies filed a response to the petition on February 22, 2002. 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. On October 25, 2000, the Lemelson Partnership filed its opposition to the above motion and also filed a motion for partial summary judgment that many of the claims of the Lemelson Partnership's patents satisfy the written description requirement. On July 12, 2001, the District Court denied the motions of both the Auto ID companies and the Lemelson Partnership, holding that there are genuine issues regarding material facts which preclude the granting of summary judgment for either party. 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 in his dealings before the United States Patent and Trademark Office in obtaining the patents in suit. On June 19, the Lemelson Partnership filed its opposition to the motion as well as a cross-motion for summary judgment that no inequitable conduct occurred. A hearing on this motion was held on November 9, 2001. In its decision, the District Court denied the motions of both the Auto ID companies and the Lemelson Partnership, holding that there are genuine issues regarding material facts which preclude the granting of summary judgment for either party. On July 25, 2001 the Court entered an order setting a schedule that concludes with a trial date set for August 2002. On August 1, 2001, the Auto ID companies filed another motion for partial summary judgment arguing that the Lemelson Partnership is not entitled, as a matter of law, to rely on a now-abandoned Lemelson patent application filed in 1954 to provide a filing date or disclosure for the claims of the patents-in-suit. Oral argument on the motion was heard on November 9, 2001. Again the District Court denied the motion of the Auto ID companies, holding that there are genuine issues regarding material facts which preclude the granting of summary judgment for either party. B. Metrologic v. PSC Inc. 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. 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 now in the final stages of discovery. On February 28, 2002, the court set a date for a Markman hearing in June, 2002. C. Symbol Technologies, Inc. v. Metrologic On May 3, 2002, the Company was served with a lawsuit that was filed on April 12, 2002 by Symbol Technologies, Inc. ("Symbol") in the United States District Court for the Eastern District of New York alleging that the Company is in breach of the terms of the License Agreement between Symbol and the Company (the "Agreement"). The Complaint seeks a declaratory judgment from the Court that the Company is in breach of the Agreement and that Symbol is not in breach of the Agreement. Under the Agreement the Company had until May 28, 2002 to cure any breach by making a payment of the royalties for the Fourth Quarter of 2001 that have been withheld pending the resolution of a dispute between the parties regarding which products are covered by the Agreement and the amount of royalties owed by each party. The Company has made this payment. However, on May 28, 2002, the Company received a notice that Symbol had not yet received the payment and therefore was terminating the Agreement. As the Company had made its payment within the cure period, the Company believes any assertion of a material breach is incorrect. The Company has not yet filed its answer to the complaint. 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. 10. Retirement Plans The Company maintains a noncontributory defined contribution cash or deferred profit sharing plan covering substantially all employees. Contributions are determined by the Chief Executive Officer and are equal to a percentage of each participant's compensation. The Company's contributions were $0 in 2001, $100 in 2000, and $300 in 1999. Additionally, the Company maintains an employee funded Deferred Compensation Retirement 401(k) Plan as amended, contributions to which are partially matched by the Company. In January 2001, the Company amended its Deferred Compensation Retirement 401(k) Plan to increase the Company's matching contribution to a rate of 60% on the first six percent of employee's earnings. Contribution expenses were $462, $92, and $75 in 2001, 2000, and 1999, respectively. 11. Financial Reporting for Business Segments and Geographical Information The Company generates its revenue from the sale of laser bar code scanners primarily to distributors, value-added resellers, original equipment manufacturers and directly to end users, in locations throughout the world. No individual customer accounted for 10% or more of revenues in 2001, 2000 or 1999. The Company manages its business on a geographical 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 Total North Other Operations Con- America AOA Europe Export Total Europe solidated Sales 1999 $ 33,698 - 2,578 12,499 48,775 31,328 80,103 2000 36,716 - 1,479 18,732 56,927 34,957 91,884 2001 26,505 24,259 2,051 15,934 68,749 44,939 113,688 Interest income 1999 $ 402 - - - 402 - 402 2000 238 - - - 238 19 257 2001 154 - - - 154 20 174 Interest expense 1999 $ 262 - - - 262 - 262 2000 1,482 - - - 1,482 - 1,482 2001 2,974 1,090 - - 4,064 - 4,064 Depreciation and Amortization 1999 $ 1,572 - - - 1,572 168 1,740 2000 2,098 - - - 2,098 453 2,551 2001 2,775 1,750 - - 4,525 538 5,063 Income (loss) before - provision for income taxes 1999 $7,519 - - - 7,519 14 7,533 2000 3,412 - - - 3,412 751 4,163 2001 (14,323) 957 - - (13,366) 814 (12,552) Identifiable assets 2000 62,836 - - - 62,836 18,987 81,823 2001 46,903 22,667 - - 69,570 18,036 87,606 12. 