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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003 Commission file number 0-24712
METROLOGIC INSTRUMENTS, INC.
A New Jersey Corporation
I.R.S. Employer Identification No. 22-1866172
90 Coles Road
Blackwood, New Jersey 08012
856-228-8100
Common stock traded on Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
Par Value $.01 Per Share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [ X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of June 30, 2003 was $72,754,602 calculated by excluding
all shares held by executive officers, directors and 5% stockholders of the
Registrant without conceding that all such persons are "affiliates" of the
Registrant for purposes of the federal securities laws.
As of March 1, 2004 there were 21,231,132 shares of Common Stock outstanding.
Documents Incorporated by Reference
Portions of the following documents are incorporated by reference:
Part III - The Registrant's definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders, to be filed not later than 120 days after the close of
the fiscal year.
PART I
Item 1. Business
Overview
Metrologic Instruments, Inc. and its subsidiaries (referred to herein as "we",
"us" "our" or the "Company") are experts in optical image capture and processing
solutions. We utilize our expertise to design, manufacture and market
sophisticated imaging and scanning solutions serving a variety of point-of-sale,
commercial and industrial applications. Our solutions utilize a broad array of
laser, holographic and vision-based technologies designed to provide superior
functionality and a compelling value proposition for our customers.
The majority of our sales are derived from products that scan and decode bar
codes in retail environments. In addition, we design and manufacture
sophisticated adaptive optical systems primarily for government and commercial
customers. We believe we have been able to increase our market share in our
point-of-sale and industrial markets by offering products with superior
performance and features at price points that are very competitive with the
products offered by others and by providing superior customer service.
Our business is divided into two major segments: Point-of-Sale/Original
Equipment Manufacturers, or POS/OEM, and Industrial Scanning and Optical.
POS/OEM bar code scanners are typically either handheld scanners or fixed
projection scanners. Handheld bar code scanners are principally suited for
retail point-of-sale, document processing, library, healthcare and inventory
applications. Fixed projection scanners, which can be mounted on or in a
counter, are principally suited for supermarkets, convenience stores, mass
merchandisers, health clubs and specialty retailers.
Industrial Scanning and dimensioning products are comprised of fixed position
systems that are either laser- or vision-based. These systems range from simple,
one-scanner solutions to complex, integrated systems incorporating
multi-scanner, image capture and dimensioning technologies. Adaptive optical
solutions are highly customized, sophisticated, laser-based systems that correct
for the natural distortion of light as it exits a complex laser and travels
through the atmosphere or other transmission medium.
For additional information concerning our business segments, please refer to
Note 13, Financial Reporting For Business Segments and Geographical Information,
to our Consolidated Financial Statements.
Since 2001, we have increased sales, cash flow from operations and net income.
We have accomplished this primarily by applying our engineering expertise to
develop innovative products that have expanded our market opportunities and by
focusing on cost reduction to maintain a competitive advantage. For example, in
2003 we introduced several new products that have approximately doubled the
addressable point-of-sale markets in which we can sell our products. Our
commitment to cost reduction has enabled us to focus on offering products with
leading technology at competitive prices. Additionally, we have decreased our
overall direct manufacturing costs as a percentage of sales from 60.3% in 2000
to 57.7% in 2003.
We were founded over 35 years ago by C. Harry Knowles, our Chairman and Chief
Executive Officer. We are a vertically integrated manufacturer, producing most
of our own optics, coatings and components in our manufacturing and design
facilities in the United States and China. We have developed a broad portfolio
of intellectual property that includes over 250 patents that we aggressively
protect. We employ a direct sales force and have a broad network of distributors
and value added resellers or VARs, to serve customers in over 110 countries
through 12 offices worldwide.
Our Markets
Market Background
Automatic Identification and Data Capture, or AIDC, is the identification and
direct collection of data into a microprocessor-controlled device, such as a
computer system, without the use of a manual input device, such as a keyboard.
AIDC technologies accelerate the speed at which information is collected and
processed and eliminate errors associated with the collection of that
information. AIDC covers a compilation of technologies and services, including
bar code technologies, vision systems, radio frequency identification, or RFID,
optical character recognition, or OCR, biometrics and card-based technologies.
The largest segment of the AIDC industry is bar code related technology. In the
late 1960s, a concerted effort was undertaken to standardize and automate
point-of-sale transactions. In 1973, the grocery industry selected the Universal
Product Code, or UPC, as the industry standard. Today, there are a variety of
bar code formats, or symbologies, that are used in many applications and
industries. Bar codes are critical elements in conducting business in today's
global economy because of their ability to accelerate the flow of information
with timeliness and accuracy.
Markets Served
We serve primarily the point-of-sale and industrial bar code scanning markets.
Customers in these markets demand innovative solutions that enable them to more
quickly and cost efficiently distribute, track and manage products from the
early stages of manufacturing to the ultimate purchase by end users. Our
industry addresses these needs with point-of-sale bar code scanners and
industrial scanning and dimensioning systems. In addition, we design and
manufacture sophisticated adaptive optical systems for government and commercial
customers.
Point-of-Sale Bar Code Scanning Products
Point-of-sale bar code scanners are typically either handheld scanners or fixed
projection scanners. Handheld bar code scanners are principally suited for
retail point-of-sale, document processing, library, healthcare and inventory
applications. Fixed projection scanners, which can be mounted on or in a
counter, are principally suited for supermarkets, convenience stores, mass
merchandisers, health clubs and specialty retailers. The market for these
products is typically served by manufacturers like us, distributors or VARs,
depending upon the size of the end user. We believe that buying decisions by end
users are typically based first upon functionality and price, then reliability
and service. The sale of point-of-sale bar code scanning products accounted for
$112.8 million or 81.7% of our revenues in 2003.
Industrial Scanning and Dimensioning Products
Industrial scanning and dimensioning products are comprised of fixed position
systems that are either laser- or vision-based. These systems range from simple,
one-scanner solutions to complex, integrated systems incorporating
multi-scanner, image capture and dimensioning technologies. Industrial scanning
and dimensioning systems are sophisticated solutions that often utilize
high-speed conveyor belt systems. Laser-based systems are primarily utilized by
the postal handling, transportation and logistics, retail distribution and
automotive industries. Vision-based systems, which use camera-based
technologies, are primarily used by the postal handling, transportation and
logistics and manufacturing industries. We believe end users purchase these
systems based first upon functionality and performance, then reliability,
service and price. The sale of industrial scanning and dimensioning products
accounted for $13.7 million or 10.0% of our revenues in 2003.
Adaptive Optical Systems
Adaptive optical systems are highly customized, sophisticated, laser-based
systems that correct for the natural distortion of light as it exits a complex
laser and travels through the atmosphere or other transmissive medium. These
systems are used in government and commercial applications utilizing the
transmission and measurement of light. Competitors in these markets include
government contractors and specialty research and manufacturing companies in the
commercial market. We believe contracts are awarded based principally on
capability and cost effectiveness. The sale of adaptive optical systems
accounted for $11.5 million or 8.3% of our revenues in 2003.
Our Competitive Strengths
We design, manufacture and market sophisticated imaging and scanning solutions
serving a variety of point-of-sale, commercial and industrial applications. Our
competitive strengths include:
Compelling Value Proposition
Through the combination of our ongoing investments in research and development
and our dedication to low-cost production disciplines, we are able to offer
feature-rich products at extremely competitive prices.
Innovative Solutions Through Technological Leadership
We believe that we are recognized as a technological leader within our industry.
Our history of innovative solutions includes, among others, the development of
one of the earliest handheld bar code scanners, the development of the first bar
code scanner to utilize infrared trigger-less activation and the first use of
holographic technology with visible laser diodes.
Approximately one out of five of our employees are employed in an engineering
capacity, including 53 engineers in Suzhou, China. We believe our engineering
expertise and ability to innovate enable us to provide and market a broad range
of superior point-of-sale and industrial scanning solutions. Additionally, we
are focused on applying our innovative technologies to the development of new
solutions designed to expand our addressable markets.
Adaptive Optical and Advanced Imaging Capabilities
We possess significant expertise in adaptive optical and advanced imaging
systems for customized, high performance commercial and government applications.
Much of the core technology that we develop for these applications is funded
through government research and development programs. We have adapted this
technology to certain of our laser-based scanners and vision systems. We believe
that this technology provides us with an advantage relative to our competitors
in new product development. We intend to utilize these capabilities to further
penetrate existing markets and to enter new markets.
Intellectual Property Portfolio
Over the past five years, we have almost quadrupled our patent portfolio to over
250 issued patents and we currently have over 200 additional new patent
applications pending. We will continue to invest in patent applications and
aggressively protect our patent position from competitors who we believe
infringe our patents.
Multiple Distribution Channels Worldwide
We sell our products in over 110 countries through 12 direct sales offices
located around the world. Our direct sales force concentrates on large retail
and OEM accounts in North America and, more recently, Europe and Asia. We also
sell our products through a growing network of distributors and VARs. Our use of
multiple distribution channels worldwide allows us to expand our market presence
and ultimately provide our products to more end users.
Vertically Integrated Low-Cost Manufacturing
We have two primary manufacturing facilities, one in Blackwood, New Jersey and
one in Suzhou, China. While we outsource some of our component requirements, we
believe our ability to manufacture many key components of our products has led
to increased quality and lower manufacturing costs, enabling us to be more
competitive. The vertical integration of our manufacturing operations also aids
in new product development and enables a more rapid response to our end users'
application specific needs.
We design and manufacture an increasing number of our high volume products at
our facility in Suzhou, China. Our operations in China allow us to take
advantage of lower direct labor, manufacturing and research and development
costs. Construction commenced in December 2003 to approximately double the size
of this facility.
Our Growth Strategy
Our goal is to increase sales and profits by increasing our market share in our
existing markets, by entering new markets in which we can apply our engineering
and manufacturing expertise, by reducing our costs and by making selective
strategic acquisitions.
Increase Our Share of Existing Markets through New Products and Expanded Sales
Efforts
We continually invest in developing new and improved products to meet the
changing needs of our existing customers. During the past two years we have
introduced several new laser scanners for point-of-sale applications and the
iQ180, a new high speed, vision-based, image capture and dimensioning system for
the parcel and postal handling, distribution and warehousing markets.
We have recently concentrated our direct sales efforts to further penetrate the
largest retailers in the United States. We have also expanded our international
network of distributors and VARs, and our relationships with OEMs. To better
serve our customers and distribution partners, we have increased our investments
in support and service capabilities, enhanced product availability and
reliability, and increased our custom product design and manufacturing
capabilities.
Enter New Markets
A significant portion of our product development activities is focused on the
introduction of point-of-sale and industrial products to open markets that we
have not previously served. For example, during 2003, we introduced the Stratos,
a bi-optic high-speed supermarket scanner, a new handheld laser scanner
featuring Bluetooth wireless communications capabilities and a new,
competitively priced two-dimensional handheld bar code scanner. Combined with
our other new products introduced, we have effectively doubled our addressable
point-of-sale market. In addition, we are currently adapting our advanced
vision-based technology to satisfy emerging retail applications that require the
capture of more than one-dimensional bar codes. We believe that our combination
of high quality products, service and support at lower price points will enable
us to successfully continue to enter and compete in these markets.
Reduce Costs While Maintaining Our Technological Capabilities
Our customers seek low-cost yet reliable and full-featured products. We
continually strive to reduce our manufacturing costs through product engineering
and design efforts and development of cost-efficient manufacturing equipment and
processes. We intend to expand our design and manufacturing capabilities at our
Suzhou, China facility to further take advantage of cost efficiencies. Quality
and productivity initiatives are also important elements of our cost reduction
strategies.
Selectively Pursue Strategic Acquisitions
In addition to our internal development and organic growth, we may selectively
pursue strategic acquisitions that we believe will broaden or complement our
current technology base and allow us to serve additional end users and their
evolving needs. For example, our acquisition of AOA in 2001 enhanced our
technical and engineering capabilities in industrial and image acquisition
applications.
Our Products
Our products include laser bar code scanners, industrial products and advanced
optical systems and are sold primarily to distributors, VARs, OEMs and directly
to end users in various industries, in locations throughout the world. Our
products are generally used as part of an integrated system and are connected to
a host device, such as a personal computer or electronic point-of-sale
equipment. Our products can be classified into one of the following three
categories:
o Point-of-Sale Bar Code Scanners and OEM Scan Engines;
o Industrial High Speed Vision and Scanning Systems; and
o Adaptive Optical Systems.
Point-of-Sale Bar Code Scanners and OEM Scan Engines
Single-line Handheld Scanners
We produce a broad line of laser-based bar code scanners that produce a single
linear scan line and are predominantly used as handheld devices by their
operators. We believe customers choose single-line handheld scanners for their
relatively low-cost and portability. They are particularly suited for
applications where items vary significantly in size, bar codes are arranged in
lists or for reading exceptionally wide bar codes.
- ----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- ----------------------------------------------------------------------------
Pulsar Entry level laser
Shorter scan range
- --------------------------------------------------
Eclipse Mid-level priced laser Retail point-of-sale
Medium scan range Inventory management
- -------------------------------------------------- Library checkout
Hospital patient
Voyager Value-priced, high-end laser identification
Long scan range Document processing
Automatic trigger for presentation
scanning
VoyagerCG Voyager with CodeGate switch
VoyagerPDF Voyager with two-dimensional symbol
reading
VoyagerBT Voyager with Bluetooth wireless
communication
- -----------------------------------------------------------------------------
Combination Handheld/Presentation Scanners
We produce a line of compact, laser-based scanners that generate a pattern of 20
intersecting scan lines for scanning bar codes independent of the bar code's
orientation to the scanner, also known as omnidirectional scanning. Given their
small size, light weight and omnidirectional capability, compact combination
scanners are well suited for applications that require occasional portability
given the size of objects being scanned or where counter space is limited.
- ----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- ----------------------------------------------------------------------------
MS6720 Separate scanner and stand for
portability
Fully adjustable stand
- -------------------------------------------------- Convenience stores
Pharmacy
Cubit Protective rubber housing Hardware stores
Adjustable built-in stand Airline ticketing
- -------------------------------------------------- Apparel and speciality
retail
Orbit Contoured, hand-supportable,
industrial design
Unique one-piece tilting scan head
scanning
- -----------------------------------------------------------------------------
High Speed Fixed projection Scanners
Our line of fixed projection, laser-based bar code scanners allow operators to
quickly sweep bar codes by the scanner in any orientation. This provides easy to
use, high speed scanning by eliminating or reducing an operator's need to twist
and turn bar codes within the scanner's working range. Fixed projection scanners
are particularly useful in applications that require high throughput, a
capability valued by our customers.
