10-Q/A 1 q1a2002.txt FORM 10-Q/A FILED MAY 28, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q/A Amendment No. 1 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to _____ Commission file number 0-24172 Metrologic Instruments, Inc. (Exact name of registrant as specified in its charter) New Jersey 22-1866172 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 90 Coles Road, Blackwood, New Jersey 08012 (Address of principal executive offices) (Zip Code) (856) 228-8100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ As of May 28, 2002 there were 5,465,605 shares of Common Stock, $.01 par value per share, outstanding. METROLOGIC INSTRUMENTS, INC. INDEX Page No. Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 3 Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 Part II - Other Information Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 Exhibit Index 20 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements Metrologic Instruments, Inc. Consolidated Balance Sheets (amounts in thousands except share data) March 31, December 31, Assets 2002 2001 -------- -------- (Unaudited) Current assets: Cash and cash equivalents $ - $ 557 Restricted cash 3,200 3,200 Accounts receivable, net of allowance 19,139 20,401 Income tax receivable 4,600 4,600 Inventory 18,566 18,385 Deferred income taxes 1,396 1,535 Other current assets 5,294 2,379 -------- -------- Total current assets 52,195 51,057 Property, plant and equipment, net 13,525 13,776 Patents and trademarks, net of amortization 4,198 4,062 Holographic technology, net of amortization 455 484 Advance license fee, net of amortization 1,382 1,412 Goodwill, net of amortization 14,510 15,249 Deferred income taxes 1,964 701 Other assets 870 865 -------- -------- Total assets $ 89,099 $ 87,606 ======== ======== Liabilities and shareholders' equity Current liabilities: Current portion of lines of credit $ 9,183 $ 11,433 Current portion of notes payable 20,135 18,163 Accounts payable 8,582 6,930 Accrued expenses 15,061 12,176 -------- -------- Total current liabilities 52,961 48,702 Notes payable, net of current portion 8,349 11,135 Deferred income taxes 1,019 951 Other liabilities 543 557 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; 5,465,605 and 5,463,382 shares issued and outstanding in 2002 and 2001, respectively 55 55 Additional paid-in capital 17,651 17,634 Retained earnings 12,947 12,926 Accumulated other comprehensive loss (4,426) (4,354) -------- -------- Total shareholders' equity 26,227 26,261 -------- -------- Total liabilities and shareholders' equity $ 89,099 $ 87,606 ======== ======== See Notes to Financial Statements Metrologic Instruments, Inc. Condensed Consolidated Statements of Operations (amounts in thousands except share and per share data) Three Months Ended March 31, -------------------------- 2002 2001 -------- -------- (unaudited) Sales $ 27,529 $ 29,784 Cost of sales 17,556 28,727 -------- -------- Gross profit 9,973 1,057 Selling, general and administrative expenses 7,280 7,873 Research and development expenses 1,713 1,790 Severance costs 276 - -------- -------- Operating income (loss) 704 (8,606) Other income (expenses) Interest income 23 121 Interest expense (696) (1,211) Foreign currency transaction (loss) gain (5) (77) Other, net 10 (40) -------- -------- Total other expenses (668) (1,207) -------- -------- Income (loss) before provision for income taxes 36 (9,813) Provision (benefit) for income taxes 14 (3,740) -------- -------- Net income (loss) $ 22 $ (6,073) ======== ======== Basic and diluted earnings (loss) per share Weighted average shares outstanding 5,463,431 5,453,678 ======== ======== Basic and diluted earnings (loss) per share $ - $ (1.11) ======== ======== See Notes to Financial Statements Metrologic Instruments, Inc. Condensed Consolidated Statements of Cash Flows (amounts in thousands) Three Months Ended March 31, --------------------------- 2002 2001 -------- -------- (unaudited) Operating activities Net cash provided by operating activities $ 2,384 $ 6,773 Investing activities Purchase of property, plant and equipment (485) (404) Patents and trademarks (214) (220) Cash paid for purchase of business, net of cash acquired - (8,739) Other intangibles 709 357 -------- ------- Net cash provided by (used in) investing activities 10 (9,006) Financing activities Proceeds from exercise of stock options and employee stock purchase plan 16 17 Principal payments on notes payable (762) (1,362) Net (payments) proceeds from line of credit (2,250) 6,455 Capital lease payments (52) (23) -------- ------- Net cash (used in) provided by financing activities (3,048) 5,087 Effect of exchange rates on cash 97 (468) -------- ------- Net (decrease) increase in cash and cash equivalents (557) 2,386 Cash and cash equivalents at beginning of period 557 2,332 -------- ------- Cash and cash equivalents at end of period $ - $ 4,718 ======== ======= Supplemental Disclosure Cash paid for interest $ 451 $ 434 ======== ======= Cash paid for income taxes $ 23 $ 20 ======== ======= See Notes to Financial Statements METROLOGIC INSTRUMENTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands) (Unaudited) 1. Business Metrologic Instruments, Inc. and its subsidiaries (collectively, the "Company") design, manufacture and market bar code scanning and high-speed automated data capture solutions using laser, holographic and vision-based technologies. The Company offers expertise in 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. 