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 board members. The shares issued will either be authorized and previously unissued common stock or issued common stock reacquired by the Company. The total number of shares authorized for issuance under the Incentive Plan is 1,600. Shares canceled for any reason without having been exercised shall again be available for issuance under the Incentive Plan. An aggregate of 538 shares were available for grant under the Incentive Plan at December 31, 2001. Options granted under the Incentive Plan become exercisable over periods ranging from one to seven years. 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 2001, 2000, and 1999, 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 90%, 60%, and 50%, respectively, 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): 2001 2000 1999 Net (loss) income: As reported $ (7,777) $ 2,737 $ 4,897 Pro forma (8,636) 1,327 3,652 Net (loss) income per share: Basic: As reported $ (1.42) $ 0.50 $ 0.90 Pro forma (1.58) 0.24 0.67 Diluted: As reported Pro forma $ (1.42) $ 0.49 $ 0.90 (1.58) 0.24 0.67 A summary of the Company's stock option activity, and related information for the years ended December 31, 1999, 2000, and 2001 follows (in thousands except for share information): Options Weighted-Average Exercise Price Outstanding - January 1, 1999 752 $ 12.36 Granted 287 10.31 Exercised (3) 11.66 Canceled (100) 11.81 Outstanding - December 31, 1999 936 $ 11.79 Granted 65 12.50 Exercised (27) 11.77 Canceled (155) 11.91 Outstanding - December 31, 2000 819 $ 11.83 Granted 181 8.46 Exercised - - Canceled (116) 11.34 ----- ----- Exercisable at December 31, 2001 884 $ 11.20 ======= ===== Weighted-average fair value of options granted during 2001 $7.32 ====== Exercise prices for options outstanding as of December 31, 2001 ranged from $7.23 to $10.23. The weighted-average remaining contractual life of those options is seven years. 13. Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan whereby eligible employees have the opportunity to acquire the Company's common stock quarterly through payroll deductions, at 90% of the lower of (a) the fair market value of the stock on the first day of the applicable quarterly offering period or (b) the fair market value of the stock on the last day of the applicable quarterly offering period. 14. Acquisitions Metrologic Eria Iberica On January 26, 2000, the Company paid cash of $1,550 and assumed liabilities of $893 for a 51% interest in a joint venture for the formation of MEI. The detail of the results of operations of MEI has been included in the Company's statement of operations since January 26, 2000. The Company accounted for this acquisition under the purchase method of accounting. The purchase price has been allocated to assets and liabilities based on estimated fair values at the date of acquisition. The total purchase price including transaction costs was $2,263 and costs in excess of assets acquired (goodwill) were $1,329. The goodwill is being amortized over a twenty-year period. Goodwill amortization of $61 is included in the statement of operations for the year ended December 31, 2001. The Company's 51% joint venture interest in Metrologic Eria Iberica contains options for the Company to purchase the remaining 49% minority interest. The purchase option is calculated based on a twelve month multiple of sales. In March 2002, the minority shareholders provided notice of their intent to sell their 49% interest and the estimated purchase price is $4,570. Metrologic Eria France On July 18, 2000, the Company paid cash of $2,873 and assumed liabilities of $2,207 for a 51% interest in a joint venture for the formation of Metrologic Eria France ("MEF"). The detail of the results of operations of MEF has been included in the Company's 2000 statement of operations since July 18, 2000. The Company accounted for this acquisition under the purchase method of accounting. The purchase price has been allocated to assets and liabilities based on estimated fair values at the date of acquisition. The total purchase price including transaction costs was $4,894 and costs in excess of assets acquired (goodwill) were $2,767. The goodwill is being amortized over a twenty-year period. Goodwill amortization of $56 is included in the statement of operations for the year ended December 31, 2001. The Company's 51% joint venture interest in Metrologic Eria France contains options for the Company to purchase the remaining 49% minority interest. The purchase option is calculated based on a twelve month multiple of sales. Adaptive Optics Associates, Inc. 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 total purchase price including transaction costs was $21,612. 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 2001 statement of operations. The excess purchase price over the fair value of net assets acquired was approximately $12,465 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 years ended December 31, 2001 and 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. 