- ----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- ----------------------------------------------------------------------------
ArgusScan Four-position mounting stand
(Vertical Small footprint
scanner)
- --------------------------------------------------
InVista Large scan area Grocery
(Vertical User-replaceable window Mass merchandisers
scanner) Built-in Electronic Article Liquor stores
Surveillance antenna ATM/self-service
- -------------------------------------------------- Gated entry
Horizon User-replaceable window
(In-counter Scratch-resistant window options
scanner) Built-in Electronic Article
Surveillance antenna
- -------------------------------------------------
Stratos Bi-optic, 6-sided scanning
(Bi-optic Redundant scanning system
in-counter 10-minute field repair
scanner) Visual diagnostic indicator
- -----------------------------------------------------------------------------
Portable Data Collection Terminals
Our line of portable data collection terminals consists of battery-powered
handheld devices incorporating a scanning module, a keypad, an application
software program and memory. Portable data collection terminals are particularly
useful in applications that require mobile data management.
- ----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- ----------------------------------------------------------------------------
ScanPal 2 Traditional screen placement
Long battery life
Laser or linear imager options Inventory management
- -------------------------------------------------- Price lookup
Shelf price audit
Navigator Unique bottom screen placement Hospital patient data
Single-handed operation Gift registry
Larger memory (2Mb)
- -----------------------------------------------------------------------------
OEM Scan Engines
We produce laser-based scanning modules or engines which are designed for
integration into a variety of OEM equipment. We offer several standard and
custom scan engine models that vary in physical size, scan pattern, decoding
capabilities and scan speed. We believe customers choose our scan engines for
their low-cost, ease of integration, robust scanning characteristics and, where
applicable, fully sealed construction.
- ----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- ----------------------------------------------------------------------------
MicroQuest 3V battery operation
(linear Extremely small size
engine) Very low power consumption
- --------------------------------------------------
Portable scanning devices
ScanQuest Completely sealed module for easy Reverse vending
(linear handling Mass storage devices
engine) Decoded and non-decoded models Medical instrumentation
Tight beam control for automated Interactive kiosks
applications
- --------------------------------------------------
Cubit Completely sealed module for easy
(omni- handling range
directional Simple remote configuration
engine) Superior up close scanning for
self-service devices
- -----------------------------------------------------------------------------
Industrial High Speed Vision and Scanning Systems
Our line of laser-and vision-based industrial products and scanning systems are
branded and marketed under the AOA name. Laser-based systems are typically
chosen for their lower cost and their ability to read one-dimensional bar codes.
We believe that vision-based technology is rapidly becoming the predominant
system sought by companies in many industries including transportation and
logistics, manufacturing, and parcel and postal handling. Vision-based systems
offer greater functionality than traditional laser scanning devices including
increased bar code read rates, two-dimensional bar code decoding, image capture
and OCR capability.
- ----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- ----------------------------------------------------------------------------
Tech Series Variety of models
HoloTrak One-dimensional bar code scanning Walk-under scanning,
Series Patented holographic technology order processing,
(Laser-Based (HoloTrak) moderate speed,
Scanning conveyor applications
Systems)
- ----------------------------------------------------------------------------
iQ Series Unique laser illumination High speed conveyor
(Vision-Based One-dimensional and two-dimensional scanning
Imaging bar code reading Pharmaceutical
Systems) Image lift and processing manufacturing
Parcel dimensioning Postal and parcel
Fixed focus and variable focus handling
models
- ----------------------------------------------------------------------------
Qtrace LDI Compact size High speed conveyor
(Laser-and High performance Dimensioning
Vision- Dimensions parcels Postal and parcel
Based Detects overlapping packages handling
Systems)
- ----------------------------------------------------------------------------
HoloTunnel Highly customizable Distribution/warehousing
iQ Tunnel One-dimensional and two-dimensional conveyor systems
(Multiple bar code reading and image Parcel and postal
Device acquisition handling
Laser- or Dimensioning Airport baggage handling
Vision-Based OCR
Systems)
- -----------------------------------------------------------------------------
Adaptive Optical Systems
We are a leading provider of high performance adaptive optical systems primarily
to government and commercial customers. Adaptive optical systems are
sophisticated, laser-based systems that correct for the natural distortion of
light as it travels through the atmosphere.
Our systems are designed and developed for highly advanced and customized
applications that require the highest standards of accuracy, reliability and
performance. As part of our adaptive optics systems, we design and manufacture
highly engineered components, wave front sensors and monolithic lenslet modules,
or MLMs. Wave front sensors provide correction signals that control deformable
mirrors. MLMs are arrays of micro lenses that focus and shape laser beams and
images. These advanced components each have applications in the control and
conditioning of lasers, retinal imaging and laser communications. Our products
are typically integrated into larger, customized systems.
Research and Product Development
As of March 1, 2004, 203 of our employees were engineers, approximately 20% of
our employees, who participate in our engineering development programs. Our
engineers primarily develop new products, derivations of existing products and
improvements to our products' reliability, ergonomics and performance.
Approximately 26% of our engineers are located in Suzhou, China. Our acquisition
of AOA in 2001 significantly increased our engineering capabilities, especially
as they relate to optics and image capture. We strive to utilize these
capabilities wherever possible in our point-of-sale and industrial scanners to
maximize our products' functionality and facilitate new product development.
Substantially all of our products are developed internally by our engineering
development programs. All of our recently introduced products, including
Stratos, VoyagerBT and VoyagerPDF are the result of this process. During 2001,
2002 and 2003, we incurred expenses of approximately $6.6 million, $6.9 million
and $6.8 million, respectively, on research and development. We also participate
in government and customer funded research programs.
Manufacturing
We manufacture our products primarily at our Blackwood, New Jersey and Suzhou,
China facilities. Our China facility is strategically located approximately 60
miles from Shanghai, allowing us access to high quality engineers and factory
employees, and close proximity to ports for shipping and receiving goods. Both
manufacturing facilities are vertically integrated, enabling us to quickly adapt
and enhance our products and services to meet specific customer requirements.
This capability reduces the length of our new product development cycle and our
products' overall time to market.
Our industrial scanning products, along with many of our newer products, are
manufactured in our Blackwood, New Jersey facility, which is ISO 9001 certified.
ISO 9001 is a system of management standards promulgated by the International
Organization of Standardization that sets forth what a company must do to manage
processes effecting quality. We manufacture a majority of our handheld products,
which are lower cost, higher volume products, in our China facility. We intend
to increasingly add manufacturing of other low-cost, high volume products to
Suzhou, China to take advantage of lower costs. Construction commenced in
December 2003 to approximately double the size of our China facility.
We have invested and will continue to invest in capital production equipment and
tooling that will further automate production, increase capacity and reduce
costs.
Suppliers
Although we manufacture many key components of our products, we also use a
limited number of suppliers. We do not believe that the loss of any one supplier
would have a long-term adverse effect on our business, although set-up costs and
delays would likely result if we were required to change any single supplier
without adequate prior notice. We believe our relationships with our suppliers
are good.
Sales and Marketing
We market our products and services on a global basis direct to end users and
OEMs and through a network of distributors and VARs. We have offices in 11
countries and sell our products into more than 110 countries.
We have contractual relationships with numerous distributors and dealers and a
limited number of OEMs, VARs and end users. OEMs purchase our products,
incorporate them into their systems and sell them under their own names. VARs
purchase our products and other peripheral components needed for specific
applications and sell them directly to end users. By utilizing multiple
distribution channels, we have been able to expand our market presence, broaden
our distribution network and sell to industries other than those serviced by our
direct sales force. We provide training and technical support to our
distributors and resellers to assist them in marketing and servicing our
systems. We also encourage our resellers to become authorized service providers
so that they can provide technical support directly to their customers.
Our subsidiaries sell, distribute and service our products throughout major
markets of the world. In February 1999, we established an engineering and
manufacturing subsidiary, Metro (Suzhou) Technologies Co., Ltd., with operations
located near Shanghai, China. Currently, a portion of our products are
manufactured by Metro (Suzhou) Technologies Co., Ltd. for sale to us and the
other subsidiaries. In addition, the adaptive optical systems market is served
through our AOA subsidiary.
Customers and End Users
We sell indirectly through distributors and VARs and directly to end users and
OEMs. Our core markets include retail point-of-sale, industrial systems and
advanced optical systems.
Our customers and end users within the retail point-of-sale market include:
department stores and chains, video rental chains, supermarkets, convenience
store chains, hospitals, pharmacies, banks and libraries among others. Within
our industrial systems market our customers and end users include: major package
handlers, worldwide transportation and logistics companies, postal agencies,
automotive and automotive component manufacturers, computer manufacturers, large
industrial prime contractors, airlines and pharmaceutical manufacturers. In our
advanced optical systems market our customers include governmental contractors,
specialty research agencies and manufacturing companies.
The method by which we sell our products is typically dependent upon the nature
of the end market application. For example, the majority of our retail
point-of-sale products are sold through indirect distribution channels. By
contrast, the majority of our sales in the industrial market are sold direct to
key end users and integrators, and the majority of our sales in the advanced
optical market are sold through large prime contractors.
Inventory and Backlog
We endeavor to produce products based upon a forecast derived from historical
sales, actual weekly shipments and regularly updated estimates of future demand.
Together with our vertical integration, this forecasting process allows us to
satisfy customers' shipment demands with limited inventory of completed products
and component parts.
As of December 31, 2003, we had approximately $22.8 million in backlog orders of
which $13.2 million is attributable to AOA contracts. All except $0.6 million of
such backlog orders are anticipated to be filled prior to December 31, 2004. As
of December 31, 2002, we had approximately $13.4 million in backlog orders, of
which approximately $6.8 million was attributable to AOA contracts. All but $0.1
million of such backlog orders as of December 31, 2002 were completed by
December 31, 2003.
Competition
Our industry is highly competitive. Our point-of-sale products, including
handheld scanners and fixed projection scanners, compete primarily with those
produced by U.S. manufacturers Hand Held Products, Inc. (a Welch Allyn
affiliate), Intermec Technologies Corporation (a division of UNOVA Inc.), NCR
Corporation, PSC Inc., and Symbol Technologies, Inc.; European manufacturer
Datalogic S.p.A.; and Asian manufacturers Densei, Fujitsu Limited, Nippondenso
ID System and Opticon, Inc. Our industrial scanners primarily compete with those
produced by U.S. manufacturers Accu-Sort Systems, Inc., Microscan Systems, Inc.;
and European manufacturers Datalogic S.p.A., Sick AG and Vitronics Soltec GmbH;
and Opticon, Inc. in Asia. While many of our competitors are larger and have
greater financial, technical, marketing and other resources than we do, we
believe that we compete successfully on the basis of price, quality, value,
service and product performance.
Intellectual Property
We file domestic and foreign patent applications to protect our technological
position and new product development. As of March 1, 2004, we owned 216 U.S.
patents, which expire between 2004 and 2021, and 35 foreign patents, which
expire between 2005 and 2018. In addition, we have over 200 patent applications
currently on file with the U.S. Patent and Trademark Office and foreign patent
offices with respect to certain products and improvements we have developed. We
own numerous U.S. and foreign trademark registrations. We intend to continue to
file applications for United States and foreign patents and trademarks. Although
we believe that our patents provide a competitive advantage, we also rely upon
our proprietary know-how, innovative skills, technical competence and marketing
abilities.
Government Regulations
Both we and our products are subject to regulation by various agencies both in
the United States and in the countries in which our products are sold. In the
United States, various federal agencies including the Food & Drug
Administration's Center for Devices and Radiological Health, Federal
Communications Commission, the Occupational Safety and Health Administration and
various state and municipal government agencies, have promulgated regulations
concerning laser safety and radio emissions standards. In Canada, laser safety
is regulated by Industry Canada. We also submit our products for safety
certification throughout the world by recognized testing laboratories such as
the Underwriters Laboratories, Inc. and the Canadian Standards Association. The
European countries in which our products are sold also have standards concerning
electrical and laser safety and electromagnetic compatibility and emissions.
Weighing systems used in conjunction with our Stratos scanner model are
regulated by various national and state organizations such as the Office of
Weights and Measures of the National Institute of Standards and Technology in
the United States and the International Organization of Legal Metrology.
We believe that all of our products are in material compliance with current
standards and regulations; however, regulatory changes in the United States and
other countries may require modifications to certain of our products in order
for us to continue to be able to manufacture and market these products.
Employees
As of March 1, 2004, we had approximately 1,043 full-time employees worldwide.
None of our employees currently is represented by a labor union. However, under
Chinese law, if we have over 200 employees in China, these employees will be
required to be represented by a union. We expect that by 2005, our employees in
Suzhou, China will be represented by a union in accordance with Chinese law.
Management believes that its relationships with its employees are good.
Financial Information about Geographic and Business Segment
We operate both domestically and internationally in two distinct business
segments. The financial information regarding our geographic and business
segments, which includes net revenues and gross profit for each of the years in
the three-year period ended December 31, 2003, and total long-lived assets as of
December 31, 2003, December 31, 2002 and December 31, 2001, is provided in Note
13 to the Consolidated Financial Statements.
Website Access to Reports
Our website address is www.metrologic.com. Our annual report on Form 10-K,
quarterly reports on Form10-Q, current reports on Form 8-K and any amendments to
these reports are available free of charge on the Investor Relations page of our
website as soon as reasonably practicable after the reports are filed
electronically with the Securities and Exchange Commission. Information
contained on our website is not a part of this report.
The general public may read and copy any materials we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC
maintains an Internet website that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The Internet address of the SEC's website is www.sec.gov.
Item 2. Properties
Our executive offices and U.S. manufacturing facilities are located in
Blackwood, New Jersey and until December 2003 were leased by us from C. Harry
Knowles, our Chairman and Chief Executive Officer, and Janet H. Knowles, our
Vice President, Administration and Director. The building is approximately
116,000 square feet, of which approximately 82,000 square feet is dedicated to
manufacturing. In order to reduce our operating costs, we purchased this
facility in December 2003 for $4.79 million, which was less than the values
determined by two independent appraisals. Our facility in Suzhou, China is
leased by us and is approximately 20,000 square feet. Construction commenced in
December 2003 to double the size of the facility and upon completion of the
construction, we will purchase the expanded facility and additional land for
future expansion.
Our subsidiaries each lease office space from third parties. As of December 31,
2003 our aggregate floor space was approximately 316,000 square feet.
Item 3. Legal Proceedings
We protect our technological position and new product development with domestic
and foreign patents. When we believe competitors are infringing on these
patents, we may pursue claims or other legal action against these parties.
Additionally, from time-to-time, we receive legal challenges to the validity of
our patents or allegations that our products infringe the patents of others.
We are currently involved in matters of litigation arising in the normal course
of business including the matters described below. We believe that such
litigation either individually or in the aggregate will not have a material
adverse effect on our consolidated financial position, results of operations or
cash flows.
