-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B971LLQom7JX72wGso/i2+58Gpr424/E5ZeFA/Ktz+I71JJFffXNQxA72w+sOA6v WTQNhab0sZnkoxHzbWJpMg== 0000815910-03-000016.txt : 20030515 0000815910-03-000016.hdr.sgml : 20030515 20030515141739 ACCESSION NUMBER: 0000815910-03-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METROLOGIC INSTRUMENTS INC CENTRAL INDEX KEY: 0000815910 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 221866172 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24712 FILM NUMBER: 03703588 BUSINESS ADDRESS: STREET 1: COLES ROAD AT RTE 42 CITY: BLACKWOOD STATE: NJ ZIP: 08012 BUSINESS PHONE: 609-228-8100 MAIL ADDRESS: STREET 1: COLES ROAD ROUTE 42 CITY: BLACKWOOD STATE: NJ ZIP: 08012 10-Q 1 q12003.txt FORM 10-Q FOR PERIOD ENDING MARCH 31, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _____ Commission file number 0-24712 Metrologic Instruments, Inc. (Exact name of registrant as specified in its charter) New Jersey 22-1866172 (State or other jurisdiction (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 __ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X As of May 12, 2003 there were 5,489,619 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, 2003 (unaudited) and December 31, 2002 3 Condensed Consolidated Statements of Operations (unaudited) -Three Months Ended March 31, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows (unaudited) - Three Months Ended March 31, 2003 and 2002 5 Notes to Condensed Consolidated Financial Statements (unaudited) 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 15 Item 4. Controls and Procedures 15 Part II - Other Information Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 18 Certifications 19 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements Metrologic Instruments, Inc. Condensed Consolidated Balance Sheets (amounts in thousands except share data) March 31, December 31, Assets 2003 2002 -------- -------- (Unaudited) Current assets: Cash and cash equivalents $ 923 $ 1,202 Restricted cash - 1,000 Accounts receivable, net of allowance 18,765 20,412 Inventory 14,630 14,039 Deferred income taxes 802 268 Other current assets 1,518 2,258 -------- -------- Total current assets 36,638 39,179 Property, plant and equipment, net 12,413 12,600 Patents and trademarks, net of amortization 4,813 4,688 Holographic technology, net of amortization 339 368 Advance license fee, net of amortization 1,265 1,294 Goodwill, net of amortization 15,606 15,175 Deferred income taxes - 190 Other assets 743 758 -------- -------- Total assets $ 71,817 $ 74,252 ======== ======== Liabilities and shareholders' equity Current liabilities: Current portion of lines of credit $ 2,157 $ 1,347 Current portion of notes payable 1,952 5,708 Accounts payable 8,928 8,719 Accrued expenses 9,600 9,389 Deferred contract revenue 611 1,707 -------- -------- Total current liabilities 23,248 26,870 Lines of credit, net of current portion 2,726 - Notes payable, net of current portion 7,518 14,431 Deferred income taxes 551 - Other liabilities 3,963 3,480 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; 5,473,939 and 5,472,555 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively 55 55 Additional paid-in capital 17,941 17,688 Retained earnings 18,403 14,601 Accumulated other comprehensive loss (2,588) (2,873) --------- -------- Total shareholders' equity 33,811 29,471 --------- -------- Total liabilities and shareholders' equity $ 71,817 $ 74,252 ========= ======== See accompanying notes. Metrologic Instruments, Inc. Condensed Consolidated Statements of Operations (Unaudited) (amounts in thousands except share and per share data) Three Months Ended March 31, 2003 2002 ---- ---- Sales $32,288 $27,529 Cost of sales 19,105 17,556 ------- ------- Gross profit 13,183 9,973 Selling, general and administrative expenses 7,797 7,280 Research and development expenses 1,761 1,713 Severance costs 27 276 ------- ------- Operating income 3,598 704 Other income (expenses) Interest income 5 23 Interest expense (464) (696) Other (expense) income, net (555) 5 Gain on extinguishment of debt 2,200 - ------- ------- Total other income (expenses) 1,186 (668) ------- ------- Income before provision for income taxes 4,784 36 Provision for income taxes 982 14 ------- ------- Net income $ 3,802 $ 22 ======= ======= Basic earnings per share Weighted average shares outstanding 5,472,555 5,463,431 Basic earnings per share $ 0.69 $ 0.00 Diluted earnings per share Weighted average shares outstanding 5,472,555 5,463,431 Net effect of dilutive securities 215,230 - Total shares outstanding used in computing diluted earnings per share 5,687,785 5,463,431 Diluted earnings per share $ 0.67 $ 0.00 See accompanying notes. Metrologic Instruments, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (amounts in thousands) Three Months Ended March 31, --------------------------- 