2. Accounting Policies Interim Financial Information The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. The results of the interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The Condensed Consolidated Financial Statements and these Notes should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2001, including the Consolidated Financial Statements and the Notes to Consolidated Financial Statements for the year ended December 31, 2001 contained therein. In connection with the Company's reaching an agreement in principle to amend its Credit Facility, the Company filed an amendment to its Form 10-K for the year ended December 31, 2001 with an audit report from our independent auditors. Additionally, our auditors were able to complete their timely SAS71 review procedures with respect to the quarter ended March 31, 2002. Accordingly, the Company is filing this amendment to its Form 10-Q for the quarter ended March 31, 2002. As more fully described in Note 9, the Company has remaining term debt outstanding of $17,250 which is classified as short-term on its balance sheet at March 31, 2002. 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. While management currently believes that it will be successful in finalizing the amendment, there can be no assurance that the amendment will be finalized shortly, if at all. Therefore, the Company remains in default under the terms of its Credit Facility until execution of the amendment. If the Company is able to enter into the amendment to the Credit Facility, it expects to file another amendment to the Form 10-Q for the quarter ended March 31, 2002, and to reclassify certain of its bank debt from short-term liabilities to long-term liabilities in the amount of approximately $6,450. Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Certain 2001 amounts have been reclassified to conform to the 2002 presentation. 3. Cost of Sales Cost of sales for the three months ended March 31, 2001 included $10,040 of special charges and other costs as follows: $4.5 million of costs associated with products that are not anticipated to be included in the prospective costs to manufacture similar products because of reductions in material costs and manufacturing efficiencies; $3.5 million of similar costs associated with a valuation charge taken on products included in inventory at March 31, 2001 due to the related cost reductions noted above; $1.0 million of costs associated with inventory deemed to be obsolete at March 31, 2001; and $1.0 million of costs associated with the expensing of floor stock inventory that had been previously capitalized by the Company. 4. Inventory Inventory consists of the following: March 31, 2002 December 31, 2001 ------------------ ------------------ Raw materials $ 6,030 $ 7,271 Work-in-process 4,084 4,144 Finished goods 8,452 6,970 ------ ------ 18,566 18,385 ------ ------ 5. Goodwill In the first quarter of 2002, the Company adopted the Provisions of Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets ". The Company has not performed an impairment review of its goodwill and thus is unable to assess the impact on the results of operations or financial condition as of March 31, 2002. The Company hopes to perform its impairment review during the second quarter of 2002. The Company applied SFAS No. 142 on January 1, 2002. The amortization expense and net loss for the year of initial application and prior year are as follows: Three Months Ended March 31, 2001 -------------- Goodwill amortization $ (330) Adjusted net loss $(5,743) A reconciliation between reported net income (loss) to the adjusted net income (loss) is as follows: Three Months Ended March 31, 2002 2001 -------- -------- Reported net income (loss) $ 22 $ (6,073) Add back: Goodwill amortization - 330 -------- -------- Adjusted net income $ 22 $ (5,743) ======== ======== Basic earnings per share: Reported net income (loss) $ - $ (1.11) Goodwill amortization $ - $ 0.06 -------- -------- Adjusted net income $ - $ (1.05) ======== ======== Diluted earnings per share: Reported net income (loss) $ - $ (1.11) Goodwill amortization $ - $ 0.06 -------- -------- Adjusted net income $ - $ (1.05) ======== ======== 6. Comprehensive Loss The Company's total comprehensive losses were as follows: Three Months Ended March 31, 2002 2001 -------- -------- Net earnings (loss) $ 22 $ (6,073) Other comprehensive losses: Change in equity