On July 21, 1999, we and six other leading members of the Automatic
Identification and Data Capture Industry (the "Auto ID companies") jointly
initiated litigation against the Lemelson Medical, Educational, & Research
Foundation, Limited Partnership (the "Lemelson Partnership"). The suit which was
commenced in the U.S. District Court, District of Nevada in Reno, Nevada, and
later transferred to the U.S. District Court in Las Vegas, Nevada, requested a
declaratory judgment that certain patents owned by the Lemelson Partnership were
not infringed, invalid and/or unenforceable for a variety of reasons. The trial
on this matter was held from November 2002 through January 2003. On January 23,
2004, the Judge issued a decision in favor of the Auto ID companies finding that
the patents in suit were not infringed, invalid and unenforceable. On February
12, 2003 the Lemelson Partnership filed motions to alter or amend the Court's
judgment and requesting additional findings of fact to support the findings of
law in the Court's decision. The Auto ID companies will vigorously oppose
these motions.
On October 13, 1999, we filed suit for patent infringement against PSC Inc.
(PSC) in the U.S. District Court for the District of New Jersey. The complaint
asserts that at least seven of our patents are infringed by a variety of
point-of-sale bar code scanner products manufactured and sold by PSC. The
complaint seeks monetary damages as well as a permanent injunction to prevent
future sales of the infringing products. 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 was pending. The stay was
lifted on July 18, 2003, and the Court issued a ruling on the Markman hearing on
August 26, 2003 entering a decision and order providing an interpretation of the
claims in suit. No date has been set for trial.
On May 3, 2002, we were served with a lawsuit that was filed on April 12, 2002
by Symbol Technologies, Inc., in the U.S. District Court for the Eastern
District of New York alleging that we were in breach of the terms of the License
Agreement between us and Symbol (the "Agreement"). The Complaint sought a
declaratory judgment from the Court that we were in breach of the Agreement. On
March 31, 2003, the Court entered its decision on the parties' respective
motions for summary judgment, and finding in our favor, the Court dismissed
certain counts of Symbol's complaint. On April 9, 2003, Symbol voluntarily
dismissed the remaining counts of the complaint. Symbol filed its Notice of
Appeal with the U.S. Court of Appeals for the Second Circuit on May 7, 2003. On
December 23, 2003, the Court of Appeals dismissed Symbol's appeal in this
matter. In the interim, Symbol decided to proceed with the arbitration for
which the Company had filed a Demand in June 2002, which had been stayed
pending the decision by the lower court. On June 26, 2003, Symbol filed an
Amended Answer and Counterclaims asserting that (a) Metrologic's allegedly
infringing products are royalty bearing products, as defined under the Symbol
Agreement, and (b) in the alternative, those products infringe upon one or more
of Symbol's patents. In December 2003, we withdrew our Demand for Arbitration,
and the parties have now briefed the threshold issue of arbitrability in this
matter on Symbol's remaining counterclaims.
On June 18, 2003, the Company filed suit against Symbol Technologies, Inc. in
the U.S. District Court for the District of New Jersey alleging claims of patent
infringement of certain of our patents by at least two Symbol products. The
complaint also contains a claim for breach of the 1996 Cross License Agreement
between the parties (the "Cross License Agreement"). Symbol's answer to the
complaint, filed on July 30, 2003, included counterclaims requesting that a
declaratory judgment be entered that patents in suit are invalid, are not
infringed by Symbol and that Symbol is not in breach of the Cross License
Agreement. This matter is in the early stages of discovery.
We are not aware of any other legal claim or action against us, which could be
expected to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The executive officers of the Company as of December 31, 2003 were as follows:
Name Age Position
C. Harry Knowles* 75 Chairman of the Board and Chief Executive Officer
Janet H. Knowles* 62 Director, Vice President, Administration, Secretary
and Treasurer
Thomas E. Mills IV 44 Director, President and Chief Operating Officer
Kevin J. Bratton 54 Chief Financial Officer
Dale M. Fischer 63 Vice President, International Sales
Benny A. Noens 56 Vice President, EMEA, and Managing Director,
Metrologic Instruments GmbH
Joseph Sawitsky 41 Vice President, Manufacturing
Mark C. Schmidt 33 Vice President, Marketing
Nancy A. Smith 37 Vice President, General Counsel
Jeffrey Yorsz 46 Vice President, Industrial Systems
* Mr. and Mrs. Knowles are husband and wife.
The Company's executive officers are elected annually by the Board of Directors
following the annual meeting of shareholders and serve at the discretion of the
Board of Directors.
C. Harry Knowles is the founder of the Company and has been Chairman of the
Board of Directors since the Company's inception in 1969. Mr. Knowles served as
President of the Company from its inception through 1982 and from 1985 until
1999. He has served as Chief Executive Officer since 1985. In addition, Mr.
Knowles served as chief technical officer with responsibility for all of the
Company's research and development activities from 1982 to 1985. Prior to
founding the Company, Mr. Knowles was the general manager of Westinghouse
Electric Corporation's integrated circuits division in Elkridge, Maryland.
Thomas E. Mills IV became President of the Company on February 9, 2000, a
director of the Company effective March 25, 1999, and has served as the
Company's Executive Vice President and Chief Operating Officer since April 1999,
as the Company's Vice President, Finance from June 1995 until July 1, 2002 and
as Chief Financial Officer from May 1994 until July 1, 2002. Mr. Mills resigned
as an officer of the Company as of February 27, 2004 and as a director as of
February 18, 2004.
Kevin J. Bratton began serving as the Company's Chief Financial Officer on July
1, 2002. Mr. Bratton was employed as the Chief Financial Officer of The JPM
Company, a company that manufactured wire and cable assemblies at various
locations throughout the world, from June 2000 through June 2002. The JPM
Company filed a Chapter 11 petition in the United States Bankruptcy Court for
the District of Delaware on March 1, 2002. From July 1999 to May 2000, Mr.
Bratton was the Director of External Reporting at The JPM Company. Prior to
joining JPM, Mr. Bratton was a Vice President and Treasurer of IGI, Inc., a
manufacturer of poultry biologics and veterinary pharmaceuticals.
Dale M. Fischer served as the Company's Director of International Marketing and
Sales from 1990 to 1993 and has served as Vice President, International Sales
since 1994. From 1989 to 1990, Mr. Fischer was Chairman of Great Valley
Corporation, a worldwide marketing and product development company. From 1967
until 1988, Mr. Fischer held several positions with TRW Electronics Component
Group ("TRW"), most recently as International Marketing, Sales and Licensing
Director. Mr. Fischer was responsible for marketing and sales of TRW products in
more than 50 countries and was responsible for the implementation of a joint
venture in Japan and the establishment of seven technology and manufacturing
licenses throughout the world. Mr. Fischer has also served as President of Dalex
International Corporation, a company devoted to export/import and worldwide
market development.
Janet H. Knowles was a director of the Company from 1972 to 1984 and has served
as a director since 1986. Mrs. Knowles served as Vice President, Administration
from 1976 to 1983 and has served in that capacity and as Secretary since 1984,
and as Treasurer since 1994. Mrs. Knowles is responsible for the Company's
administrative matters.
Benny A. Noens served as the Company's European Sales Manager from 1991 to 1993
and has served as Vice President, European Sales since 1994. In addition, Mr.
Noens has been Managing Director of Metrologic Instruments GmbH since 1994. From
1980 until 1991, Mr. Noens held several positions with Data General Corporation,
including serving in Latin America as Marketing and Distribution Manager. Prior
to his employment at Data General, Mr. Noens managed a division of C.T. Janer
Co., an import/export company located in Rio de Janiero, Brazil.
Joseph Sawitsky has served as the Company's Vice President, Manufacturing since
November 1999. He joined Metrologic in 1998 as the Production Manager. After
serving in the Nuclear Submarine Force, he worked at ICI Composites from 1990 to
1994 and manufactured specialty polymer materials for the aerospace and
industrial markets. From 1994 to 1998 he held several positions with Zenith
Electronic Corporation making consumer electronic equipment.
Mark C. Schmidt has served as the Company's Vice President, Marketing since
November 1999. He has been employed by Metrologic since 1992. During his tenure,
Mr. Schmidt has progressed from Optical Engineer to the position of POS Product
Manager in 1995, and Marketing Manager in 1997. Mr. Schmidt earned a B.S. from
Rowan University where he graduated summa cum laude in 1993.
Nancy A. Smith has served as the Company's Vice President, General Counsel since
March 2002. Ms. Smith joined the Company in 1996 as its Corporate Counsel and
patent attorney. Prior to joining Metrologic, Ms. Smith was employed as a patent
attorney for a private law firm in Baltimore, Maryland. Ms. Smith earned her law
degree from the University of Baltimore, where she graduated magna cum laude in
1994.
Jeffrey Yorsz has served as the Vice President, Industrial Systems since March
2002. Mr. Yorsz also serves as President and General Manager of Adaptive Optics
Associates, Inc., a wholly owned subsidiary of Metrologic Instruments, Inc.,
since its acquisition in January 2001. He joined AOA as an engineer in 1984 and
has held prior positions of Manager of Electrical Engineering and Assistant
General Manager of the company. Mr. Yorsz earned an E.E., B.S. and M.S. in
Electrical Engineering as well as a B.S. in Management, from M.I.T.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
PRICE RANGE OF OUR COMMON STOCK
Our common stock is listed on the Nasdaq National Market and trades under
the symbol MTLG. On March 1, 2004, we had 21,231,132 shares of common stock
outstanding, which were held by approximately 150 holders of record. The
following table sets forth, for the fiscal periods indicated, the high and low
sales prices per share for our common stock on the Nasdaq National Market,
adjusted to reflect the 3-for-2 stock split effected July 3, 2003 and the
two-for-one stock split effected October 30, 2003:
High Low
---- ---
Year ended December 31, 2002
First Quarter $ 2.89 $ 1.94
Second Quarter 2.45 1.97
Third Quarter 2.13 1.24
Fourth Quarter 2.94 1.57
Year ended December 31, 2003
First Quarter $ 4.10 $ 2.50
Second Quarter 15.13 3.46
Third Quarter 22.75 10.33
Fourth Quarter 32.38 17.20
On December 31, 2003 the last reported sale price of our common stock on the
Nasdaq National Market was $27.06 per share.
DIVIDEND POLICY
We have not paid cash dividends on our common stock since becoming a public
company, and we do not intend to pay cash dividends in the foreseeable future.
We currently intend to retain any earnings to further develop and grow our
business. While this dividend policy is subject to periodic review by our Board
of Directors, there can be no assurance that we will declare and pay dividends
in the future.
Item 6. Selected Consolidated Financial Data
(in thousands except share and per share data)
(certain reclassifications have been made to prior year balances to
conform to the 2003 presentation)
Year Ended December 31,
1999 2000(1) 2001(1)(2)2002(3) 2003(4)
---- ---- ---- ---- ----
Statement of Operations Data:
Sales $ 80,103 $ 91,884 $ 112,011 $ 115,806 $ 138,011
Cost of sales 46,710 55,394 83,527 74,385 79,654
--------- -------- --------- --------- ---------
Gross profit 33,393 36,490 28,484 41,421 58,357
Selling, general and
administrative expenses 21,331 26,314 30,877 28,271 31,378
Research and development
expenses 4,327 4,975 6,563 6,929 6,764
Severance costs - 160 - 602 71
--------- --------- --------- -------- ---------
Operating income (loss) 7,735 5,041 (8,956) 5,619 20,144
Other income (expense),
net (202) (878) (3,596) (2,917) 897
--------- --------- --------- -------- ---------
Income (loss) before
income taxes 7,533 4,163 (12,552) 2,702 21,041
Provision (benefit) for
income taxes 2,636 1,426 (4,775) 1,027 7,160
--------- --------- --------- --------- --------
Net income (loss) $ 4,897 $ 2,737 $ (7,777)$ 1,675 $ 13,881
Add back: Goodwill
amortization 24 102 818 - -
Adjusted net income
(loss) $ 4,921 $ 2,839 $ (6,959)$ 1,675 $ 13,881
========= ========= ========= ========= ========
Net income (loss) per
common share (5)
Basic $ 0.30 $ 0.17 $ (0.47)$ 0.10 $ 0.79
--------- --------- --------- --------- ---------
Diluted $ 0.30 $ 0.16 $ (0.47)$ 0.10 $ 0.72
========= ========= ========= ========= =========
Weighted average number
of outstanding common
shares and equivalents(5)
Basic 16,238 16,316 16,373 16,400 17,597
========= ========= ========= ========= =========
Diluted 16,381 16,674 16,373 16,471 19,383
========= ========= ========= ========= =========
Year Ended December 31,
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 6,970 $ 2,332 $ 557 $ 1,202 $ 48,817
Working capital $ 24,844 $ 42,472 $ 20,606 $ 13,407 $ 74,112
Total assets $ 56,375 $ 81,447 $ 85,773 $ 74,579 $ 139,900
Long-term debt $ 3,414 $ 25,334 $ 27,465 $ 14,431 $ 320
Total debt $ 7,746 $ 28,039 $ 40,731 $ 21,486 $ 5,527
Total shareholders'
equity $ 34,544 $ 35,763 $ 26,261 $ 29,471 $ 107,608
(1) On January 26, 2000, we acquired a 51.0% interest in Metrologic Eria
Iberica ("MEI") and our results of operations include the results of
operations of MEI from that date forward. On July 18, 2000, we acquired a
51.0% interest in Metrologic Eria France ("MEF") and our results of
operations include the results of operations of MEF from that date
forward. On January 8, 2001, we completed the acquisition of AOA and our
results of operations include the results of operations of AOA from that
date forward.
(2) During the year ended December 31, 2001, cost of sales included special
charges and other costs of $10.0 million that are not expected to recur in
subsequent periods. See "Management's Discussion and Analysis of Financial
Condition and Results of operations."
(3) On January 1, 2002, we adopted FAS 142 and discontinued the amortization
of goodwill. See Note 6 to our Consolidated Financial Statements.
(4) During the year ended December 31, 2003, we recorded a gain of $2.2
million on the early extinguishment of debt and expenses of $463 incurred
in connection with our efforts to refinance our bank debt. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(5) Weighted average number of common shares and per share amounts for
1999-2002 have been restated to reflect the 2003 stock splits.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements; Certain Cautionary Language
Written and oral statements provided by us 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 we
believe that the assumptions underlying such forward looking information are
reasonable based on present conditions, forward looking statements made by us
involve risks and uncertainties and are not guarantees of future performance.
Actual results may differ materially from those in our 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 us to business failure risks of such
parties, 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 our 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 our 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 and 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 our 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 our requirements
for raw material and components; (x) the costs and potential outcomes of legal
proceedings or assertions by or against us relating to intellectual property
rights and licenses; (xi) our ability to successfully defend against challenges
to our patents and our ability to develop products which avoid infringement of
third parties' patents; (xii) occurrences affecting the slope or speed of
decline of the life cycle of our products, or affecting our ability to reduce
product and other costs and to increase productivity; (xiii) and the potential
impact of terrorism and international hostilities.