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 Year Ended December 31, 2001 2000 ---- ---- Sales $ 114,147 $ 113,395 Operating (loss) income (8,943) 6,413 Net (loss) income (7,748) 1,690 (Loss) earnings per share Basic (1.42) 0.31 Diluted (1.42) 0.30 Weighted average number of shares outstanding Basic 5,457,806 5,438,553 Diluted 5,457,806 5,557,992 Supplementary Data The following tables present unaudited quarterly operating results for the Company for each quarter of 2001 and 2000. This information has been derived from unaudited financial statements and includes all adjustments, consisting only of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for these periods. Such quarterly operating results are not necessarily indicative of the Company's future results of operations. Quarterly Consolidated Operating Results (Unaudited) (in thousands except share and per share data) Three Months Ended March 31, June 30, September 30, December 31, 2001 2001 2001 2001 --------- --------- --------- --------- Sales $ 29,784 $ 28,057 $ 26,809 $ 29,038 Cost of sales 28,727 18,288 18,089 18,423 --------- --------- --------- --------- Gross profit 1,057 9,769 8,720 10,615 Selling, general and administrative expenses 7,873 8,617 7,806 8,258 Research and development expenses 1,790 1,481 1,612 1,680 --------- --------- --------- --------- Operating (loss) income (8,606) (329) (698) 677 Other (expenses) income Interest income 121 16 10 27 Interest expense (1,211) (1,021) (953) (879) Foreign currency transaction (loss) gain (77) (84) 337 256 Other, net (40) (39) (58) (1) --------- --------- --------- --------- Total other expenses (1,207) (1,128) (664) (597) --------- --------- --------- --------- (Loss) income before provision for income taxes (9,813) (1,457) (1,362) 80 (Benefit) provision for income taxes (3,740) (550) (517) 32 --------- --------- --------- --------- Net (loss) income $ (6,073) $ (907) $ (845) $ 48 ========= ========= ========= ========= Basic (loss) earnings per share Weighted average shares outstanding 5,453,678 5,456,365 5,458,368 5,462,814 ========= ========= ========= ========= Basic (loss) earnings per share $ (1.11) $ (0.17) $ (0.15) $ 0.01 ========= ========= ========= ========= Diluted (loss) earnings per share Weighted average shares outstanding 5,453,678 5,456,365 5,458,368 5,462,814 Net effect of dilutive securities - - - - --------- --------- --------- --------- Total shares outstanding used in computing diluted earnings per share 5,453,678 5,456,365 5,458,368 5,462,814 ========= ========= ========= ========= Diluted (loss) earnings per share $ (1.11) $ (0.17) $ (0.15) $ 0.01 ========= ========= ========= ========= Supplementary Data (Con't) Quarterly Consolidated Operating Results (Unaudited) (In thousands except share and per share data) Three Months Ended March 31, June 30, September 30, December 31, 2000 2000 2000 2000 --------- --------- --------- --------- Sales $ 22,332 $ 23,128 $ 22,453 $ 23,971 Cost of sales 13,215 13,903 13,671 14,605 --------- --------- --------- --------- Gross profit 9,117 9,225 8,782 9,366 Selling, general and administrative expenses 5,770 6,080 6,476 7,988 Research and development expenses 1,332 1,338 1,246 1,059 Severance costs - - 160 - --------- --------- --------- --------- Operating income 2,015) 1,807 900 319 Other (expenses) income Interest income 71 74 56 56 Interest expense (139) (226) (481) (636) Foreign currency transaction (loss) gain 13 205 (145) 457 Other, net (67) (101) (96) 81 --------- --------- --------- --------- Total other expenses (122) (48) (666) (42) --------- --------- --------- --------- Income before provision for income taxes 1,893 1,759 234 277 Provision for income taxes 681 561 84 100 --------- --------- --------- --------- Net income $ 1,212) $ 1,198 $ 150 $ 177 ========= ========= ========= ========= Basic earnings per share Weighted average shares outstanding 5,420,321 5,436,104 5,446,802 5,450,984 ========= ========= ========= ========= Basic earnings per share $ 0.22 $ 0.22 $ 0.03 $ 0.03 ========= ========= ========= ========= Diluted earnings per share Weighted average shares outstanding 5,420,321 5,436,104 5,446,802 5,450,984 Net effect of dilutive securities 161,389 250,425 65,698 245 --------- --------- --------- --------- Total shares outstanding used in computing diluted earnings per share 5,581,710 5,686,529 5,512,500 5,451,229 ========= ========= ========= ========= Diluted earnings per share $ 0.22 $ 0.21 $ 0.03 $ 0.03 ========= ========= ========= ========= Schedule II - Valuation and Qualifying Accounts Years ended December 31, 2001, 2000, and 1999 (All dollar amounts in thousands) 2001 2000 1999 Allowance for possible losses on accounts and notes receivable: Balance at beginning of year $ 655 $ 350 $ 389 Additions charged to expense 1,042 322 203 Write-offs (1,275) (17) (242) Balance at end of year $ 422 $ 655 $ 350 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. No change of accountants and/or disagreement on any matter of accounting principles or financial statement disclosures has occurred within the last two years. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT C. Harry Knowles Mr. Knowles, 73, is the founder of the Company and has been Chairman of the Board of Directors since the Company's inception. Mr. Knowles has served as Chief Executive Officer since 1985. Mr. Knowles served as President of the Company from its inception through 1982 and from 1985 until February 2000. 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. Mr. Knowles is married to Janet H. Knowles, the Vice President, Administration, Secretary, Treasurer and a director of the Company. Mr. Knowles' current term as a director expires in 2003. Thomas E. Mills IV Mr. Mills, 42, became a director of the Company in March 1999, became President of the Company in February 2000, and has served as the Company's Chief Operating Officer since April 1998, and as Chief Financial Officer since May 1994. From April 1998 to February 2000, Mr. Mills served as the Company's Executive Vice President and from June 1995 to April 1998 as the Company's Vice President, Finance. 