2003 2002 -------- -------- Operating activities Net cash provided by operating activities $ 6,518 $ 3,093 Investing activities Restricted cash 1,000 - Purchase of property, plant and equipment (374) (485) Purchase of minority interest in subsidiary (70) - Patents and trademarks (216) (214) ------- ------- Net cash provided by (used in) investing activities 340 (699) Financing activities Proceeds from exercise of stock options and employee stock purchase plan 6 16 Principal payments on notes payable (15,012) (762) Proceeds from issuance of notes payable 4,137 - Net proceeds from (payments on) lines of credit 3,536 (2,250) Capital lease payments (6) (52) Issuance of warrants 247 - Increase in financing costs (110) - Net cash used in ------- ------- financing activities (7,202) (3,048) Effect of exchange rates on cash 65 97 ------- ------- Net decrease in cash and cash equivalents (279) (557) Cash and cash equivalents at beginning of period 1,202 557 ------- ------- Cash and cash equivalents at end of period $ 923 $ - ======== ======= Supplemental Disclosure Cash paid for interest $ 813 $ 727 Cash paid for income taxes $ 0 $ 23 See accompanying notes. METROLOGIC INSTRUMENTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2003 (Amounts in thousands except per share data) (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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. The results of the interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The Condensed Consolidated Financial Statements and these Notes should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2002, including the Consolidated Financial Statements and the Notes to Consolidated Financial Statements for the year ended December 31, 2002 contained therein. Stock-Based Compensation The Company accounts for stock options under SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. At March 31, 2003, the Company had one stock-based employee compensation plan. The Company accounts for the plan under the recognition and measurement principles of APB No. 25, and related interpretations. Stock-based employee compensation costs are not reflected in net earnings, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation (in thousands, except per share amounts). Three Months Ended March 31, 2003 2002 ---- ---- Net income: As reported $ 3,802 $ 22 Deduct: (total stock-based employee compensation expense determined under fair value based method, net of related taxes) (137) (87) ----- ----- Pro forma $ 3,665 $ (65) ===== ===== Net income (loss) per share: Basic: As reported $ 0.69 $ 0.00 Pro forma 0.67 (0.01) Diluted: As reported $ 0.67 $ 0.00 Pro forma 0.64 (0.01) The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2002; expected volatility of 90%; risk-free interest rate of 3.9%; and expected lives of 5 years. The estimated fair value of the options is amortized to expense over the options' vesting period. No options were granted during the three months ended March 31, 2003. 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 prior period amounts have been reclassified to conform to the current period presentation. 3. Accounts Receivable In 2002, Metrologic Instruments GmbH, the Company's German subsidiary, entered into a factoring agreement with a local bank to provide local financing on a non-recourse basis. The factoring charge ranges from .52% to .62% of the receivables assigned to the bank and outstanding advances bear interest at 6.75%. The following amounts due from factor relating to non-recourse factoring were included in accounts receivable: March 31, December 31, 2003 2002 ---- ---- Receivables assigned to factor $1,570 $1,645 Less advances from factor (995) (1,091) ------ ------ Due from factor $ 575 $ 554 ====== ====== 4. Inventory Inventory consists of the following: March 31, 2003 December 31, 2002 -------------- ------------------ Raw materials $ 5,578 $ 5,788 Work-in-process 2,110 1,865 Finished goods 6,942 6,386 ------ ------ 14,630 14,039 ------ ------ 5. Comprehensive Income (Loss) The Company's total comprehensive income (loss) was as follows: Three Months Ended March 31, 2003 2002 ---- ---- Net income (loss) $ 3,802 $ 22 Other comprehensive income (loss): Change in equity due to foreign currency translation adjustments 285 (72) ------- ------- Comprehensive income (loss) $ 4,087 $ (50) ======= ======= 6. 