All forward-looking statements included herein are based upon information
presently available, and we assume no obligation to update any forward-looking
statements.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with generally
accepted accounting principles in the United States requires us 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, we evaluate our estimates and judgments, including those
related to revenue recognition, asset impairment, intangible assets and
inventory and accounts receivable. We base our 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. See Note 2 to our
consolidated financial statements, "Accounting Policies," for a summary of each
significant accounting policy. We believe the following critical accounting
policies and estimates, among others, affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. Revenue related to sales of our 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. We accrue related product
return reserves and warranty expenses at the time of sale. Additionally, we
record estimated reductions to revenue for customer programs and incentive
offerings including special pricing agreements, price protection, promotions and
other volume-based incentives. We recognize 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 Debts. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. If economic or political conditions were to change in the countries
where we do business, it could have a significant impact on the results of
operations, and our ability to realize the full value of our accounts
receivables. Furthermore, we are dependent on customers in the retail markets.
Economic difficulties experienced in those markets could have a significant
impact on our results of operations, and our ability to realize the full value
of our accounts receivables. In establishing the appropriate provisions for
customer receivable balances, we make assumptions with respect to their future
collectibility. Our assumptions are based on an individual assessment of a
customer's credit quality as well as subjective factors and trends, including
the aging of receivable balances. Once we consider all of these factors, a
determination is made to the probability of default. An appropriate provision is
made, which takes into account the severity of the likely loss on the
outstanding receivable balance based on our experience in collecting these
amounts.
Inventory. We write down our inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of the inventory
and the estimated market value, less disposal costs and reasonable profit
margin, 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.
Goodwill. Goodwill represents the excess of the cost of businesses acquired over
the fair value of the related net identifiable assets at the date of
acquisition. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," we no longer amortize
goodwill, but test for impairment of goodwill using a discounted cash flow
analysis. The goodwill impairment test is a two-step process, which requires
management to make judgments in determining what assumptions to use in the
calculation. The first step of the process consists of estimating the fair value
of each reporting unit based on a discounted cash flow model using revenue and
profit forecasts and comparing those estimated fair values with the carrying
values, which includes the allocated goodwill. If the estimated fair value is
less than the carrying value, a second step is performed to compute the amount
of the impairment by determining an "implied fair value" of goodwill. The
determination of a reporting unit's "implied fair value" of goodwill requires us
to allocate the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value represents the
"implied fair value" of goodwill, which is compared to its corresponding
carrying value. We completed our annual impairment test as of October 1, 2003
and determined that there was no goodwill impairment to be recognized. The key
assumptions used to determine the fair value of our reporting units included (a)
cash flow periods of 5 years; (b) terminal values based upon a terminal growth
rate of 3%; and (c) a discount rate of 13.8%, which was based on the Company's
weighted average cost of capital adjusted for the risks associated with the
operations.
Long-Lived Assets. We assess the impairment of our long-lived assets, other than
goodwill, 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 we
consider 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. We expense 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. We capitalize costs
incurred for internally developed product software where economic and
technological feasibility has been established and for qualifying purchased
product software. We assess the recoverability of our software development costs
against estimated future revenue over the remaining economic life of the
software.
Impact of Recently Issued Accounting Standards.
In April 2002, the Financial Accounting Standards Board ("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 requires all gains and losses from the
extinguishment of debt to be included as an item of income from continuing
operations. We adopted the provisions of this statement on January 1, 2003 and
have recorded a gain of $2.2 million on the extinguishment of the UTC
subordinated debt in other income (expense) in the consolidated statement of
operations during 2003.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. Under
EITF Issue 94-3, certain liabilities were recognized at the date of an entity's
commitment to an exit plan. Adoption of this statement had no material impact on
our consolidated financial position, consolidated results of operations or
liquidity.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," or "FIN 46." This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. In
October 2003, the FASB deferred the effective date for applying the provisions
of FIN 46 to interests held in VIEs created before February 1, 2003 to the end
of the first interim or annual period ending after December 15, 2003. In
addition, the FASB issued an Exposure Draft of a proposed Interpretation of FIN
46 in October 2003 to address implementation issues. We do not expect the
adoption of FIN 46 and related interpretations to have any significant impact on
our consolidated financial position, consolidated results of operations or
liquidity.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Interests with Characteristics of Both Liabilities and Equity." This
statement requires liability classification for certain types of financial
instruments, many of which were previously classified as equity. The statement
was effective on July 1, 2003; however, FASB's adoption of certain provisions
has been deferred for an indefinite period. Adoption of this statement had no
material impact on our consolidated financial position, consolidated results of
operations or liquidity.
Executive Overview
We are experts in optical image capture and processing solutions. We utilize our
expertise to design, manufacture and market sophisticated imaging and scanning
solutions serving a variety of point-of-sale, commercial and industrial
applications. Our solutions utilize a broad array of laser, holographic and
vision-based technologies designed to provide superior functionality and a
compelling value proposition for our customers. In recent years, we have
increased sales, cash flow from operations and net income primarily through the
introduction of new products and a focus on cost reduction activities to
maintain a competitive advantage.
Success factors critical to our business include sales growth through continued
penetration in existing and new markets, maintaining a highly responsive and
cost efficient infrastructure, achieving the financial flexibility to ensure
that we can respond to new market opportunities and return value to our
shareholders, and selective pursuit of strategic acquisitions.
In order to continue our penetration into new and existing markets our strategy
involves expanding our sales channels and expanding our product development
activities. We have recently concentrated our direct sales efforts to further
penetrate some of the largest retailers in the United States. During 2003, we
were awarded significant contracts from some major customers in both our POS/OEM
and Industrial/Optical business segments partially attributing to year over year
sales growth of approximately 19%. In addition, we continued to invest in
developing new and improved products to meet the changing needs of our existing
customers. A significant portion of our product development was focused on the
introduction of POS and industrial products that will allow us to penetrate new
markets that we have not previously served. During 2003, we introduced Stratos,
a bi-optic, high speed supermarket scanner, a new handheld laser scanner
featuring Bluetooth wireless communications capabilities and a new two
dimensional handheld barcode scanner. In addition, we are currently adapting our
advanced vision based technology to satisfy emerging retail applications that
require the capture of more than one-dimensional bar codes. We achieved our 2003
sales growth without any significant contribution from the new products
discussed above. While these products significantly increase our addressable
market, these new products only attributed to approximately 1% of 2003 sales. We
believe 2004 sales will be positively affected as these new products begin to
ship in larger quantities
To maintain a highly responsive and cost efficient infrastructure, our focus is
to maximize the efficiency of our organization through process improvements and
cost containment. We continually strive to reduce our manufacturing costs
through product engineering and design efforts. During 2003, the benefits of
these process improvements were evident through lower direct material costs,
royalty costs, and related overhead costs. Also during 2003, we began
construction of an addition to our manufacturing facility in Suzhou, China that
will nearly double the size of the existing China operations and more
importantly, will take advantage of cost efficiencies through lower direct labor
costs.
Closely linked to the success factors discussed above is our continued focus to
achieve the financial flexibility. In October 2003, we completed a follow-on
public offering of 1.725 million shares of common stock, prior to a two-for-one
stock split on October 30, 2003, which provided us with net proceeds of $55.5
million. We used a portion of those net proceeds to pay down existing
indebtedness and purchase our Blackwood, NJ facilty. We intend to use the
remaining net proceeds to fund working capital requirements in the future for
continued growth of our business. As of December 31, 2003 the Company had cash
and cash equivalents of approximately $49 million and total debt of only $5.5
million.
In addition to our internal development and organic growth we may selectively
pursue strategic acquisitions that we believe will broaden or complement our
current technology base and allow us to serve additional end users and the
evolving needs of our existing customers. In February 2003 we purchased the
remaining 49% interest in Metrologic do Brasil that we previously did not own
and in August 2003, we entered into an agreement to purchase the remaining 49.0%
of Metrologic Eria Iberica over the next three years. In addition, our 51.0%
interests in Metrologic Eria France contains an option for us to purchase the
remaining 49.0% interest. We expect to purchase the minority interest in 2004.
Forward-looking statements contained in this overview are highly dependent upon
a variety of important factors which could cause actual results to differ
materially from those reflected in such forward looking statements. For list of
the factors that could cause actual results to differ from expectations, refer
to the section on Forward Looking Statements included at the beginning of this
Item 7 on Management's Discussion and Analysis.
Results of Operations
The following table sets forth certain of our consolidated statement of
operations data as a percentage of revenues for the periods indicated. The
following discussion should be read in conjunction with our Consolidated
Financial Statements and the Notes to our Consolidated Financial Statements.
December 31,
2001 2002 2003
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of sales 74.6 64.2 57.7
Gross profit 25.4 35.8 42.3
Operating expenses:
Selling, general and administrative expenses 27.6 24.4 22.7
Research and development expenses 5.9 6.0 4.9
Severance costs 0.0 0.5 0.1
Total operating expenses 33.5 30.9 27.7
Operating income (loss) (8.0) 4.9 14.6
Other income (expenses), net (3.2) (2.5) 0.6
Income (loss) before income taxes (11.2) 2.3 15.2
Provision (benefit) for income taxes (4.3) 0.9 5.2
Net income (loss) (6.9)% 1.4% 10.1%
Our business is divided into two major segments: Point-of-Sale/Original
Equipment Manufacturers, or POS/OEM, and Industrial Scanning and Optical.
POS/OEM bar code scanners are typically either handheld scanners or fixed
projection scanners. Handheld bar code scanners are principally suited for
retail point-of-sale, document processing, library, healthcare and inventory
applications. Fixed projection scanners, which can be mounted on or in a
counter, are principally suited for supermarkets, convenience stores, mass
merchandisers, health clubs and specialty retailers.
Industrial Scanning and dimensioning products are comprised of fixed position
systems that are either laser- or vision-based. These systems range from simple,
one-scanner solutions to complex, integrated systems incorporating
multi-scanner, image capture and dimensioning technologies. Adaptive optical
solutions are highly customized sophisticated, laser-based systems that correct
for the natural distortion of light as it exits a complex laser and travels
through the atmosphere or other transmission medium.
The following table sets forth certain information regarding our revenues by our
two business segments for the periods indicated.
2001 2002 2003
---- ---- ----
(In thousands)
POS/OEM $ 84,041 $ 87,929 $ 112,817
Industrial & Optical:
Industrial 10,408 11,499 13,712
Optical 17,562 16,378 11,482
--------- --------- ---------
Total Industrial 27,970 27,877 25,194
--------- --------- ---------
Total Company $ 112,011 $ 115,806 $ 138,011
========= ========= =========
Most of our product sales in Western Europe, Brazil and Asia are billed in
foreign currencies and are subject to currency exchange rate fluctuations. A
significant percentage of our products are manufactured in our 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. Manufacture of our
point-of-sale products in our Suzhou, China facility accounted for approximately
58.5% and 38.0% of point-of-sale unit sales in 2003 and 2002, respectively. In
2001, sales and gross profit were adversely affected by the continuing rise in
the value of the U.S. dollar in relation to foreign currencies. In 2003 and
2002, sales and gross profit were favorably affected by the continuing decline
in the value of the U.S. dollar in relation to certain foreign currencies,
especially the euro.
The following table sets forth certain information as to our sales by
geographical location:
Year Ended December 31,
----------------------------------------------------------
2001 % 2002 % 2003 %
-------------- ---------------- -----------------
(Dollars in thousands)
North America $ 49,467 44.2% $ 55,179 47.6% $ 58,149 42.1%
Europe 46,377 41.4 43,057 37.2 57,474 41.7
Rest of World 16,167 14.4 17,570 15.2 22,388 16.2
--------- ----- ---------- ----- --------- -----
Total $ 112,011 100.0% $ 115,806 100.0% $ 138,011 100.0%
========= ===== ========== ===== ========= =====
We derive revenue from product sales, engineering development, system
maintenance and other services. Our cost of sales includes manufacturing costs,
labor costs related to service revenues, the costs associated with quality
control and the payment of royalties on license agreements. Selling, general and
administrative ("SG&A") expenses primarily consist of salaries, commissions and
related expenses for personnel engaged in sales, marketing and sales support
functions; costs associated with other marketing activities; salaries and
related expenses for executive, finance, accounting, legal and human resources
personnel; and professional fees and corporate expenses. Research and
development ("R&D") expenses primarily consist of salaries and expenses for
development and engineering and prototype costs. We also participate in
government and customer funded research programs. Costs of the engineers working
on such programs are charged to cost of sales for the time spent on the
programs. When the engineers are not working on these programs, they are
available to work on our own internal development projects and their costs are
included in research and development expense.
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Sales increased 19.2% to $138.0 million in 2003 from $115.8 million in 2002. The
increase was primarily attributable to higher sales of our point-of-sale ("POS")
and original equipment manufacturers ("OEM") products. Sales of our POS and OEM
products increased by 28.3%, sales of industrial products increased by 19.2%,
while sales of optical systems decreased by 29.9%. Approximately $8.9 million of
the increase in POS/OEM sales resulted from the strengthening of the euro
against the U.S. dollar in 2003. POS/OEM sales increased approximately $21.9
million due to increased unit sales of our handheld scanners, of which $1.1
million was attributed to the introduction of new products in 2003. These
factors were partially offset by a decrease of approximately $5.8 million
resulting from lower average selling prices due to competitive pricing pressures
experienced in the retail sector during 2003, primarily in Europe.
The increase in the industrial product sales is primarily due to increased sales
attributable to (i) a contract with a large systems integrator for use in a new
automated parcel and package system for the U.S. Postal Service; and (ii) a
contract with a major airline customer for bar code scanning equipment and
installation services to build and install scanning stations and tunnels for use
in baggage handling systems.
The decrease in optical system sales reflects the termination of certain optical
projects at AOA in 2002. These projects included certain government contracts
related to programs that were cancelled or downsized by the government as well
as purchase orders from a customer involved in the semiconductor manufacturing
industry. Revenue from these customers was $7.3 million in 2003 as compared with
$13.6 million in 2002 which included a $4.6 million negotiated settlement for
purchase order cancellations from one customer. These purchase order
cancellations were the result of our customer's excess capacity due to an
acquisition. We continue to receive contracts from this customer.
International sales accounted for $79.9 million or 57.9% of total sales in 2003
and $60.6 million, or 52.4% of total sales in 2002. The largest portion of the
growth in international sales was from increased sales in Europe. No individual
customer accounted for 10% or more of revenues in 2003 or 2002. The increase in
European sales can be attributed to increased unit volume along with the
strengthening of the euro against the U.S. dollar, offset by lower average
selling prices.