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. Mr. Mills' current term as a director expires in 2002. Richard C. Close Mr. Close, 59, became a director of the Company in September 1999. He is a private investor and also provides consulting and transition management for companies in the midst of merger and acquisition activities. From January 1997 until August 2000, Mr. Close served as President and General Manager of Polaroid Graphics Imaging LLC. Polaroid Graphics Imaging LLC was formerly a division of Polaroid Corporation, and is now a privately-held independent company. Mr. Close served as President and Chief Executive Officer of Computer Identics Corporation from 1993 until 1997. Mr. Close has a Bachelor of Science in Electrical Engineering from Vanderbilt University. Mr. Close's current term as a director expires in 2004. Janet H. Knowles Mrs. Knowles, 60, 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. Mrs. Knowles is married to C. Harry Knowles, the Chief Executive Officer and Chairman of the Board of Directors of the Company. Mrs. Knowles' current term as a director expires in 2002. John H. Mathias Mr. Mathias, 55, became a director of the Company in September 1999. Since 1981 Mr. Mathias has been Chairman and Chief Executive Officer of The JPM Company, a publicly traded company that manufactures wire and cable assemblies at various locations throughout the world. Mr. Mathias has a Bachelor of Science in Business Administration and a Masters in Mathematics, both from Bucknell University. Mr. Mathias' current term as a director expires in 2004. Stanton L. Meltzer Mr. Meltzer, 63, has been a director of the Company since 1987. Mr. Meltzer, a graduate of Wharton School of the University of Pennsylvania, is a certified public accountant and since 1964 has been a principal in the firm of Gold, Meltzer, Plasky & Wise, a professional corporation of certified public accountants, located in Moorestown, New Jersey. He has chaired conferences, lectured and taught courses to accountants throughout the United States for the American Institute of Certified Public Accountants and other professional organizations. Mr. Meltzer's current term as a director expires in 2003. Hsu Jau Nan Mr. Hsu, 58, became a director of the Company in September 1999. Mr. Hsu is a major owner and managing director of several companies in Taiwan, Singapore, and China which, in the aggregate, employ over 5,000 people. From 1973 to 1983, Mr. Hsu was an Engineering Manager for General Electric's television operations. Mr. Hsu has an Electrical Engineering degree from National Taipei University of Technology. Mr. Hsu's current term as a director expires in 2002. William Rulon-Miller Mr. Rulon-Miller, 53, became a director of the Company in December 1997. Mr. Rulon-Miller joined Janney Montgomery Scott Inc. in 1979 and currently serves as Senior Vice President and Director of Investment Banking. He is currently on the Board of Directors of The JPM Company, Inc. He is a partner of Five Penn Center Partners and a director of The Penn Janney Fund, Inc., which are private venture capital organizations. Mr. Rulon-Miller graduated from Princeton University and received an M.B.A. from the Wharton School of the University of Pennsylvania. Mr. Rulon-Miller's current term as a director expires in 2004. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, generally requires the Company's directors, executive officers and persons who own more than 10% of a registered class of the Company's equity securities ("10% owners") to file with the Commission initial reports of beneficial ownership and reports of changes in beneficial ownership of Common Stock and other equity securities of the Company. Directors, executive officers and 10% owners are required by regulations of the Commission to furnish the Company with copies of all Section 16(a) forms they file. All officers, directors and 10% owners filed reports for transactions required by Section 16(a) of the Securities Exchange Act of 1934. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Stanton L. Meltzer, a member of the Compensation Committee, is a principal of an accounting firm which, in fiscal 2001, charged fees of approximately $73,438 for tax consulting services performed for the Company. William Rulon-Miller, a member of the Compensation Committee, serves as Senior Vice President and Co-Director of Investment Banking at Janney Montgomery Scott, which, in January 2001, charged fees of approximately $199,627 for investment banking services in connection with the acquisition of Adaptive Optics Associates, Inc. COMPENSATION OF DIRECTORS Directors who are not employees of the Company receive an annual retainer of $10,000 plus expenses, and fees of $1,000 for each Board of Directors' meeting attended and $500 for each committee meeting attended. In addition, directors are eligible to receive options to purchase the Company's Common Stock, at the discretion of the Incentive Committee, under the Company's Incentive Plan. EXECUTIVE COMPENSATION Summary of Cash and Certain Other Compensation The following table summarizes the compensation earned for services rendered during each of the last three fiscal years with respect to the Company's Chief Executive Officer and the Company's four other most highly compensated executive officers. SUMMARY COMPENSATION TABLE Annual Compensation ------------------------------------- Long-Term Compensation Awards ------------------- All Other Other Securities Compen- Principal Fiscal Annual Underlying sation Position Year Salary($) Bonus($) Compensation Options(#) ($)(1) -------- ---- --------- -------- ------------ ---------- ------- C. Harry Knowles 2001 $350,000 - - - $6,300 Chairman of the 2000 275,000(2)$250,000 - - 1,847 Board and Chief 1999 200,000 200,000 - - 3,743 Executive Officer Thomas E. Mills IV 2001 250,000 - - - 6,300 President, Chief 2000 215,000(3) 250,000 - 8,000 1,847 