due to foreign currency translation adjustments (72) (643) ------ ------ Comprehensive loss $ (50) $ (6,716)) ------ ------ 7. Business Segment Information The Company generates its revenue from the sale of laser bar code scanners primarily to distributors, value-added resellers, original equipment manufacturers and directly to end users, in locations throughout the world. No individual customer accounted for 10% or more of revenues in 2002 or 2001. The Company manages its business on a business segment basis. Sales were attributed to business segments in the following table: Metrologic Total AOA Instruments Consolidated ------- --------- --------- Three months ended March 31, 2002: Sales $ 5,763 21,766 27,529 (Loss) income before provision for income taxes 160 (124) 36 Identifiable assets 20,810 68,289 89,099 Three months ended March 31, 2001: Sales $ 7,613 22,171 29,784 (Loss) income before benefit for income taxes 745 (10,558) (9,813) Identifiable assets 22,477 67,232 89,709 8. Acquisition On January 8, 2001, the Company acquired all of the outstanding stock of Adaptive Optics Associates, Inc. ("AOA"), a developer and manufacturer of custom optical systems which include precision laser beam delivery, high speed imaging control and data processing, industrial inspections and scanning and dimensioning systems for the aerospace and defense industry. The 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 $11,755 and is being amortized over a straight-line basis over 10 years. The following unaudited pro forma condensed results of operations combine the historical consolidated statements of operations for Metrologic and AOA for the three months ended March 31, 2001 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 Three Months Ended March 31, 2001 -------- Sales $ 30,243 Operating loss (8,593) Net loss (6,044) Loss per share Basic (1.11) Diluted (1.11) Weighted average number of shares outstanding Basic 5,453,678 Diluted 5,453,678 9. 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. As of March 31, 2002, the balance outstanding was $17,250. A proposed amendment to the Credit Facility in May 2002 calls for remaining maturities of $10,050 in 2002 and $7,200 in 2003. In connection with the Credit Facility, the Company secured a $25,000 revolving credit line, which was originally scheduled to expire in January 2006. Based on the proposed amendment to the Credit Facility in May 2002, the revolving credit line will now expire in May 2003. 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 March 31, 2002, the balance outstanding was $9,183. 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, 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 $17,250 which is classified as short-term on its balance sheet dated March 31, 2002. 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General The following discussion of the Company's results of operations and liquidity and capital resources should be read in conjunction with the unaudited Condensed Consolidated Financial Statements of the Company and the related Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and the Notes to Consolidated Financial Statements for the year ended December 31, 2001 appearing in the Company's Annual Report on Form 10-K/A, Amendment No. 2, for the year ended December 31, 2001. The Condensed Consolidated Financial Statements for the three months ended March 31, 2002 and 2001 are unaudited. In connection with the Company's reaching an agreement in principle to amend its Credit Facility, the Company filed an amendment to its Form 10-K for the year ended December 31, 2001 with an audit report from our independent auditors. Additionally, our auditors were able to complete their timely SAS71 review procedures with respect to the quarter ended March 31, 2002. Accordingly, the Company is filing this amendment to its Form 10-Q for the quarter ended March 31, 2002. As more fully described in Note 9, the Company has remaining term debt outstanding of $17,250 which is classified as short-term on its balance sheet at March 31, 2002. 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. While management currently believes that it will be successful in finalizing the amendment, there can be no assurance that the amendment will be finalized shortly, if at all. Therefore, the Company remains in default under the terms of its Credit Facility until execution of the amendment. If the Company is able to enter into the amendment to the Credit Facility, it expects to file another amendment to the Form 10-Q for the quarter ended March 31, 2002, and to reclassify certain of its bank debt from short-term liabilities to long-term liabilities in the amount of approximately $6,450. 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. 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. Currently, a significant percentage of the Company's products are manufactured in the Company's U.S. facility, and therefore, sales and results of operations are affected by fluctuations in the value of the U.S. dollar relative to foreign currencies. 