Cost of sales increased 7.1% to $79.7 million in 2003 from $74.4 million in
2002. As a percentage of sales, cost of sales was 57.7% in 2003 compared with
64.2% in 2002. The decrease in the percentage of cost of sales in 2003 was due
to the following:
o The strengthening of the euro against the U.S. dollar, as discussed
above, net of the decreases in average selling prices.
o A decrease in direct labor costs as a percent of sales as a result of
increased unit production in our Suzhou, China facility and the
workforce reductions in 2002.
o A decrease in direct material costs as a percent of sales resulting
from product redesigns lowering our bill of material costs.
o A decrease in royalty costs due to a reduction in the number of
products covered by the agreement between Symbol Technologies and the
Company. (See Note 11 to the Consolidated Financial Statements,
"Commitments and Contingencies," located elsewhere in this document.)
o More favorable product mix resulting from increased sales of certain
more profitable handheld scanners in 2003.
These factors were partially offset by increased sales of certain lower margin
products, including our portable data terminals that are not manufactured by us,
but purchased from other sources. These items generally have margins 10-15%
lower than our own manufactured products.
SG&A expenses increased $3.1 million or 11.0%, to $31.4 million in 2003 from
$28.3 million in 2002. As a percentage of sales, SG&A expenses were 22.7% in
2003 as compared with 24.4% in 2002. SG&A expenses in 2002 included $0.7 million
of expenses incurred prior to the finalization of the Amended and Restated
Credit Agreement that was executed on July 9, 2002. Excluding these expenses,
SG&A expenses were $27.5 million in 2002. As a percentage of sales, SG&A
expenses were 22.7% of sales in 2003 compared with 23.8% (excluding the
financing related expenses of $0.7 million) in 2002. The increase in SG&A
expenses was due to increased variable selling expenses associated with the
higher sales volume in 2003, the strengthening of the euro against the U.S.
dollar on euro denominated expenses, increased marketing expenses and an
increase in incentive compensation expense during 2003. These increases were
partially offset by lower personnel costs resulting from workforce reductions in
2002.
R&D expenses remained relatively flat in dollars at $6.8 million in 2003
compared to $6.9 million in 2002; however, as a percent of sales, R&D expenses
decreased to 4.9% of sales from 6.0% of sales. The decrease in R&D expenses was
the result of expanded R&D efforts focused on our development of the iQ180
camera-based acquisition vision system during 2002.
Severance costs decreased to $0.1 million in 2003 from $0.6 million in 2002. The
decrease is attributed to workforce reductions in March, April, August, and
September 2002.
Net interest expense decreased by 52.9% to $1.3 million in 2003 from $2.7
million in 2002. The decrease is due to lower outstanding borrowings and lower
interest rates in 2003. Interest expense in 2003 includes $0.2 million of
unamortized original issue discount associated with repayment of the
subordinated note to Mr. and Mrs. Knowles in October 2003. Interest expense in
2002 includes $0.1 million of additional interest expense that resulted from the
incremental 200 basis point default interest rate charged by our bank group from
April 12, 2002 to July 10, 2002.
Other income/expense reflects net other income of $2.2 million in 2003 compared
to net other expenses of $0.2 million in 2002. The increase in other income was
due to (i) a $2.2 million gain on the early repayment of subordinated debt
related to the acquisition of AOA; (ii) foreign exchange gains of $0.8 million
in 2003 as compared with foreign exchange losses of $0.1 million in 2002; and
(iii) $0.5 million of bank charges in 2003 incurred in connection with our
efforts to refinance our bank debt and restructure our overall debt position
that enabled us to realize the gain on early extinguishment of debt.
Net income was $13.9 million in 2003 as compared with $1.7 million in 2002. Net
income reflects a 34% and 38% effective income tax rate in 2003 and 2002,
respectively. The decrease in the effective income tax rate can be attributed to
the $2.2 million gain on early extinguishment of debt which, for tax purposes,
will be treated as a reduction of the purchase price of AOA, and as such will
not be subject to federal or state income tax.
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Sales increased 3.4% to $115.8 million in 2002 from $112.1 million in 2001. The
increase was primarily attributable to higher sales of our POS and OEM products.
Sales of our POS and OEM products increased by 4.6%, sales of industrial
products increased by 10.5%, while sales of optical systems decreased by 6.7%.
Approximately $1.9 million of the increase in POS/OEM sales resulted from the
strengthening of the euro against the U.S. dollar in 2002. POS/OEM sales
increased approximately $4 million due to the introduction of new products in
2002. These factors were partially offset by a decrease of approximately $1.6
million resulting from lower average selling prices.
The decrease in optical system sales reflects the termination of certain optical
projects at AOA in 2002. These projects included certain government contracts
related to programs that were cancelled or downsized by the government as well
as purchase orders from a customer involved in the semiconductor manufacturing
industry. Revenue from these customers was $13.6 million in 2002 as compared
with $14.3 million in 2001. These purchase order cancellations were the result
of our customer's excess capacity due to an acquisition. We continue to receive
contracts from this customer.
International sales accounted for $60.6 million or 52.4% of total sales in 2002
and $62.5 million, or 55.8% of total sales in 2001. Sales in North America
increased 11.5% in 2002 due primarily to increased sales of POS products to
major retail customers. Sales in Asia and South America increased by 8.7% in
2002 due primarily to increased demand for our POS products in China. These
increases, however, were partially offset by decreased sales in Europe due to
lower unit demand resulting from the recession in Europe. No individual customer
accounted for 10% or more of revenues in 2002 or 2001.
Cost of sales decreased 10.9% to $74.4 million in 2002 from $83.5 million in
2001. As a percentage of sales, cost of sales was 64.2% in 2002 compared with
74.6% in 2001. Cost of sales in 2001 included $10.0 million of special charges
and other costs that are not expected to recur in subsequent periods 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 we had previously capitalized. Cost of sales in 2002 compared to
2001, excluding the $10.0 million of special charges and other costs, increased
by $0.9 million or 1.2%. As a percentage of sales, costs of sales, excluding the
special charges, was 64.2% in 2002 as compared with 65.6% in 2001. The decrease
in the percentage of cost of sales in 2002 was due to the following:
o The strengthening of the euro against the U.S. dollar, as discussed
above, net of the decreases in average selling prices.
o A decrease of approximately $1.4 million in direct labor costs as a
result of increased unit production in our Suzhou, China facility and
the workforce reductions in 2002.
o A decrease in royalty costs due to a reduction in the number of
products covered by the agreement between Symbol Technologies and the
Company. (See Note 11 to our Consolidated Financial Statements,
"Commitments and Contingencies.")
These factors were partially offset by increased sales of certain lower margin
products, including our portable data terminals that are not manufactured by us,
but purchased from other sources. These items generally have margins 10-15%
lower than our own manufactured products.
SG&A expenses decreased $2.6 million or 8.4%, to $28.3 million in 2002 from
$30.9 million in 2001. As a percentage of sales, SG&A expenses were 24.4% in
2002 as compared with 27.6% in 2001. The decrease was due primarily to $1.1
million in reduced marketing and promotion expenses, $0.4 million in lower
personnel costs as a result of workforce reductions, a reduction of $1.0 million
in charges for uncollectible accounts receivable, $0.8 million in reduced
commission and incentive compensation expenses and the absence of $0.8 million
of goodwill amortization expense in 2002 in accordance with Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
The reduction in 2002 was partially offset by $0.7 million in increased legal
expenses in 2002 and $0.7 million of expenses related to our Amended Credit
Agreement. (See - "Liquidity and Capital Resources," below.)
R&D expenses increased 5.6% to $6.9 million in 2002 from $6.6 million in 2001,
and increased as a percentage of sales to 6.0% from 5.9%. The increase in R&D
expenses was the result of expanded R&D efforts focused on our development of
the iQ180 camera-based acquisition vision system.
Severance costs of $0.6 million in 2002 were due to workforce reductions in
March and April and further workforce reductions in August and September 2002.
As a result of these workforce reductions, our total number of employees
decreased by 163 employees, or approximately 16.0% of the total workforce. These
workforce reductions were part of a company-wide effort to increase our future
profitability. The workforce reductions and additional cost reductions
represented annualized savings of approximately $3.0 million in overhead and
operating expenses.
Net interest expense decreased by 29.6% from $3.9 million in 2001 to $2.7
million in 2002. The decrease is due to lower outstanding borrowings in 2002.
Interest expense in 2002 includes $0.1 million of additional interest expense
that resulted from the incremental 200 basis point default interest rate charged
by our bank group from April 12, 2002 to July 10, 2002.
Other income/expense reflects net other expenses of $0.2 million in 2002
compared to net other income of $0.3 million in 2001. The increase in other
expenses was due in part to foreign currency transaction losses of $0.1 million
in 2002 as compared with transaction gains of $0.4 million in 2001.
Net income was $1.7 million in 2002 compared with a net loss of $7.8 million in
2001. Net income (loss) reflects a 38% effective income tax rate in 2002 and
2001.
Inflation and Seasonality
Inflation and seasonality have not had a material impact on our results of
operations. However, our sales are typically impacted by fluctuation decreases
in seasonal demand from European customers in our third quarter. For quarterly
results of operations, see Supplementary Data following the Notes to our
Consolidated Financial Statements.
Liquidity and Capital Resources
Operating Activities for the Period Ended December 31, 2003
Net cash provided from operations decreased $7.8 million, or 38.9% from $20.0
million in 2002 to $12.2 million in 2003. Net cash provided by operating
activities in 2003 can be attributed primarily from net income of $13.9 million,
increases in inventory, accounts receivable and accrued expenses offset by a
decrease in accounts payable.
Our working capital increased $60.7 million to $74.1 million as of December 31,
2003 from $13.4 million as of December 31, 2002 as a result of our profitable
operations, proceeds from our October 2003 follow-on public offering, increases
in inventory and accounts receivable and the debt restructuring discussed below.
The significant balance sheet changes were as follows:
o Inventory increased $3.0 million to $17.0 million as of December 31,
2003 from $14.0 million as of December 31, 2002. The increase is a
result of a buildup in the inventory levels resulting from the longer
delivery cycle of finished goods from our Suzhou, China facility as
we increase our production volume in Suzhou.
o Accounts receivable, net increased $7.0 million to $27.4 million as of
December 31, 2003 from $20.4 million as of December 31, 2002. The
increase is primarily attributable to our increased sales volumes
especially near the end of the fourth quarter. Our days sales
outstanding ("DSO") increased slightly to 71 days in 2003 from 64
days in 2002.
o The current portion of lines of credit and notes payable decreased $1.9
million to $5.2 million as of December 31, 2003 from $7.1 million as
of December 31, 2002. The decrease is a result of the payment of
subordinated promissory notes due to UTOS and the payment in full of
the term loan under our Amended Credit Facility.
o Deferred contract revenue decreased $1.4 million to $0.3 million as of
December 31, 2003 from $1.7 million as of December 31, 2002. The
decrease is a result of the recognition of revenue for work performed
on a specific contract that was recognized as deferred contract
revenue in 2002.
o Accrued expenses increased $2.7 million to $11.5 million as of December
31, 2003 from $8.8 million as of December 31, 2002. The increase is
primarily attributable to accrued compensation and accrued commissions
as a result of higher sales volumes and related incentive compensation,
which was partially offset by a reduction in accrued corporate taxes
and accrued interest.
Operating Activities for the Year Ended December 31, 2002
Net cash provided by operating activities for 2002 resulted primarily from
income tax refunds, reductions in inventory, increases in accounts payable and
deferred contract revenue plus non-cash charges.
Our working capital decreased 35.0% to $13.4 million as of December 31, 2002
from $20.6 million as of December 31, 2001 as a result of our profitable
operations, reduction in inventory and the debt restructuring discussed below.
The significant balance sheet changes are as follows:
o Restricted cash decreased $2.2 million to $1.0 million as of December
31, 2002 from $3.2 million as of December 31, 2001. The decrease is a
result of $3.2 million used to pay bank debt offset by the
establishment of an additional $1.0 million of restricted cash from
loans from certain of our executive officers. The above transactions
were in accordance with the terms of our Amended Credit Agreement dated
July 9, 2002.
o Income tax receivable decreased $4.6 million to a zero balance as of
December 31, 2002 from $4.6 million as of December 31, 2001. The
decrease is a result of the receipt of income tax refunds in 2002.
o Inventory decreased $4.4 million to $14 million as of December 31, 2002
from $18.4 million as of December 31, 2001. The decrease is a result of
our effort to reduce inventory levels in order to help minimize
outstanding debt.
o The current portion of lines of credit and notes payable decreased $6.1
million to $7.1 million as of December 31, 2002 from $13.2 million as
of December 31, 2001. The decrease is a result of payments on the line
of credit and term loan under our Amended Credit Agreement. The credit
facility and the subsequent amendments and restructuring are more fully
described below under "Outstanding debt and financing arrangements."
o Accounts payable increased $1.8 million to $8.7 million as of December
31, 2002 from $6.9 million as of December 31, 2001. The increase is a
result of increased business opportunities in the fourth quarter of
2002 combined with an increase in accounts payable days.
o Deferred revenue increased $1.7 million as of December 31, 2002 from a
zero balance as of December 31, 2001. The increase is a result of the
recognition of deferred revenue for a contract in which cash received
was in excess of the revenue earned based on percentage completed.
Investing activities
Cash used in investing activities was $8.2 million and $0.4 million for the
years ended December 31, 2003 and 2002, respectively. The increase in cash used
by investing activities is primarily due to an increase in cash used for
property, plant and equipment purchases of $6.9 million primarily related to the
purchase of our Blackwood, NJ facility and initial funding for the expansion of
our Suzhou, China manufacturing facility. Furthermore, the increase is also
attributed to the release of $1.0 million of cash previously restricted
according to the January 31, 2003 Amendment (the "Amendment") to the Amended
Credit Agreement. The credit facility and the subsequent amendments and
restructuring are more fully described below under "Outstanding debt and
financing arrangements."
Cash used in investing activities in 2002 reflected $1.7 million used for
property, plant and equipment expenditures offset in part by the release of $3.2
million of restricted cash used to pay bank debt, net of an additional $1.0
million of cash restricted in accordance with the Amendment. During 2002, we
continued making expenditures related to manufacturing automation and capacity
expansion.
Our current plans for future capital expenditures include: (i) approximately
$2.2 million for investment and expansion of our Suzhou, China facility; (ii)
approximately $1.0 million for continued investment in manufacturing capacity
expansion at our Blackwood, New Jersey headquarters; and (iii) approximately
$1.0 million for additional manufacturing automation equipment and information
technology related equipment.
Financing activities
Cash provided by (used in) financing activities was $44.5 million and ($19.2)
million for the years ended December 31, 2003 and 2002, respectively. This
change is primarily attributed to (i) proceeds of $55.5 million from the
follow-on public offering that closed in October 2003; (ii) $3.4 million of
proceeds from the exercise of stock options; (iii) proceeds from the issuance of
notes payable; (iv) partially offset by higher principal payments on notes
payable.