Operating Officer 1999 180,000 230,000 - 20,000 3,743 and Chief Financial Officer Dale M. Fischer 2001 157,400 122,420 - - 6,300 Vice President, 2000 155,000 148,362 - 8,000 1,847 International Sales 1999 150,000 200,954 - 14,000 3,743 Benny A. Noens 2001 162,500 326,140 $8,478(4) - 6,300 Vice President, 2000 155,000 161,435 7,034(4) - 1,847 European Sales and 1999 150,000 297,545 8,963(4) 8,000 3,743 Managing Director, Metrologic Instruments GmbH Kevin P. Woznicki(5) 2001 162,220 210,130 - - 6,300 Vice President, 2000 155,000 382,794 - 8,000 1,847 Sales, The Americas 1999 150,000 450,788 - 10,000 3,743 (1) Represents the Company's contributions to the Company's profit sharing plan, including employer 401(k) matching contributions, on behalf of each executive officer. (2) Represents base salary of $200,000 through June 2000 and $350,000 thereafter. (3) Represents base salary of $180,000 through June 2000 and $250,000 thereafter. (4) Mr. Noens' other annual compensation includes certain foreign housing costs incurred by the Company on behalf of Mr. Noens. (5) In March 2002, Mr. Woznicki resigned his position with the Company. STOCK OPTION GRANTS There were no options granted pursuant to the Company's Incentive Plan to any named officers during the fiscal year ended December 31, 2001 FISCAL YEAR - END OPTION INFORMATION The following table sets forth information with respect to the number of shares covered by exercisable and unexercisable options held by the executive officers of the Company named in the Summary Compensation Table on December 31, 2001 and the value of such unexercised options on December 31, 2001. No stock options were exercised by any of such executive officers during 2001. VALUE OF OPTIONS HELD AT DECEMBER 31, 2001 Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options at 12/31/01 Options at 12/31/01($)(1) --------------------------- ---------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- C. Harry Knowles - - - - Thomas E. Mills IV 65,000 8,000 0 0 Dale M. Fischer 51,400 5,600 0 0 Benny A. Noens 34,800 3,200 0 0 Kevin P. Woznicki 46,000 4,000 0 0 (1) Options are in-the-money if the market value of the shares covered thereby is greater than the options' exercise price. Calculated based on the fair market value at December 31, 2001 of $7.15 per share, less the exercise price. EMPLOYMENT CONTRACTS On January 8, 2001, the Company entered into employment contracts with each of C. Harry Knowles, Chairman of the Board of Directors and Chief Executive Officer of the Company and Thomas E. Mills IV, President, Chief Operating Officer and Chief Financial Officer of the Company. The terms and conditions of these contracts provide that Messrs. Knowles and Mills are to receive an annual base salary of $350,000 and $250,000, respectively, for the year ending December 31, 2001. The initial term of the each of Messrs. Knowles and Mills contracts expires on December 31, 2002 and provide for one-year renewal periods thereafter. The employment contracts provide for a severance payment of an amount equal to 12 months of the executive's base salary in the event the executive terminates his employment for "Good Reason" (diminution in the executive's responsibilities by the Company or failure of the Company to pay the executive his compensation) or if the Company terminates the executive without cause. Additionally, in the event of a change-in-control of the Company, and the subsequent termination or diminution in the executive's responsibilities, each of Messers. Knowles and Mills will be entitled to a payment of an amount equal to two times the executive's base salary annualized over the two-year period leading up to termination. Under the terms of the employment contracts a "change-in-control" occurs if: o Any person, entity, or group (with certain exceptions) becomes the beneficial owner of 20% or more of the outstanding shares of the Company's common stock; o There is a change in a majority of the Board of Directors other than by election or nomination by a vote of the majority of directors comprising the Incumbent Board; o Upon consummation of, or approval by the Company's shareholders of, a reorganization, merger, consolidation or sale that results in the Company's shareholders owning less than 50% of the combined voting power of the surviving corporation following the transaction; or o Upon consummation of, or approval by the Company's shareholders of a liquidation or dissolution of the Company or the sale of all or substantially all of the assets of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of May 24, 2002 by: (i) each person known by the Company to be a beneficial owner of more than five percent of the outstanding Common Stock; (ii) each of the Company's directors; (iii) each nominee for election as a director; (iv) each executive officer of the Company named in the Summary Compensation Table above; and (v) all executive officers and directors of the Company as a group. Name of Beneficial Owner Shares Beneficially Owned(1) Percent of Class(1) ------------------------ --------------------------- ------------------- C. Harry Knowles 3,323,000 60.8% Janet H. Knowles 3,323,000(2) 60.8% Richard C. Close 9,000(3) * John H. Mathias 6,500(4) * Stanton L. Meltzer 24,833(5) * Thomas E. Mills IV 69,755(6)(7) 1.2% Hsu Jau Nan 8,000(8) * William Rulon-Miller 14,200(9) * Dale M. Fischer 62,230(10)(11) 1.1% Benny A. Noens 37,336(12) * Kevin Woznicki 47,000(13) * All executive officers and directors as a group (15 persons) 3,674,983 63.7% ----------------- *Less than 1%. (1) Based on 5,465,605 shares outstanding as of April 25, 2002. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the "Commission") and generally includes voting or investment power with respect to securities. (2) Janet H. Knowles, Vice President, Administration, Secretary and Treasurer is the wife of C. Harry Knowles and, therefore, may be deemed to have shared voting and investment power with respect to the 3,323,000 shares owned by Mr. Knowles. (3) Includes currently exercisable options to purchase 9,000 shares of Common Stock. (4) Includes currently exercisable options to purchase 6,000 shares of Common Stock. (5) Includes currently exercisable options to purchase 1,500 shares of Common Stock. (6) Includes an aggregate of 300 shares held by Mr. Mills' children. (7) Includes currently exercisable options to purchase 65,000 shares of Common Stock. (8) Includes currently exercisable options to purchase 8,000 shares of Common Stock. (9) Includes currently exercisable options to purchase 11,500 shares of Common Stock. (10) Includes currently exercisable options to purchase 51,400 shares of Common Stock. (11) Includes 1,000 shares held in a trust of which Mr. Fischer is a trustee and a beneficiary. (12) Includes currently exercisable options to purchase 34,800 shares of Common Stock. (13) Includes currently exercisable options to purchase 46,000 shares of Common Stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN TRANSACTIONS Since 1990, the Company's executive offices and manufacturing facilities have been located in Blackwood, New Jersey in a building leased by the Company from C. Harry Knowles, Chairman of the Board and Chief Executive Officer of the Company, and Janet H. Knowles, Vice President, Administration, Secretary, Treasurer and a director of the Company. During 2001, the Company paid Mr. and Mrs. Knowles an aggregate of approximately $869,201 under the lease agreement for rent payments. Janet H. Knowles, a director and officer of the Company, borrowed $75,000 from the Company under a promissory note to be repaid on or about August 31, 2002 due to collateral being held by the banks guarantors for the Credit Agreement. The accounting firm in which Stanton L. Meltzer, a director and shareholder of the Company, is a principal, charged fees of approximately $73,438 during 2001 for tax consulting services performed for the Company. The investment banking company of Janney Montgomery Scott in which William Rulon-Miller serves as Senior Vice President and Co-Director of Investment Banking charged fees of $199,627 in connection with the acquisition of Adaptive Optics Associates, Inc. In connection with a distribution in the amount of $1,561,000 paid to the Company's shareholders of record in September 1994, on account of previously undistributed S Corporation earnings accumulated through December 31, 1993, which were taxed at the shareholder level, $780,500 is being paid pursuant to seven-year notes of the Company, bearing interest at an annual rate equal to PNC Bank, National Association's prime rate plus 0.5%. Payments made to Mr. Knowles in 2001 amounted to approximately $113,383 including approximately $8,796 in interest. The amounts paid in 2001 represent the final payment of the seven-year note. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements The Financial Statements listed below are filed as part of this Annual Report on Form 10-K: Report of Ernst & Young LLP, Independent Auditors Consolidated Balance Sheets at December 31, 2001 and 2000 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements Supplementary Data (Unaudited) 2. 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. 3. Exhibits required to be filed by Item 601 of Regulation S-K. 2.1 Option Agreement dated as of March 1, 1995 among Metrologic Instruments, Inc. and the parties listed on schedule A thereto (incorporated by reference to Exhibit 2.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 3.1 Amended and Restated Certificate of Incorporation of Metrologic Instruments, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 3.2 Amended and Restated Bylaws of Metrologic Instruments, Inc. (incorporated by reference to Exhibit 3.02 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78358)). 10.1 Metrologic Instruments, Inc. 1994 Incentive Plan (incorporated by reference to Exhibit 99 to the Registrant's Registration Statement on Form S-8 (Reg. No. 33-89376)). 10.2 Metrologic Instruments, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 99 to the Registrant's Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (Reg. No. 33-86670) and Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 10.3 Lease Agreement dated April 1, 1994 among C. Harry Knowles, Janet H. Knowles and Metrologic Instruments, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78358)). 10.4 Agreement of Settlement between Symbol Technologies, Inc. and Metrologic Instruments, Inc. (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78358)). 10.5 Agreement and Release dated February 7, 1986 among Michael L. Sanyour, C. Harry Knowles, Janet H. Knowles and Metrologic Instruments, Inc. (incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78358)). 10.6 Agreement dated January 6, 1995 between Michael L. Sanyour, C. Harry Knowles, Janet H. Knowles and Metrologic Instruments, Inc. (incorporated by reference to Exhibit 10.6(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.7 Promissory Note from Metrologic Instruments, Inc. to C. Harry Knowles (incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78358)). 10.8 Indemnification Agreement between Metrologic Instruments, Inc. and C. Harry Knowles and Janet H. Knowles (incorporated by reference to Exhibit 10.9 to the Registrant's Registration statement on Form S-1 (Reg. No. 33-78358)). 