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 the quarters ended March 31, 2003 or 2002. The Company manages its business on a business segment basis dividing the business into two major segments: Industrial scanning and Optical; and Point of Sale ("POS")/Original Equipment Manufacturers ("OEM"). Sales were attributed to business segments in the following table. Industrial/ Total Optical POS/OEM Consolidated ------- --------- --------- Three months ended March 31, 2003: Sales $ 5,058 27,230 32,288 Income (loss) before (benefit) provision for income taxes $ (339) 5,123 4,784 Identifiable assets $16,352 55,465 71,817 Three months ended March 31, 2002: Sales $ 6,406 21,123 27,529 Income (loss) before (benefit) provision for income taxes $ (539) 575 36 Identifiable assets $20,810 68,289 89,099 7. Credit Facility On January 31, 2003, the Company executed an Amendment (the "Amendment") to the Amended Credit Agreement. The Amendment, which extends the Amended Credit Agreement until January 31, 2006, provides for a $13,000 revolving credit facility and a $4,500 term loan. Principal payments on the term loan are $94 a month commencing in March 2003 with the balance due at maturity. The interest rates under the Amendment are prime plus .25% on borrowings under the revolving credit facility and prime plus .75% on the Term Loan. The Company has the option to select LIBOR rate interest plus spreads ranging from 3.00% to 3.50%. The Amendment lowers the commitment fee to .25% on the unused facility. Beginning with the year ending December 31, 2003, the Company could be required to make additional prepayments under the Amendment upon the occurrence of certain events or if there is excess cash flow, both as defined in the Amendment. The Amendment contains various negative and positive covenants including minimum tangible net worth requirements and fixed charge coverage ratios. The security interest in the Company's assets and properties granted to the bank pursuant to the Amended Credit Agreement remains in effect under the Amendment. The Amendment requires the daily application of Company receipts as payments against the revolving credit facility and daily borrowings to fund cash requirements. In connection with the Amendment, the personal guarantees of C. Harry Knowles, Chairman and Chief Executive Officer and his spouse, Janet Knowles, Vice President, Administration, were released. Outstanding borrowings under the revolving credit facility were $2,726 at March 31, 2003. Subordinated Debt 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 scheduled maturities of $9,000 in 2003 and $1,000 in 2004 and 2005. Interest rates were fixed at 10%. In January 2003, the Company and UTOS entered into a Payoff Agreement to accelerate the principal payments on the Subordinated Debt. In accordance with the Payoff Agreement, the Company paid UTOS $5,000 on January 31, 2003 and $3,800 on March 31, 2003 as payment in full of its obligation under the Subordinated Debt. Accordingly, the Company has recorded a $2,200 gain on the extinguishment of the Subordinated Debt in March 2003. In January 2003, the Company entered into a $4,260 subordinated note payable with its Chairman and CEO and his spouse, a Director and Vice President, Administration. The subordinated note bears interest at 10% and requires 60 monthly principal payments of approximately $36 with the balance of $2,130 due in January 2008. In connection with this note, the Company issued warrants to Mr. and Mrs. Knowles to purchase 65,000 shares of its common stock at an exercise price of $10.41 expiring on January 31, 2013. These warrants have been valued at $247 in total, and the resulting original issue discount will be amortized into interest expense over the life of the subordinated note payable. 8. Recently Issued Accounting Standards In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." In addition to other technical provisions, this Statement rescinds FASB Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of tax. This provision is effective for fiscal years beginning after May 15, 2002, with early adoption permitted. In accordance with the provisions of SFAS 145, the Company has recorded the $2,200 gain on the extinguishment of the Subordinated Debt in Other Income in the Consolidated Statement of Operations for the three months ended March 31, 2003. 9. Legal Matters 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 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 allegations of breach relate to the dispute between the parties as to which products are covered by the licenses under the Agreement. On May 30, 2002, the Company was served with an amended complaint in this action. The amended Complaint also includes new claims of patent infringement from the date of the alleged breach against the Company and C. Harry Knowles, the Company's Chairman and CEO. The amended complaint further includes claims for injunctive relief and a claim of fraudulent transfer related to the transactions under the Amended Credit Agreement. The Company believes that Symbol's claims in the lawsuit are without merit and intends to vigorously defend its rights. The Company filed a motion with the court to stay the infringement actions, and to allow the parties to arbitrate those claims in accordance with the