Cash used in financing activities in 2002 reflected $21.1 million used to pay
down our revolving credit facility and term note partially offset by $2.1
million of proceeds from the issuance of notes payable.
Outstanding debt and financing arrangements
In connection with the acquisition
of AOA on January 8, 2001, we entered into a $45.0 million credit facility with
our primary bank, as agent for other bank parties. Under the terms of the credit
facility, we secured a $20.0 million term loan and a $25.0 million revolving
credit line. Proceeds from the credit facility were applied toward the financing
of the acquisition of AOA, paying down our existing term loans and lines of
credit and providing us and our subsidiaries with working capital. We granted a
security interest in our assets and properties to our primary bank as agent for
the banks as security for borrowings under the credit facility.
On July 9, 2002, we replaced the credit facility by executing an Amended and
Restated Credit Agreement (the "Amended Credit Agreement") with our lenders. The
Amended Credit Agreement provided for a term loan in the amount of $9.2 million
and a revolving credit facility of $14.0 million.
On January 31, 2003, we executed an Amendment (the "Amendment") to the Amended
and Restated Credit Agreement dated July 9, 2002 (the "Agreement"). The
Amendment, which extended the Agreement until January 31, 2006, provided for a
$13 million revolving credit facility and a $4.5 million term loan. Principal
payments on the term loan were $94,000 a month commencing in March 2003 with the
balance due at maturity. The interest rates under the Amendment were prime plus
..25% on borrowings under the revolving credit facility and prime plus .75% on
the term loan. The Amendment contained various negative and positive covenants
including minimum tangible net worth requirements and fixed charge coverage
ratios. All outstanding borrowings under the Agreement were repaid in October
2003 and the Agreement was terminated. As a result, unamortized deferred
financing costs of $86,000 were recognized as a charge to income in the fourth
quarter of 2003.
In connection with the acquisition of AOA, we entered into Subordinated
Promissory Notes ("Subordinated Debt") aggregating $11.0 million with United
Technologies Optical Systems, Inc. ("UTOS"), the former parent of AOA. In
January 2003, we and UTOS entered into a Payoff Agreement to accelerate the
principal payments on the Subordinated Debt. In accordance with the Payoff
Agreement, we paid UTOS $5.0 million on January 31, 2003 and $3.8 million on
March 31, 2003 as payment in full of our obligation under the Subordinated Debt.
Accordingly, we have recorded a $2.2 million gain on the extinguishment of the
Subordinated Debt in March 2003.
In order to provide us with sufficient subordinated financing within the time
period required to meet the terms of the Payoff Agreement which provided a $2.2
million gain, in January 2003, we issued a $4.3 million subordinated note to C.
Harry Knowles, our Chairman and Chief Executive Officer, and his spouse, Janet
H. Knowles, a Director and Vice President, Administration. The subordinated note
bore interest at 10.0% and required 60 monthly principal payments of $36,000
with the balance of $2.1 million due in January 2008. In connection with this
note, we issued a common stock purchase warrant, expiring on January 31, 2013,
to Mr. and Mrs. Knowles to purchase 195,000 shares of our common stock at an
exercise price of $3.47 per share, which was the fair market value on the date
of issuance. These warrants were valued at the time of issue at approximately
$247,000, and the resulting original issue discount was being amortized into
interest expense over the life of the subordinated note. This note was paid in
full in October 2003 and the unamortized original issue discount of $214,000 was
recognized as a charge to interest expense in the fourth quarter of 2003.
In addition, some of our European subsidiaries have entered into working capital
and/or invoice discounting agreements, with HypoVereinsbank, NMB-Heller Limited,
Societe General and La Caixa. Outstanding borrowings under the working capital
agreement with HypoVereinsbank have been guaranteed by the parent company. These
agreements provide us with availability of up to $5.3 million, using December
31, 2003 exchange rates at interest rates ranging from 3.15% to 5.75%. At
December 31, 2003, $4.9 million was outstanding under such agreements and is
included in our lines of credit for reporting purposes.
We believe that our current cash and working capital positions and expected
operating cash flows will be sufficient to fund our working capital, planned
capital expenditures, and debt repayment requirements for the foreseeable
future.
Foreign Currency Exchange
Our 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, we may selectively
enter into derivative financial instruments to offset our exposure to foreign
currency risks. Derivative financial instruments may include (i) foreign
currency forward exchange contracts with our primary bank for periods not
exceeding six months, which partially hedge sales to our German subsidiary and
(ii) euro based loans, which act as a partial hedge against outstanding
intercompany receivables and the net assets of our European subsidiary, which
are denominated in euros. Additionally, our European subsidiary invoices and
receives payment in certain other major currencies, including the British pound,
which results in an additional mitigating measure that reduces our 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 December 31, 2003.
Acquisition of Minority Interests
Our original 51.0% interest in MEI and MEF contained options for us to purchase
the remaining 49.0% interests. The purchase price under the option is calculated
based on a twelve-month multiple of sales and provides us with a twelve-month
period in which to find a buyer or negotiate a purchase price with a default
minimum. We have agreed to purchase the 49.0% of MEI that we do not own for
approximately 5.9 million euros. Payments will be made over 3 years commencing
in August 2003. As of December 31, 2003, we had purchased an additional 9.90% of
Metrologic Eria Iberica for approximately 1.2 million euros.
We have not received any notice concerning the purchase option we hold on MEF.
However, we expect to purchase the minority interest during 2004 at a negotiated
price.
Disclosures about Contractual Obligations and Commercial Commitments
Less After
than 1 1-3 4-5 5 Years
Contractual Obligations Total Year Years Years Years
(In thousands)
Long-Term Debt 353 210 143 - -
Capital Lease Obligations 288 111 177 - -
Operating Leases 10,942 2,532 3,750 3,319 1,341
Option to purchase minority
interest in MEI 5,832 2,411 3,421 - -
-------- -------- -------- -------- --------
Total Contractual Cash
Obligations $ 17,415 $ 5,264 $ 7,491 $ 3,319 $ 1,341
======== ======== ======== ======== ========
Total Less
Amounts than 1 1-3 4-5 Over 5
Other Commercial Committed Year Years Years Years
Commitments
(In thousands)
Revolving credit facility $ 4,886 $ 4,886 $ - $ - $ -
======== ========= ========== ========= ========
Item 7a - Quantitative and Qualitative Disclosures about Market Risk
Market Risk Sensitive Instruments. The market risk inherent in our market risk
sensitive instruments and position is the potential loss arising from adverse
changes in foreign currency exchange rates and interest rates.
Interest Rate Risk. Our bank loans expose our earnings to changes in short-term
interest rates, since interest rates on the underlying obligations are either
variable or fixed for such a short period of time as to effectively become
variable. The fair values of our bank loans are not significantly affected by
changes in market interest rates. The impact on earnings of a hypothetical 10%
change in interest rates on our outstanding debt would have been approximately
$0.1 million and $0.2 million in 2003 and 2002, respectively. Actual results may
differ.
Foreign Exchange Risk. We periodically enter into forward foreign exchange
contracts principally to hedge the currency fluctuations in transactions
denominated in foreign currencies, namely the euro, thereby mitigating our risk
that would otherwise result from changes in exchange rates. Principal
transactions hedged are intercompany sales and payments. Gains and losses on
forward foreign exchange contracts and the offsetting losses and gains on hedged
transactions are reflected in our statement of operations. A large percentage of
our foreign sales are transacted in foreign local currencies. As a result, our
international operating results are subject to foreign exchange rate
fluctuations. A hypothetical 10% percent strengthening or weakening of the U.S.
dollar against the euro could have had an impact of $0.2 million and $0.1
million on our net earnings in 2003 and 2002, respectively. Actual results may
differ.
We are subject to risk from fluctuations in the value of the euro relative to
the U.S. dollar for our European subsidiaries, which use the euro as their
functional currency and translated into U.S. dollars in consolidation. Such
changes result in cumulative translation adjustments which are included in other
comprehensive income (loss). At December 31, 2003 and 2002, we had translation
exposure. The potential effect on other comprehensive income (loss) resulting
from a hypothetical 10% change in the quoted euro rate amounts to $0.4 million
and $0.2 million in 2003 and 2002, respectively. Actual results may differ.
In addition, we held debt denominated in euros at December 31, 2003 and 2002,
respectively and recognized foreign currency translation adjustments in net
income. The potential effect resulting from a hypothetical 10% adverse change on
the quoted euro rate amounts to $0.5 million and $0.1 million in 2003 and 2002.
Actual results may differ.
Item 8. Financial Statements and Supplementary Data
Index Pages
Report of Ernst & Young LLP, Independent Auditors F-1
Consolidated Balance Sheets at December 31, 2003 and 2002 F-2
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 2003, 2002 and 2001 F-3
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2003, 2002 and 2001 F-5
Notes to Consolidated Financial Statements F-6
Supplementary Data F-25
Financial statement schedules:
Schedule II - Valuation and Qualifying Accounts is filed
herewith. All other schedules are omitted because they are
not applicable, not required, or because the required
information is included in the consolidated financial
statements or notes thereto. F-27
Report of Independent Auditors
The Board of Directors and Shareholders
Metrologic Instruments, Inc.
We have audited the accompanying consolidated balance sheets of Metrologic
Instruments, Inc. as of December 31, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2003. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Metrologic
Instruments, Inc. at December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and its related
amortization.
/s/Ernst & Young LLP
Philadelphia, Pennsylvania
February 12, 2004,
Metrologic Instruments, Inc.
Consolidated Balance Sheets
(amounts in thousands except share data)
December 31,
-----------------------
2003 2002
Assets --------- ---------
Current assets:
Cash and cash equivalents $ 48,817 $ 1,202
Restricted cash - 1,000
Accounts receivable, net of allowance of
$485 and $341 in 2003 and 2002, respectively 27,369 20,412
Inventory 16,972 14,039
Deferred income taxes 1,758 785
Other current assets 3,692 2,258
--------- ---------
Total current assets 98,608 39,696
Property, plant and equipment, net 16,940 12,600
Patents and trademarks, net 5,184 4,688
Holographic technology, net 252 368
Advance license fee, net 1,176 1,294
Goodwill 17,536 15,175
Other assets 204 758
---------- ---------
Total assets $ 139,900 $ 74,579
========== =========
Liabilities and shareholders' equity Current
liabilities:
Current portion of lines of credit $ 4,886 $ 1,347
Current portion of notes payable 321 5,708
Accounts payable 7,482 8,719
Accrued expenses 11,518 8,808
Deferred contract revenue 289 1,707
---------- ---------
Total current liabilities 24,496 26,289
Notes payable, net of current portion 320 14,431
Deferred income taxes 3,515 908
Other liabilities 3,961 3,480
Shareholders' equity:
Preferred stock, $0.01 par value: 500,000
shares authorized; none issued - -
Common stock, $0.01 par value: 30,000,000
shares authorized; 20,807,884 and 16,417,665
shares issued and outstanding in 2003
and 2002, respectively 208 164
Additional paid-in capital 80,201 17,579
Retained earnings 28,482 14,601
Accumulated other comprehensive loss (1,283) (2,873)
----------- ---------
Total shareholders' equity 107,608 29,471
----------- ---------
Total liabilities and shareholders' equity $ 139,900 $ 74,579
=========== =========
See accompanying notes.
Metrologic Instruments, Inc.
Consolidated Statements of Operations
(amounts in thousands except share and per share data)
Year Ended December 31,
----------------------------------
2003 2002 2001
---------- ----------- -----------
Sales $ 138,011 $ 115,806 $ 112,011
Cost of sales 79,654 74,385 83,527
---------- ----------- -----------
Gross profit 58,357 41,421 28,484
Selling, general and administrative
expenses 31,378 28,271 30,877
Research and development expenses 6,764 6,929 6,563
Severance costs 71 602 -
---------- ----------- -----------
Operating income (loss) 20,144 5,619 (8,956)
Other income (expenses)
Interest income 123 85 174
Interest expense (1,414) (2,824) (4,064)
Foreign currency transaction
gain (loss) 805 (132) 432
Gain on extinguishment of debt 2,200 - -
Other, net (817) (46) (138)
---------- ----------- -----------
Total other income (expenses) 897 (2,917) (3,596)
---------- ----------- -----------
Income (loss) before income taxes 21,041 2,702 (12,552)
Provision (benefit) for income taxes 7,160 1,027 (4,775)
----------- ----------- -----------
Net income (loss) $ 13,881 $ 1,675 $ (7,777)
=========== =========== ============
Basic earnings (loss) per share:
Weighted average shares outstanding 17,597,068 16,399,992 16,373,418
=========== =========== ===========
Basic earnings (loss) per share $ 0.79 $ 0.10 $ (0.47)
=========== =========== ===========
Diluted earnings (loss) per share:
Weighted average shares outstanding 17,597,068 16,399,992 16,373,418
Net effect of dilutive securities 1,785,582 71,229 -
----------- ----------- ----------
Total shares outstanding used in
computing diluted earnings per share 19,382,650 16,471,221 16,373,418
=========== =========== ===========
Diluted earnings (loss) per share $ 0.72 $ 0.10 $ (0.47)
=========== =========== ===========
See accompanying notes.
Metrologic Instruments, Inc.
Consolidated Statements of Shareholders' Equity
(amounts in thousands except share data)
Accumulated
Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Loss Total
Balances, January 1, 2001 $163 $17,453 $ 20,703 $ (2,556) $ 35,763
Net loss - - (7,777) - (7,777)
Other comprehensive loss -
foreign currency
translation adjustment - - - (1,798) (1,798)
--------
Total comprehensive loss - - - - (9,575)
--------
Stock issued through employee
stock purchase plan 1 72 - - 73
---- ------- -------- -------- --------
Balances, December 31, 2001 $164 $17,525 $ 12,926 $ (4,354) $ 26,261
Comprehensive income:
Net income - - 1,675 - 1,675
foreign currency
translation adjustment - - - 1,481 1,481
--------
Total comprehensive income - - - - 3,156
--------
Stock issued through employee stock
purchase plan - 54 - - 54
---- ------- -------- -------- --------
Balances, December 31, 2002 $164 $17,579 $ 14,601 $ (2,873) $ 29,471
Comprehensive income:
Net income - - 13,881 - 13,881
Other comprehensive income -
foreign currency
translation adjustment - - - 1,590 1,590
--------
Total comprehensive income - - - - 15,471
--------
Issuance of 3,450,000 shares of
common stock 35 55,480 - - 55,515
Issuance of warrants - 247 - - 247
Exercise of stock options 9 3,354 - - 3,363
Tax benefit from exercise of stock
options - 3,488 - - 3,488
Stock issued through employee stock
purchase plan - 53 - - 53
---- ------- -------- -------- --------
Balances, December 31, 2003 $208 $80,201 $ 28,482 $ (1,283) $107,608
==== ======= ======== ======== ========
*Amounts denoted include the effect of the 2003 stock splits.