10.9 Agreement between Symbol Technologies, Inc. and Metrologic Instruments, Inc. dated December 18, 1996 (incorporated by reference to Exhibit 10 to the Registrant's Current Report on Form 8-K filed on February 14, 1997). 10.10 First Amendment to Metrologic Instruments, Inc. 1994 Incentive Plan dated July 1, 1997 (incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.11 Agreement for Settlement, Dismissal of Claims and Mutual Releases dated April 9, 1997 between Metrologic Instruments, Inc. and PSC Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed April 16, 1997). 10.12 Stipulation of Dismissal filed April 10, 1997 in the United States District Court for the Western District of New York (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed April 16, 1997). 10.13 Joint Venture Agreement between MTLG Investments, Inc. and CCH Automation Systems, Inc. dated December 1997 (incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 10.14 Quotaholders' Agreement between MTLG Investments, Inc and CCH Automation Systems, Inc. dated December 1997 (incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 10.15 Guarantee of Mr. Chaim Bulka and Mrs. Gilda Meire Rosenberg Bulka in favor of MTLG Investments, Inc. dated December 12, 1997 (incorporated by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 10.16 Stock Purchase Agreement dated December 22, 2000 by and among United Technologies Optical Systems, Inc., Hamilton Sundstrand Corporation, MTLG Investments Inc. and Metrologic Instruments, Inc. (incorporated by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K filed January 23, 2001). 10.17 Credit Agreement dated January 8, 2001 by and among Metrologic Instruments, Inc., Adaptive Optics Associates, Inc., the Guarantors named therein, PNC Bank, National Association, as agent to the Banks and the Banks named therein (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed January 23, 2001). 10.18 Subordination, Nondisturbance and Attornment Agreement dated January 8, 2001, by and among Metrologic Instruments, Inc., C. Harry Knowles, Janet Knowles, Metrologic Instruments, Inc. and PNC Bank, National Association, as Agent (incorporated by reference to Exhibit 99.4 to the Registrant's Current Report on Form 8-K filed January 23, 2001). 10.19 Security Agreement dated January 8, 2001, by and among Metrologic Instruments, Inc., C. Harry Knowles and Janet Knowles (incorporated by reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K filed January 23, 2001). 10.20 Amended and Restated Intercreditor Agreement between PNC Bank, National Association, United Technologies Optical Systems, Inc., C. Harry Knowles, Janet H. Knowles, Registrant, Adaptive Optics Associates, Inc., and MTLG Investments Inc. (incorporated by reference to Exhibit 10.22 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2000). 10.21 Employment Agreement dated January 8, 2001 between Metrologic Instruments, Inc. and C. Harry Knowles (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001). 10.22 Employment Agreement dated January 8, 2001 between Metrologic Instruments, Inc. and Thomas E. Mills IV (incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001). 10.23 Subordinated Promissory Note in the amount of $11 million, dated November 16, 2001, executed by MTLG Investments, Inc. in favor of United Technology Optical Systems, Inc. (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed December 2, 2001). 21 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP (b) Reports on Form 8-K The Registrant filed a report on Form 8-K dated January 23, 2001, a report on Form 8-K/A dated March 23, 2001 and a Form 8-K on December 2, 2001. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. METROLOGIC INSTRUMENTS, INC. By:/s/ C. Harry Knowles C. Harry Knowles Chief Executive Officer (Principal Executive Officer) Dated: May 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ C. Harry Knowles Chairman of the Board, President May 28, 2002 C. Harry Knowles and Chief Executive Officer (Principal Executive Officer) /s/ Thomas E. Mills IV Director, President, May 28, 2002 Thomas E. Mills IV Chief Operating Officer, Chief Financial Officer and Vice President Finance (Principal Financial Officer and Principal Accounting Officer) /s/ Richard Close Director May 28, 2002 Richard Close /s/ Janet H. Knowles Director, Vice President, May 28, 2002 Janet H. Knowles Administration, Secretary and Treasurer /s/ John H. Mathias Director May 28, 2002 John H. Mathias /s/ Stanton L. Meltzer Director May 28, 2002 Stanton L. Meltzer /s/ William Rulon-Miller Director May 28, 2002 William Rulon-Miller EXHIBIT INDEX 2.1 Option Agreement dated as of March 1, 1995 among Metrologic Instruments, Inc. and the parties listed on schedule A thereto (incorporated by reference to Exhibit 2.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 3.1 Amended and Restated Certificate of Incorporation of Metrologic Instruments, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 3.2 Amended and Restated Bylaws of Metrologic Instruments, Inc. (incorporated by reference to Exhibit 3.02 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78358)). 10.1 Metrologic Instruments, Inc. 1994 Incentive Plan (incorporated by reference to Exhibit 99 to the Registrant's Registration Statement on Form S-8 (Reg. No. 33-89376)). 10.2 Metrologic Instruments, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 99 to the Registrant's Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (Reg. No. 33-86670) and Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 10.3 Lease Agreement dated April 1, 1994 among C. Harry Knowles, Janet H. Knowles and Metrologic Instruments, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78358)). 