procedures set forth in the Agreement. In response, Symbol filed a motion to stay the arbitration proceedings pending a decision by the court as to whether the issues are subject to arbitration. On October 4, 2002, the parties had a conference with the judge during which a schedule was set for the filing of the parties' cross motions for summary judgment. On March 31, 2003, the Court entered its decision on the parties' respective motions for summary judgment. In finding for the Company, the Court dismissed certain counts of Symbol's complaint, and granted the Company's motion to compel arbitration regarding certain matters. On April 9, 2003, Symbol voluntarily dismissed the remaining counts of the complaint and requested that the Court enter a final order in the case. The final order was entered on April 16, 2003. Symbol has until May 16, 2003 to file its notice of appeal. Management is of the opinion that there are no legal claims against the Company which are expected to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 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 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, 2002 appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The Condensed Consolidated Financial Statements for the three months ended March 31, 2003 and 2002 are unaudited. 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. 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: (i) 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; (ii) continued or increased competitive pressure which could result in reduced selling prices of products or increased sales and marketing promotion costs; (iii) 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; (iv) 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; (v) 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, Chinese renminbi and British pound affecting the Company's results of operations; (vi) the potential impact on production and sales resulting from the outbreak of Severe Acute Respiratory Syndrome ("SARS") in Asian and other markets; (vii) the effects of changes in trade, monetary and fiscal policies, laws, regulations and other activities of government; 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; (viii) continued or prolonged capacity constraints that may hinder the Company's ability to deliver ordered product to customers; (ix) 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; (x) the costs and potential outcomes of legal proceedings or assertions by or against the Company relating to intellectual property rights and licenses; (xi) the Company's ability to successfully defend against challenges to its patents and the ability of the Company to develop products which avoid infringement of third parties' patents; (xii) 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; and (xiii) the potential impact of terrorism and international hostilities. 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 For a discussion of the Company's critical accounting policies and use of estimates, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The only change in critical accounting policies during the three-month period ended March 31, 2003 is the adoption of SFAS 145 during the first quarter of 2003. 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. Currently, a significant percentage of the Company's products are manufactured in the Company's US facility, and therefore, sales and results of operations are affected by fluctuations in the value of the US dollar relative to such foreign currencies. The Company expects, however, that the manufacture of its POS products in its Suzhou, China facility to increase in 2003, which will partially mitigate the profit impact of foreign exchange rate fluctuation with reduced labor costs in the Company's POS scanners. In the three months ended March 31, 2003, sales and gross profit were favorably affected by the continuing decline in the value of the US dollar in relation to certain foreign currencies, especially the Euro. This favorable impact offsets the adverse impact of the strengthening value of the US dollar on sales and gross profit in the three months ended March 31, 2002. However, in the three months ended March 31, 2003, sales and gross profits were negatively affected by the strengthening of the value of the US dollar in relation to the Brazilian real. Three Months Ended March 31, 2003 Compared with Three Months Ended March 31, 2002 (dollars in thousands except per share information) Sales increased 17.3% to $32,288 in the three months ended March 31, 2003 from $27,529 in the three months ended March 31, 2002. Sales of Metrologic's point-of-sale ("POS") and Original Equipment Manufacturers ("OEM") products increased by 29.9%, sales of industrial products increased by 46.1% while sales of optical systems decreased by 54%. The