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 the three months ended March 31, 2002, sales and gross profit were adversely affected by the continuing rise in the value of the US dollar in relation to foreign currencies. Critical Accounting Policies The preparation of these 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. 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. Three Months Ended March 31, 2002 Compared with Three Months Ended March 31, 2001 (amounts in thousands except per share information) Sales decreased 7.6% to $27,529 in the three months ended March 31, 2002 from $29,784 in the three months ended March 31, 2001, principally as a result of the completion of certain fixed price projects at AOA during 2001. The reduction in the value of the euro against the U.S. dollar negatively affected the recorded U.S. dollar value of quarterly European operation sales by approximately 5.8% and quarterly consolidated sales by approximately 3.1% as compared to the corresponding period in 2001. 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 $13,967 (50.7% of total sales) in the three months ended March 31, 2002 and $13,777 (46.3% of total sales) in the three months ended March 31, 2001. Two customers accounted for 8.1% and 5.9%, respectively, of the Company's total revenues in the three months ended March 31, 2002. Two customers accounted for 8.2% and 5.2%, respectively, of the Company's total revenues in the three months ended March 31, 2001. Cost of sales decreased to $17,556 in the three months ended March 31, 2002 from $28,727 in the three months ended March 31, 2001. Cost of sales for the three months ended March 31, 2001 included $10,040 of special charges and other costs that are not expected to reoccur in subsequent quarters as follows: $4.5 million of costs associated with products that are not anticipated to be included in the prospective costs to manufacture similar products because of reductions in material costs and manufacturing efficiencies; $3.5 million of similar costs associated with a valuation charge taken on products included in inventory at March 31, 2001 due to the related cost reductions noted above; $1.0 million of costs associated with inventory deemed to be obsolete at March 31, 2001; and $1.0 million of costs associated with the expensing of floor stock inventory that had been previously capitalized by the Company. Cost of sales, excluding the $10,040 of special charges and other costs decreased 6.1% to $17,556 in the three months ended March 31, 2002 from $18,687 in the three months ended March 31, 2001, principally as a result of decreased material costs from engineering enhancements and lower direct labor costs as more of the Company's lower gross margin products are produced at the Suzhou, China facility. Further, cost of sales as a percentage of sales during the three months ended March 31, 2002 was negatively impacted by the reduction in the value of the euro against the U.S. dollar as compared to the corresponding period in 2001. Selling, general and administrative ("SG&A") expenses decreased 7.5% to $7,280 in the three months ended March 31, 2002 from $7,873 in the three months ended March 31, 2001 and remained constant as a percentage at sales at 26.4%. The decrease in SG&A expenses was due primarily to reduced marketing and advertising costs, which include costs associated with the Company's Concert (tm) program, a business partner program used to market and promote the Company's products, and no goodwill amortization expense in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and other Intangible Assets". Research and development ("R&D") expenses decreased 4.3% to $1,713 in the three months ended March 31, 2002 from $1,790 in the three months ended March 31, 2000, and increased as a percentage of sales to 6.2% from 6.0%. Severance costs of $276 for the three months ended March 31, 2002 were due to a workforce reduction in March and April 2002. These cost reductions represent in excess of $3,000 in annualized savings of overhead and SG&A costs. Operating income, excluding special charges and other costs, decreased 50.9% to $704 in the three months ended March 31, 2002 from $1,434 in the three months ended March 30, 2001, and operating income as a percentage of sales decreased to 2.6% from 4.8%. Operating losses including special charges and other costs in the three months ended March 31, 2001 was $8,606. Other income/expenses reflect net other expenses of $668 in the three months ended March 31, 2002 compared to net other expenses of $1,207 in the corresponding period in 2001. Net other expenses for the three months ended March 31, 2002 reflect lower interest expense due to a reduction in the Company's bank debt. Net income was $22 in the three months ended March 31, 2002 compared with a