See accompanying notes.
Metrologic Instruments, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
Year Ended December 31,
-------------------------------
2003 2002 2001
--------- -------- ---------
Operating activities
Net income (loss) $ 13,881 $ 1,675 $ (7,777)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation 2,915 2,785 3,019
Amortization 620 570 2,044
Deferred income tax provision (benefit) 1,634 152 (4,619)
Loss on disposal of property 109 164 143
Gain on extinguishment of debt (2,200) - -
Amortization of warrants and deferred
financing fees 357 - -
Changes in operating assets and liabilities:
Accounts receivable (5,446) 550 10,089
Inventory (1,829) 4,883 12,024
Other current assets (1,434) 4,111 2,126
Other assets 554 107 86
Accounts payable (1,480) 1,618 604
Accrued expenses 5,331 653 (3,432)
Other liabilities (802) 2,709 1,050
--------- -------- ---------
Net cash provided by operating activities 12,210 19,977 15,357
Investing activities
Restricted cash 1,000 2,200 (3,200)
Purchase of property, plant and equipment (6,892) (1,660) (2,208)
Patents and trademarks (882) (962) (1,317)
Cash paid for purchase of business, net of
cash acquired - - (10,393)
Purchase of minority interests in subsidiaries (1,442) - -
Other intangibles - - (253)
--------- -------- ----------
Net cash used in investing activities (8,216) (422) (17,371)
Financing activities
Proceeds from equity offering, net of
expenses 55,515 - -
Proceeds from exercise of stock options
and employee stock purchase plan 3,416 54 73
Proceeds from issuance of notes payable 4,169 2,054 9,239
Principal payments on notes payable (22,206) (18,712) (12,649)
Net borrowings (repayments) on lines
of credit 3,576 (2,429) 4,743
Capital lease payments (77) (158) (80)
Issuance of warrants 247 - -
Increase in deferred financing costs (110) - -
--------- -------- ----------
Net cash provided by (used in) financing
activities 44,530 (19,191) 1,326
Effect of exchange rates on cash (909) 281 (1,087)
--------- -------- ----------
Net increase (decrease) in cash and cash
equivalents 47,615 645 (1,775)
Cash and cash equivalents at beginning
of year 1,202 557 2,332
--------- --------- ----------
Cash and cash equivalents at end of year $ 48,817 $ 1,202 $ 557
========= ========= ==========
Supplemental Disclosures:
Cash paid for interest $ 1,469 $ 2,774 $ 3,913
======== ========= ==========
Cash paid for income taxes $ 2,989 $ 194 $ 112
======== ========= ==========
Tax benefit from exercise of stock options $ 3,488 $ - $ -
======== ========= ==========
See accompanying notes
Metrologic Instruments, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
(Dollars in Thousands, except per share data)
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 110 countries worldwide
through the Company's sales, service and distribution offices located in North
and South America, Europe and Asia.
2. Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
Metrologic Instruments, Inc., and its domestic and foreign subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
Product sales revenue is recognized upon shipment of products to customers. The
Company has agreements with certain distributors that provide limited rights of
return. Allowances for product returns and allowances are estimated based on
historical experience and provisions are recorded at the time of shipment.
Amounts charged to customers for shipping and handling are included in sales.
Shipping and handling amounts incurred by the Company are included in cost of
sales.
Revenue Recognition - Contracts
Revenue is recognized on a percentage of completion basis (generally measured
using the cost-to-cost method) for long-term contracts for the sale of tangible
products and upon delivery for short-term contracts. Cost and profit estimates
are reviewed periodically as work progresses, and adjustments to revenue
recognized, if needed, are reflected in the period in which estimates are
revised. Provisions for estimated losses, if any, on uncompleted contracts are
made in the periods in which such losses become probable and can be reasonably
estimated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Fair Values of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable and accounts
payable approximate fair value because of their short-term nature. The carrying
amount of long-term debt approximates its fair value because the interest rate
is reflective of rates that the Company could currently obtain on debt with
similar terms and conditions. The Company records an allowance for doubtful
accounts when it becomes probable that a customer will be unable to make its
required payments. Accounts receivable are written off against the allowance for
doubtful accounts when all collection efforts have been abandoned.
Inventory
Inventory is stated at the lower of cost, determined on a first-in, first-out
basis, or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is determined on
the straight-line method for building and improvements over estimated useful
lives of 31 to 40 years and on an accelerated method for machinery and equipment
over estimated useful lives of 3 to 15 years.
Patents and Trademarks
Patents and trademarks reflect application and testing costs for products with
respect to which the Company has applied for or received patent and trademark
protection. Costs expended for successful patent and trademark applications are
being amortized on a straight-line basis over their useful lives, which
generally are 17 years.
Holographic Technology
Holographic Technology resulted from the acquisition of Holoscan, Inc. on March
1, 1996 and is being amortized over ten years. The Company was required to pay
the former shareholders of Holoscan, Inc. $194 in 1998, which was based on sales
of certain holographic laser scanners. Such amounts were considered additions to
holographic technology and are being amortized over the remainder of the
ten-year period.
Software Development Costs
Costs incurred in the research and development of new software embedded in
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. After technological
feasibility is established, any additional development costs are capitalized in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed." Capitalization ceases when the product
is available for general release to customers.
Internal Use Software
Costs incurred in the development or purchase of internal use software, other
than those incurred during the application development stage, are expensed as
incurred. Costs incurred during the application development stage are
capitalized and amortized over the estimated useful life of the software. The
Company has capitalized $2,256 of software obtained for internal use through
December 31, 2003. Capitalized software costs are amortized on a straight-line
basis over seven years. Amortization related to the capitalized software was
$339, $303 and $265 for the years ended December 31, 2003, 2002 and 2001,
respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of businesses acquired over the fair
value of the related net assets at the date of acquisition. The Company accounts
for goodwill in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets" , which was adopted by the Company on January 1, 2002.
SFAS 142 provides guidance on accounting for goodwill and intangible assets with
indefinite useful lives and prohibits the amortization of these assets.
Intangible assets with finite lives continue to be amortized over their
estimated useful lives. Intangible assets, including goodwill, that are not
subject to amortization are tested for impairment and possible writedown on an
annual basis. The Company tests goodwill for impairment using the two-step
process prescribed in SFAS 142. The first step is a screen for potential
impairment, while the second step measures the amount of impairment, if any. The
Company uses a discounted cash flow analysis to complete the first step in the
process. The Company completed its annual impairment tests in 2003 and 2002 and
determined that there were no goodwill impairments to be recognized. See Note 6
for further information on the impact of adopting SFAS 142.
Long-Lived Assets
The Company evaluates impairment of its intangible and other long-lived assets,
other than goodwill, in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which has been adopted by the
Company as of January 1, 2002. SFAS 144 provides guidance on financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," and the accounting and reporting
provisions of Accounting Principles Bulletin Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." When indicators of impairment exist, the Company will compare the
estimated future cash flows, on an undiscounted basis, of the underlying
operations or assets with their carrying value to determine if any impairment
exists. If impairment exists, any adjustment will be determined by comparing the
carrying amount of the impaired asset to its fair value. The Company considers
all impaired assets "to be held and used" until such time as management commits
to a plan to dispose of the impaired asset. At that time, the impaired asset is
classified as "to be disposed of" and is carried at its fair value less its cost
of disposal. No assets were determined to be impaired in 2003 and 2002 and the
adoption of SFAS 144 had no affect on the Company's financial position or its
results of operations.
Advanced License Fee
The Company capitalized an advance license fee of $2,000 in December 1996. The
advance license fee is being amortized on a straight-line basis over the 17-year
life of the cross-licensing agreement.
Foreign Currency Translation
The financial statements of Metrologic's foreign subsidiaries have been
translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." All balance sheet accounts have been translated using the exchange
rates in effect at the balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year. The gains and losses
resulting from the changes in exchange rates from year to year have been
reported separately in other comprehensive loss in the consolidated financial
statements.
Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with SFAS 128,
"Earnings Per Share." Basic earnings per share is calculated by dividing net
income by the weighted average shares outstanding for the year and diluted
earnings per share is calculated by dividing net income by the weighted average
shares outstanding for the year plus the dilutive effect of stock options.
Concentrations of Credit Risk
The Company has operations, subsidiaries and affiliates in the United States,
Europe, Asia and South America. The Company performs ongoing credit evaluations
of its customers' financial condition, and except where risk warrants, requires
no collateral. The Company may require, however, letters of credit or prepayment
terms for those customers in lesser-developed countries.
Short-term cash investments are placed with high credit quality financial
institutions or in short-term high quality debt securities. The Company limits
the amount of credit exposure in any one institution or single investment.
Accounting for Stock Options
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for stock options. Under APB 25, if the exercise price of the Company's stock
options equals or exceeds the market price of the underlying common stock on the
date of grant, no compensation expense is recognized. Had compensation expense
for the Company's stock option plan been determined based upon the fair value at
the grant date using the Black Scholes pricing model prescribed under SFAS 123,
the Company's net earnings/(loss) and net earnings/(loss) per share would
approximate the pro-forma amounts as follows:
2003 2002 2001
---- ---- ----
Net income (loss):
As reported $13,881 $ 1,675 $(7,777)
Deduct: (total stock-based employee
compensation expense determined
under fair value based method, net of
related taxes) (778) (818) (859)
------- ------- -------
Pro forma $13,103 $ 857 $(8,636)
======= ======= =======
Net income (loss) per share:
Basic:
As reported $ 0.79 $ 0.10 $ (0.47)
Pro forma 0.74 0.05 (0.53)
Diluted:
As reported $ 0.72 $ 0.10 $ (0.47)
Pro forma 0.68 0.05 (0.53)
Derivative Financial Instruments
On January 1, 2001, the Company adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS
No. 133 requires the recognition of all derivative instruments as either assets
or liabilities in the consolidated balance sheet measured at fair value. Changes
in fair value are recognized immediately in earnings unless the derivative
qualifies as a hedge of future cash flows. For derivatives qualifying as cash
flow hedges, the effective portion of changes in fair value of the derivative
instrument is recorded as a component of other comprehensive income and
reclassified to earnings in the same period during which the hedged transaction
affects earnings. Any ineffective portion (representing the remaining gain or
loss on the derivative instrument in excess of the cumulative change in the
present value of future cash flows of the hedged transaction) is recognized in
earnings as it occurs.
The Company formally designates and documents each derivative financial
instrument as a hedge of a specific underlying exposure as well as the risk
management objectives and strategies for entering into the hedge transaction
upon inception. The Company also assesses whether the derivative financial
instrument is effective in offsetting changes in the fair value of cash flows of
the hedged item. The Company recognized no gain or loss related to hedge
ineffectiveness in 2003, 2002 or 2001, respectively.
The Company also utilizes derivative financial instruments to hedge the risk
exposures associated with foreign currency fluctuations for payments from the
Company's international subsidiaries denominated in foreign currencies. These
derivative instruments are designated as either fair value or cash flow hedges,
depending on the exposure being hedged, and have maturities of less than one
year. Gains and losses on these derivative financial instruments and the
offsetting losses and gains on hedged transactions are reflected in the
Company's statement of operations. The Company does not use these derivative
financial instruments for trading purposes. At December 31, 2003, the Company
had no derivative financial instruments outstanding.
Stock Splits
On June 6, 2003, the Board of Directors approved a three-for-two stock split of
our common stock. The stock split was payable in the form of a 50% stock
dividend and entitled each stockholder of record at the close of business on
June 23, 2003 to receive three shares of common stock for every two outstanding
shares of common stock held on that date. The stock dividend was payable on July
3, 2003.
On October 7, 2003, the Board of Directors approved a two-for-one stock split of
our common stock. The stock split was payable in the form of a 100% stock
dividend and entitled each stockholder of record at the close of business on
October 20, 2003 to receive two shares of common stock for every outstanding
share of common stock held on that date. The stock dividend was payable on
October 30, 2003.
The capital stock accounts, all share data and earnings per share data in the
consolidated financial statements give effect to the stock splits, applied
retroactively, to all periods presented.
Impact of Recently Issued Accounting Standards
In April 2002, the Financial Accounting Standards Board ("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 requires all gains and losses from the
extinguishment of debt to be included as an item of income from continuing
operations. We adopted the provisions of this statement on January 1, 2003 and
have recorded a gain of $2.2 million on the extinguishment of the UTC
subordinated debt in other income (expense) in the consolidated statement of
operations during 2003.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. Under
EITF Issue 94-3, certain liabilities were recognized at the date of an entity's
commitment to an exit plan. Adoption of this statement had no material impact on
our consolidated financial position, consolidated results of operations or
liquidity.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," or "FIN 46." This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. In
October 2003, the FASB deferred the effective date for applying the provisions
of FIN 46 to interests held in VIEs created before February 1, 2003 to the end
of the first interim or annual period ending after December 15, 2003. In
addition, the FASB issued an Exposure Draft of a proposed Interpretation of FIN
46 in October 2003 to address implementation issues. We do not expect the
adoption of FIN 46 and related interpretations to have any significant impact on
our consolidated financial position, consolidated results of operations or
liquidity.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Interests with Characteristics of Both Liabilities and Equity." This
statement requires liability classification for certain types of financial
instruments, many of which were previously classified as equity. The statement
was effective on July 1, 2003 however, FASB's adoption of certain provisions has
been deferred for an indefinite period. Adoption of this statement had no
material impact on our consolidated financial position, consolidated results of
operations or liquidity.
Reclassifications
Certain reclassifications have been made to prior year balances in order to
conform to the 2003 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%. During November 2003, this factoring agreement expired. The following
amounts relating to non-recourse factoring were included in accounts receivable
at December 31, 2002:
Receivables assigned to factor $ 1,645
Less advances from factor (1,091)
-------
Due from factor $ 554
=======
4. Inventory
Inventory consists of the following:
December 31,
2003 2002
---- ----
Raw materials $ 6,444 $ 5,788
Work-in-process 1,945 1,865
Finished goods 8,583 6,386
--------- --------
$ 16,972 $ 14,039
========= ========
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
2003 2002
---- ----
Buildings and improvements $ 10,237 $ 5,482
Machinery and equipment 21,824 19,347
Capitalized internal use software 2,256 1,903
Capitalized software development costs 546 546
-------- --------
34,863 27,278
Less accumulated depreciation 17,923 14,678
-------- --------
$ 16,940 $ 12,600
======== ========
Machinery and equipment included $389 and $104 under capital leases as of
December 31, 2003 and 2002. Accumulated depreciation on these assets was $51 and
$15 as of December 31, 2003 and 2002, respectively. Depreciation expense on the
Company's property, plant and equipment was approximately $2,900, $2,800, and
$3,000, for 2003, 2002, and 2001, respectively.