decrease in optical systems reflects the completion of certain fixed price optical projects at AOA in 2002. Sales of POS and OEM products in North America increased by 33.6% and sales of these products in Europe increased by 32.1%. The Company benefited from the strengthening of the euro against the US dollar in the first quarter of 2003. Sales of products denominated in euros or pounds increased 4% in 2003, while the increase in U.S. dollars for such sales approximated 28%. International sales accounted for $17,768 (55.03% of total sales) in the three months ended March 31, 2003 and $13,967 (50.7% of total sales) in the three months ended March 31, 2002. No individual customer accounted for 10% or more of sales in the three months ended March 31, 2003 or 2002. Cost of sales increased 8.8% to $19,105 in the three months ended March 31, 2003 from $17,556 in the three months ended March 31, 2002, and decreased as a percentage of sales to 59.2% from 63.8%. The decrease in the percentage of cost of sales was due to increased unit production in the Company's Suzhou facility resulting in reduced labor costs, reduced direct labor and labor related costs as a result of workforce reductions in March and April 2002 and lower material costs resulting from engineering efforts to reduce bill of material costs. These factors were partially offset by increased sales of lower margin non-Metrologic manufactured products. Selling, general and administrative ("SG&A") expenses increased 7.1% to $7,797 in the three months ended March 31, 2003 from $7,280 in the three months ended March 31, 2002 and decreased as a percentage of sales to 24.1% from 26.4%. The increase in SG&A expenses was due to increased variable selling expenses associated with the higher sales volume in 2003 and increased marketing and promotional expenses in 2003, partially offset by lower personnel costs as a result of the workforce reduction in March and April 2002. Research and Development ("R&D") expenses increased 2.8% to $1,761 in the three months ended March 31, 2003 from $1,713 in the three months ended March 31, 2002, and decreased as a percentage of sales to 5.5% from 6.2%. The increase in 2003 is attributable to product development costs associated with new products introduced during the first quarter. Severance costs decreased to $27 in the three months ended March 31, 2003 from $276 in the three months ended March 31, 2002. The severance costs in 2002 were due to a workforce reduction in March 2002. Other income/expense reflect net other income of $1,186 in the three months ended March 31, 2003 compared to net other expenses of $668 in the corresponding period in 2002. Net other income for the three months ended March 31, 2003 included a $2,200 gain on an early extinguishment of debt in connection with early repayment of Subordinated debt relating to the acquisition of Adaptive Optics Associates, Inc. ("AOA"). This debt was repaid in full in the first quarter of 2003. Net interest expenses decreased from $673 in 2002 to $459 in 2003 due to lower outstanding borrowings and lower interest rates in 2003. Other expenses in 2003 include costs of $463 incurred in connection with the Company's efforts to refinance its bank debt. Net income was $3,802 in the three months ended March 31, 2003 compared with $22 in the three months ended March 31, 2002. Net income reflects a 21% effective income tax rate for the three months ended March 31, 2003 and 38% for the same period in 2002. The decrease in the effective tax rate was a result of the $2,200 gain on early extinguishment of debt which, for tax purposes, will be treated as a reduction to purchase price of AOA, and as such will not be subject to federal or state income tax. The decrease in the value of the U.S. dollar relative to other foreign currencies positively affected diluted earnings per share by approximately $0.18 as compared to the corresponding period in 2002. 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 except share and warrant data) The Company's working capital increased to $13,390 as of March 31, 2003 from $12,309 as of December 31, 2002 as a result of the Company's profitable operations, reduction in accounts receivable and the debt restructuring discussed in Note 7 of the Notes to the Consolidated Financial Statements. The Company's operating activities provided net cash of $6,518 and $2,384 for the three months ended March 31, 2003 and 2002, respectively. Net cash provided in operating activities for the three months ended March 31, 2003 resulted primarily from net income of $3,802 plus reductions in accounts receivable and increases in accrued expenses. On January 31, 2003, the Company executed an Amendment (the "Amendment") to the Amended Credit Agreement. The Amendment, which extends the Amended Credit Agreement until January 31, 2006, provides for