10.4 Agreement of Settlement between Symbol Technologies, Inc. and Metrologic Instruments, Inc. (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78358)). 10.5 Agreement and Release dated February 7, 1986 among Michael L. Sanyour, C. Harry Knowles, Janet H. Knowles and Metrologic Instruments, Inc. (incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78358)). 10.6 Agreement dated January 6, 1995 between Michael L. Sanyour, C. Harry Knowles, Janet H. Knowles and Metrologic Instruments, Inc. (incorporated by reference to Exhibit 10.6(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.7 Promissory Note from Metrologic Instruments, Inc. to C. Harry Knowles (incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-78358)). 10.8 Indemnification Agreement between Metrologic Instruments, Inc. and C. Harry Knowles and Janet H. Knowles (incorporated by reference to Exhibit 10.9 to the Registrant's Registration statement on Form S-1 (Reg. No. 33-78358)). 10.9 Agreement between Symbol Technologies, Inc. and Metrologic Instruments, Inc. dated December 18, 1996 (incorporated by reference to Exhibit 10 to the Registrant's Current Report on Form 8-K filed on February 14, 1997). 10.10 First Amendment to Metrologic Instruments, Inc. 1994 Incentive Plan dated July 1, 1997 (incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.11 Agreement for Settlement, Dismissal of Claims and Mutual Releases dated April 9, 1997 between Metrologic Instruments, Inc. and PSC Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed April 16, 1997). 10.12 Stipulation of Dismissal filed April 10, 1997 in the United States District Court for the Western District of New York (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed April 16, 1997). 10.13 Joint Venture Agreement between MTLG Investments, Inc. and CCH Automation Systems, Inc. dated December 1997 (incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 10.14 Quotaholders' Agreement between MTLG Investments, Inc and CCH Automation Systems, Inc. dated December 1997 (incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 10.15 Guarantee of Mr. Chaim Bulka and Mrs. Gilda Meire Rosenberg Bulka in favor of MTLG Investments, Inc. dated December 12, 1997 (incorporated by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 10.16 Stock Purchase Agreement dated December 22, 2000 by and among United Technologies Optical Systems, Inc., Hamilton Sundstrand Corporation, MTLG Investments Inc. and Metrologic Instruments, Inc. (incorporated by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K filed January 23, 2001). 10.17 Credit Agreement dated January 8, 2001 by and among Metrologic Instruments, Inc., Adaptive Optics Associates, Inc., the Guarantors named therein, PNC Bank, National Association, as agent to the Banks and the Banks named therein (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed January 23, 2001). 10.18 Subordination, Nondisturbance and Attornment Agreement dated January 8, 2001, by and among Metrologic Instruments, Inc., C. Harry Knowles, Janet Knowles, Metrologic Instruments, Inc. and PNC Bank, National Association, as Agent (incorporated by reference to Exhibit 99.4 to the Registrant's Current Report on Form 8-K filed January 23, 2001). 10.19 Security Agreement dated January 8, 2001, by and among Metrologic Instruments, Inc., C. Harry Knowles and Janet Knowles (incorporated by reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K filed January 23, 2001). 10.20 Amended and Restated Intercreditor Agreement between PNC Bank, National Association, United Technologies Optical Systems, Inc., C. Harry Knowles, Janet H. Knowles, Registrant, Adaptive Optics Associates, Inc., and MTLG Investments Inc. (incorporated by reference to Exhibit 10.22 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2000). 10.21 Employment Agreement dated January 8, 2001 between Metrologic Instruments, Inc. and C. Harry Knowles (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001). 10.22 Employment Agreement dated January 8, 2001 between Metrologic Instruments, Inc. and Thomas E. Mills IV (incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001). 10.23 Subordinated Promissory Note in the amount of $11 million, dated November 16, 2001, executed by MTLG Investments, Inc. in favor of United Technology Optical Systems, Inc. (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed December 2, 2001). 21 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Metrologic do Brasil Ltda., a Brazil corporation Metrologic Asia (PTE) Ltd., a Singapore corporation MTLG Investments Inc., a Delaware corporation Metrologic Instruments GmbH, a German corporation Metro (Suzhou) Technologies Co., Ltd., a China corporation Metrologic Eria Iberica SL, a Spain corporation Metrologic Italia S.r.l., an Italy corporation Metrologic Eria France S.A., a France corporation Metrologic Instruments UK Limited, a United Kingdom corporation MetroAsia Resources, Inc., a Taiwan corporation Adaptive Optics Associates, Inc., a Delaware corporation Metrologic Japan Co. Ltd., a Japan corporation EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-89376) pertaining to the Metrologic Instruments, Inc. 1994 Incentive Plan and the Registration Statement (Form S-8 No. 33-86670) pertaining to the Metrologic Instruments, Inc. Employee Stock Purchase Plan of our report dated May 28, 2002, with respect to the consolidated financial statements and schedule of Metrologic Instruments, Inc. included in this Annual Report (Form 10-K/A, Amendment No. 2) for the year ended December 31, 2001. /s/ Ernst & Young LLP Philadelphia, Pennsylvania May 28, 2002