net loss of $6,073 in the three months ended March 31, 2001. Net income (loss) reflects a 38% effective income tax rate for the three months ended March 31, 2002 and 200. The increase in the value of the U.S. dollar relative to other foreign currencies negatively affected diluted earnings per share by approximately $.07 as compared to the corresponding period in 2001. Inflation and Seasonality Inflation and seasonality have not had a material impact on the Company's results of operations. There can be no assurance, however, that the Company's sales in future periods will not be impacted by fluctuations in seasonal demand from European customers in its third quarter or from reduced production days in the Company's fourth quarter. Liquidity and Capital Resources (amounts in thousands) The Company's working capital decreased to ($766) as of March 31, 2002 from $2,355 as of December 31, 2001. The Company's operating activities provided net cash of $2,384 and $6,773 for the three months ended March 31, 2002 and 2001, respectively. Net cash provided in operating activities for the three months ended March 31, 2002 resulted primarily from reductions in accounts receivable and increases in accounts payable and accrued expenses. 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. As of March 31, 2002, the balance outstanding was $17,250. A proposed amendment to the Credit Facility in May 2002 calls for remaining maturities of $10,050 in 2002 and $7,200 in 2003. In connection with the Credit Facility, the Company secured a $25,000 revolving credit line, which was originally scheduled to expire in January 2006. Based on the proposed amendment to the Credit Facility in May 2002, the revolving credit line will now expire in May 2003. 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 March 31, 2002, the balance outstanding was $9,183. 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, 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 $17,250 which is classified as short-term on its balance sheet dated March 31, 2002. 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 March and 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 and $9,000 in 2003 and $1,000 in 2004 and 2005. Interest rates are fixed at 10%. Property, plant & equipment expenditures were $485 and $404 for the three months ended March 31, 2002 and 2001, respectively. The Company's current plans for future capital expenditures include: (i) investment in the Company's Suzhou, China facility; (ii) continued investment in manufacturing capacity expansion at the Blackwood, NJ headquarters; (iii) additional Company facilities; and (iv) enhancements to existing information systems, and additional information systems. The Company's liquidity has been, and may continue to be, adversely affected by changes in foreign currency exchange rates, particularly the value of the U.S. dollar relative to the euro, the Brazilian real, the Singapore dollar, 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 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. 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. 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 28,405 20,056 8,349 - - Capital Lease Obligations 79 79 - - - 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 $ 47,332 $22,504 $ 18,415 $4,975 $ 1,438 ========= ======= ======== ====== ======== Total Less Amounts than 1 1-3 4-5 Over 5 Other Commercial Commitments Committed Year Years Years Years ---------------------------- --------- ---- ----- ----- ----- Lines of Credit 9,183 9,183 - - - ------ ------ 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 3- Quantitative and Qualitative Disclosures about Market Risk (amounts in thousands) The information contained in Item 7A of the Company's Annual Report on Form 10-K/A for the year ended December 31, 2001 is hereby incorporated herein by reference. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is currently involved in matters of litigation arising from the normal course of business including matters described below. Management is of the opinion that such litigation 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 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. 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 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. Discovery in the case is now complete. 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 6. Exhibits and Reports on Form 8-K (a) Exhibits: (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K on April 25, 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. METROLOGIC INSTRUMENTS, INC. Date: May 28, 2002 By:/s/ C. Harry Knowles ---------------- ----------------------- C. Harry Knowles Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: May 28, 2002 By:/s/Thomas E. Mills IV ---------------- -------------------------- Thomas E. Mills IV President, Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit No. Page No.