a $13,000 revolving credit facility and a $4,500 term loan. Principal payments on the term loan are $94 a month commencing in March 2003 with the balance due at maturity. The interest rates under the Amendment are prime plus .25% on borrowings under the revolving credit facility and prime plus .75% on the term loan. The Company has the option to select LIBOR rate interest plus spreads ranging from 3.00% to 3.50%. The Amendment lowers the commitment fee to .25% on the unused facility. Beginning with the year ending December 31, 2003, the Company could be required to make additional prepayments under the Amendment upon the occurrence of certain events or if there is excess cash flow, both as defined in the Amendment. The Amendment contains various negative and positive covenants including minimum tangible net worth requirements and fixed charge coverage ratios. The security interest in the Company's assets and properties granted to the bank pursuant to the Amended Credit Agreement remains in effect under the Amendment. The Amendment requires the daily application of Company receipts as payments against the revolving credit facility and daily borrowings to fund cash requirements. 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 scheduled maturities of $9,000 in 2003 and $1,000 in 2004 and 2005. Interest rates were fixed at 10%. In January 2003, the Company and UTOS entered into a Payoff Agreement to accelerate the principal payments on the Subordinated Debt. In accordance with the Payoff Agreement, the Company paid UTOS $5,000 on January 31, 2003 and $3,800 on March 31, 2003 as payment in full of its obligation under the Subordinated Debt. Accordingly, the Company has recorded a $2,200 gain on the extinguishment of the Subordinated Debt in March 2003. In January 2003, the Company entered into a $4,260 subordinated note payable with C. Harry Knowles, its Chairman and CEO and his spouse, Janet Knowles, a Director and Vice President, Administration. The subordinated note bears interest at 10% and requires 60 monthly principal payments of $36 with the balance of $2,130 due in January 2008. In connection with this note, the Company issued warrants to Mr. and Mrs. Knowles to purchase 65,000 shares of its common stock at an exercise price of $10.41 expiring on January 31, 2013. These warrants have been valued at $247 in total, and the resulting original issue discount will be amortized into interest expense over the life of the subordinated note payable. 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. No derivative instruments were outstanding at March 31, 2003. 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 and provides the Company with a twelve month period in which to find a buyer or negotiate a purchase price with a default minimum. In March 2002, the minority shareholders in Metrologic Eria Iberica provided notice of their intent to sell their 49% interests and the purchase price under the contract is estimated at 5,300 euros or $5,724 at March 31, 2003. It is expected that payments will be made over 3 years commencing July 1, 2003. To date, no notice has been received concerning the option to purchase the minority interest in France. 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 9,398 1,924 5,228 2,246 - Capital Lease Obligations 72 28 44 - - Operating Leases* 13,361 2,457 5,690 1,421 3,793 Option to purchase minority interest in joint venture 6,172 2,278 3,894 - - --------- ------- -------- ------- --------- Total Contractual Cash Obligations $ 29,003 $ 6,687 $ 14,856 $3,667 $ 3,793 ========= ======= ======== ====== ======== *Based on information as of December 31, 2002. Total Less Amounts than 1 1-3 4-5 Over 5 Other Commercial Commitments Committed Year Years Years Years - ---------------------------- --------- ---- ----- ----- ----- Revolving Credit Facility $ 4,883 $2,157 $2,726 $ - $ - ======== ====== ====== ===== ===== 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 for the year ended December 31, 2002 is hereby incorporated herein by reference. Item 4- Controls and Procedures As of May 13, 2003, the principal executive officer, chief operating officer and principal financial officer evaluated the Company's controls and procedures related to its reporting and disclosure obligations. These officers have concluded that these disclosure controls and procedures are sufficient to provide that (a) material information relating to the Company is made known to these officers by other employees of the Company, particularly material information related to the period for which this periodic report is being prepared; and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is currently involved in matters of litigation arising in the normal course of business as well as the matters described below. Management is of the opinion that there are no legal claims against the Company which are expected to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. A. Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research Foundation, Limited Partnerships On September 25, 2002, the District Court issued a trial order allocating thirty-four (34) days for the trial on this matter commencing November 18, 2002. The trial was commenced on that date and continued through January 17, 2003. At the conclusion of the trial, the judge set a schedule for the submission of post-trial briefs requiring all papers to be filed by May 27, 2003. It is expected that the judge will issue a final ruling within several months thereafter, but no specific date for a ruling has been set. B. Metrologic v. PSC Inc. On November 22, 2002, PSC filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Court issued an automatic stay in this case while the bankruptcy is pending. C. Symbol Technologies, Inc. v. Metrologic On March 31, 2003, the Court entered its decision on the parties' respective motions for summary judgment. In finding for the Company, the Court dismissed certain counts of Symbol's complaint, and granted the Company's motion to compel arbitration regarding certain matters. On April 9, 2003, Symbol voluntarily dismissed the remaining counts of the complaint and requested that the Court enter a final order in the case. The final order was entered on April 16, 2003. Symbol has until May 16, 2003 to file its notice of appeal. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the Chief Executive Officer of the Company. 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the President and Chief Operating Officer of the Company. 99.3 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the Chief Financial Officer of the Company. (b) Reports on Form 8-K. On February 4, 2003, the Company filed a current report on Form 8-K to report the execution of Amendment No. 1 to the Amended and Restated Credit Agreement dated July 9, 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 15, 2003 - --------------------- By:/s/C. Harry Knowles ---------------------------------------- C. Harry Knowles Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: May 15, 2003 - --------------------- By:/s/Thomas E. Mills IV ---------------------------------------- Thomas E. Mills IV President and Chief Operating Officer Date: May 15, 2003 - --------------------- By:/s/Kevin J. Bratton ---------------------------------------- Kevin J. Bratton Chief Financial Officer (Principal Financial and Accounting Officer) CERTIFICATIONS I, C. Harry Knowles, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Metrologic Instruments, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/C. Harry Knowles ---------------------------------- C. Harry Knowles Chief Executive Officer CERTIFICATIONS I, Thomas E. Mills IV, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Metrologic Instruments, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/Thomas E. Mills IV ---------------------------------- Thomas E. Mills IV President and Chief Operating Officer CERTIFICATIONS I, Kevin J. Bratton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Metrologic Instruments, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/Kevin J. Bratton ---------------------------------- Kevin J. Bratton Chief Financial Officer Exhibit Index Page Number 99.1 Certification pursuant to 18 U.S.C. Section 1350, 23 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the Chief Executive Officer of the Company. 99.2 Certification pursuant to 18 U.S.C. Section 1350, 24 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the President and Chief Operating Officer of the Company. 99.3 Certification pursuant to 18 U.S.C. Section 1350, 25 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the Chief Financial Officer of the Company. EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Metrologic Instruments, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, C. Harry Knowles, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/C. Harry Knowles - ------------------------------------ C. Harry Knowles Chief Executive Officer May 15, 2003 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Metrologic Instruments, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas E. Mills IV, President and Chief Operating Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/Thomas E. Mills IV - ------------------------------------ Thomas E. Mills IV President and Chief Operating Officer May 15, 2003 EXHIBIT 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Metrologic Instruments, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin J. Bratton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/Kevin J. Bratton - ------------------------------------ Kevin J. Bratton Chief Financial Officer May 15, 2003 -----END PRIVACY-ENHANCED MESSAGE-----