6. Goodwill and Other Intangible Assets
As discussed in Footnote 2, the Company adopted Statement 142 on January 1,
2002. A reconciliation between reported net income (loss) to the adjusted net
income (loss) is as follows:
Year Ended December 31,
2003 2002 2001
---- ---- ----
Reported net income (loss) $ 13,881 $ 1,675 $ (7,777)
Add back: Goodwill amortization $ - $ - $ 818
--------- --------- ----------
Adjusted net income (loss) $ 13,881 $ 1,675 $ (6,959)
========= ========= ==========
Basic earnings per share:
Reported net income (loss) $ 0.79 $ 0.10 $ (0.47)
Goodwill amortization $ - $ - $ 0.05
--------- --------- ----------
Adjusted net income (loss) $ 0.79 $ 0.10 $ (0.42)
========= ========= ==========
Diluted earnings per share:
Reported net income (loss) $ 0.72 $ 0.10 $ (0.47)
Goodwill amortization $ - $ - $ 0.05
--------- --------- ----------
Adjusted net income (loss) $ 0.72 $ 0.10 $ (0.42)
========= ========= ==========
The changes in the net carrying amount of goodwill for the years ended 2003 and
2002 consist of the following:
Industrial/
POS/OEM Optical Total
-------- -------- --------
Balance as January 1, 2002 $ 3,861 $ 11,388 $ 15,249
Purchase price adjustments - (710) (710)
Currency translation adjustments 636 - 636
-------- -------- --------
Balance as of December 31, 2002 4,497 10,678 15,175
Purchase of minority interest
in subsidiaries 1,548 - 1,548
Currency translation adjustments 813 - 813
-------- -------- --------
Balance as of December 31, 2003 $ 6,858 $ 10,678 $ 17,536
======== ======== ========
Identifiable Intangibles
The Company had identifiable intangible assets with a net book value of $6.6
million and $6.4 million as of December 31, 2003 and December 31, 2002,
respectively.
The following table reflects the components of identifiable intangible assets:
December 31, 2003 December 31, 2002
--------------------- --------------------
Amortizable Gross Gross
Life Carrying Accumulated Carrying Accumulated
(years) Amount Amortization Amount Amortization
----------- --------------------- ---------------------
Patents and Trademarks 17 7,143 (1,959) 6,261 (1,573)
Holographic Technology 10 1,082 (830) 1,082 (714)
Advanced license fee 17 2,000 (824) 2,000 (706)
------ ----- ----- -----
10,225 (3,613) 9,343 (2,993)
====== ===== ===== =====
The Company has determined that the lives previously assigned to these
finite-lived assets are still appropriate, and has recorded $620, $570, and $502
of amortization expense for 2003, 2002 and 2001, respectively.
Estimated amortization expense for each of the five succeeding years is
anticipated to be $701, $748, $699, $726 and $773, respectively.
7. Accrued Expenses
Accrued expenses consist of the following:
December 31,
2003 2002
---- ----
Accrued compensation $ 3,129 $ 1,850
Accrued marketing 1,467 1,125
Accrued commissions 1,138 669
Accrued other taxes 851 437
Product warranty 728 555
Accrued professional fees 727 518
Accrued rent 719 644
Accrued royalties 654 557
Accrued corporate taxes - 716
Accrued interest - 399
Other 2,105 1,338
--------- --------
$ 11,518 $ 8,808
========= =========
8. Debt
Credit Facility
In connection with the acquisition of AOA on January 8, 2001, the Company
entered into a $45,000 credit facility with its primary bank as agent for other
bank parties. On July 9, 2002, we replaced our former Credit Facility by
executing an Amended and Restated Credit Agreement (the "Amended Credit
Agreement") with our bank lenders. The key terms of the Amended Credit Agreement
included the waiver of all existing defaults under our former Credit Facility
and the withdrawal by the banks of the notice of default that had been
previously issued to the Company. The Company granted a security interest in our
assets and properties to the primary bank in favor of the banks as security for
borrowings under the Amended Credit Agreement. The Amended Credit Agreement
contained various negative and positive covenants, such as minimum tangible net
worth requirements, and a scheduled expiration date of May 31, 2003. A portion
of outstanding borrowings under the Amended Credit Agreement were guaranteed by
C. Harry Knowles and Janet Knowles.
The Amended Credit Agreement also included a revolving credit facility of
$14,000. Amounts available for borrowing under this facility were equal to a
percentage of the total of eligible accounts receivable and inventories, as
defined in the agreement, plus an allowable over advance of $2,750. The over
advance allowance expired on January 1, 2003. The Amended Credit Agreement
required the daily application of the Company's receipts as payments against the
revolving credit facility and daily borrowings to fund cash requirements.
Interest on outstanding borrowings was at the banks' prime rate plus 2.5%, and
the agreement provided for a commitment fee of .5% on the unused facility.
In connection with the Amended Credit Agreement, certain directors and executive
officers made loans to the Company, which amounts were held as cash collateral
under the terms of the Amended Credit Agreement and have been classified as
restricted cash on the accompanying balance sheet. Specifically, C. Harry
Knowles and Janet H. Knowles, Dale M. Fischer and Hsu Jau Nan loaned the Company
$400, $125 and $475, respectively. The loans accrued interest at a rate of nine
percent (9%) per annum and were repaid in full on February 28, 2003.
On January 31, 2003, the Company executed an Amendment (the "Amendment") to the
Amended and Restated Credit Agreement dated July 9, 2002. The Amendment, which
extended the Amended and Restated Credit Agreement until January 31, 2006,
provided for a $13,000 revolving credit facility and a $4,500 term loan.
Principal payments on the term loan were $94 a month commencing in March 2003
with the balance due at maturity. The interest rates under the Amendment were
prime plus .25% on borrowings under the revolving credit facility and prime plus
..75% on the Term Loan. The Amendment contained 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 Credit Agreement remained in effect under
the Amendment. In connection with the Amendment, the personal guarantees of C.
Harry Knowles, Chairman and Chief Executive Officer, and his spouse, Janet
Knowles, a Director and Vice President, Administration, were released. All
outstanding borrowings under the Amendment were paid in October 2003 and the
Agreement was terminated. As a result, we recorded a charge to income of $86 for
unamortized deferred financing fee in the fourth quarter of 2003.
In addition, some of our European subsidiaries have entered into working capital
and invoice discounting agreements with HypoVeieinsbank, NMB-Heller Limited,
Societe General and La Caixa. Outstanding borrowings under the working capital
agreement with HypoVereinsbank have been guaranteed by the parent company. These
agreements provide the Company with availability of up to $5,252, using December
31, 2003 exchange rates, at interest rates ranging from 3.15% to 5.75%. At
December 31, 2003, $4,886 was outstanding under such agreements and is included
in lines of credit.
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 order to provide the Company with sufficient subordinated financing within
the time period required to meet the terms of the Payoff Agreement which
provided a $2,200 gain, in January 2003, the Company issued a $4,260
subordinated note to C. Harry Knowles, its Chairman and Chief Executive Officer,
and his spouse, Janet H. Knowles, a Director and Vice President, Administration.
The subordinated note bore interest at 10.0% and required 60 monthly principal
payments of $36 with the balance of $2,130 due in January 2008. In connection
with this note, the Company issued a common stock purchase warrant, expiring on
January 31, 2013, to Mr. and Mrs. Knowles to purchase 195,000 shares of its
common stock at an exercise price of $3.47 per share, which was the fair market
value on the date of issuance. These warrants were valued at the time of issue
at $247 in aggregate, and the resulting original issue discount was to be
amortized into interest expense over the life of the subordinated note. The
subordinated note to Mr. and Mrs. Knowles was paid in full in October 2003 and
the unamortized original issue discount of $214 was recognized as a charge to
interest expense in the fourth quarter of 2003.
Notes payable consist of the following:
December 31,
2003 2002
---- ----
Term Note $ - $ 7,329
Subordinated promissory notes - 11,000
Capital lease obligations 288 78
Other 353 1,732
------- ---------
641 20,139
Less: current maturities 321 5,708
------- ---------
$ 320 $ 14,431
======= =========
The minimum annual principal payments of notes payable and capital lease
obligations at December 31, 2003 were:
2004 $ 321
2005 199
2006 121
2007 -
2008 -
Thereafter -
-------
641
=======
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes and are
disclosed in the consolidated balance sheets. Significant components of the
Company's deferred tax assets and liabilities are as follows:
December 31,
2003 2002
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 687 $ 1,352
Reserves on current assets 461 407
Inventory capitalization 218 109
Warranty reserve 282 220
Other accrued expenses 797 49
------- --------
2,445 2,137
------- --------
Deferred tax liability:
Advance license fee 458 517
Unrealized gain on foreign currency 854 942
Depreciation and amortization 1,118 219
Foreign taxes on unremitted earnings 1,772 582
------- --------
4,202 2,260
------- --------
Net deferred tax liability $(1,757) $ (123)
======= ========
Significant components of the provision (benefit) for income taxes are as
follows:
Year ended December 31,
2003 2002 2001
---- ---- ----
Current:
Federal $ 3,196 $ - $ (5,142)
Foreign 920 693 354
State 1,410 182 32
-------- --------- ---------
Total current 5,526 875 (4,756)
Deferred:
Federal 511 (413) (293)
State (68) (17) 274
Foreign 1,191 582 -
-------- --------- ---------
Total deferred 1,634 152 (19)
-------- --------- ---------
Provision (benefit) for income taxes $ 7,160 $ 1,027 $ (4,775)
======== ========= =========
The effective income tax rate of 34.0%, 38.0% and 38.0% for the years ended
December 31, 2003, 2002, and 2001, respectively, differs from the federal
statutory rate of 34% because of the difference in treatment of certain expense
items for financial and income tax reporting purposes and state and foreign
taxes. A reconciliation between the statutory provision and the provision for
financial reporting purposes is as follows:
December 31,
2003 2002 2001
---- ---- ----
Statutory federal tax provision (benefit) $ 7,154 $ 919 $ (4,268)
State income taxes, net of
federal income tax benefit 886 66 (443)
Foreign income tax benefit (252) (33) (193)
Gain on extinguishment of debt (748) - -
Other 120 75 129
--------- -------- ---------
Provision (benefit) for income taxes $ 7,160 $ 1,027 $ (4,775)
========= ======== ==========
The Company has state net operating loss carryforwards of $16,671 and they
generally begin to expire in 2010.
The Company's earnings in China are not subject to local income taxes in the
years 2002 through 2006. In addition, the Company will pay income taxes at 50%
of the local statutory rate for the years 2007 through 2011. The Company has
provided deferred income taxes on $3.5 million of income in China at U.S.
statutory rates as it is the Company's intention to repatriate such earnings.
The Company's cumulative undistributed earnings of foreign subsidiaries that are
expected to be reinvested indefinitely, for which no incremental U.S. income or
foreign withholding taxes have been recorded, approximated $5,618 at December
31, 2003.
10. Related Party Transactions
The Company's principal shareholder, Chairman, and CEO, C. Harry Knowles and his
spouse, Janet H. Knowles, the Company's Vice President, Administration,
Secretary, Treasurer and a director, owned and leased to the Company certain
real estate utilized in the operation of the Company's business. Lease payments
made to these related parties were approximately $1,209, $526, and $869, for the
years ended December 31, 2003, 2002, and 2001, respectively. Under the terms of
the Amended Credit Agreement, no rental payments were paid to Mr. and Mrs.
Knowles during the term of the Amended Credit Agreement. The unpaid, accrued
portion of the rental payments were repaid to Mr. and Mrs. Knowles during 2003
after the Amendment to the Amended Credit Agreement was executed. The lease for
the real estate was replaced in January 2003 with a new lease which was due to
expire in December 2012. In December 2003, the Company purchased the real estate
from Mr. & Mrs. Knowles for approximately $4.79 million, which was less than the
fair market values contained in two independent appraisals.
Other current assets at December 31, 2002 included a loan receivable from Janet
H. Knowles, a director and officer of the Company, who borrowed $75 from the
Company under a promissory note to be repaid upon the termination of the Amended
Credit Agreement. The Company made the loan to Mrs. Knowles in December 2001 as
a result of her pledge of cash collateral to the banks in her capacity as
guarantor for Company borrowings under its Credit Facility. This loan was paid
in full in February 2003.
The accounting firm in which Stanton L. Meltzer, a director and shareholder of
the Company, is a principal, charged fees of approximately $50, $105, and $73
for tax consulting services performed for the Company during the years ended
December 31, 2003, 2002, and 2001, respectively.
The investment banking company of Janney Montgomery Scott LLC ("JMS") in which
William Rulon-Miller, a director, serves as Senior Vice President and
Co-Director of Investment Banking charged fees totaling approximately $175 in
2003, $50 in 2002 and $200 in 2001 in connection with assisting the Company with
its plans to refinance its bank debt and restructure its overall debt position
along with the acquisition of AOA.
As discussed in Note 8, certain directors and executive officers made loans
aggregating $1,000 to the Company in July 2002 in connection with the Amended
Credit Agreement. The loan proceeds were held as cash collateral under the terms
of the Amended Credit Agreement. The loans accrued interest at an annual rate of
9% and were repaid in full on February 28, 2003.
11. Commitments & Contingencies
Operating Leases
The Company has entered into operating lease agreements with unrelated companies
to lease manufacturing and office equipment and office space and vehicles for
its foreign subsidiaries.
Future minimum lease payments required under the lease agreements as of December
31, 2003 are $2,532 in 2004, $1,972 in 2005, $1,778 in 2006, $1,687 in 2007,
$1,632 in 2008 and $1,341 thereafter. Rental expenses paid to third parties for
2003, 2002, and 2001 were approximately $3,402, $2,022, and $2,318,
respectively.
Cross-Licensing Agreement and Settlement of Patent Litigation
In December 1996, the Company and Symbol Technologies, Inc. ("Symbol") executed
an extensive cross-license of patents (the "Symbol Agreement") for which the
Company and Symbol pay royalties to each other under certain circumstances
effective January 1, 1996. In connection with the Symbol Agreement, the Company
paid Symbol an advance license fee of $1 million in December 1996 and another $1
million in quarterly installments of $125 over the subsequent two years ended
December 1998. The Company has amended the Symbol Agreement providing for
additional patent licenses whereby the Company and Symbol make recurring
periodic royalty payments. Royalty payments under the Symbol Agreement amounted
to $1,869, $1,945, and $4,346 in 2003, 2002, and 2001, respectively. The Company
received royalty income from Symbol under the agreement of $1,157, $1,006, and
$875 in 2003, 2002 and 2001, respectively. The parties are currently in
litigation with respect to the Symbol Agreement. For further discussions on the
litigation, see Item C below in "Other Legal Matters."
Other Legal Matters
The Company files domestic and foreign patent applications to protect its
technological position and new product development. From time to time, the
Company receives legal challenges to the validity of its patents or allegations
that its products infringe the patents of others.
The Company is currently involved in matters of litigation arising in 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,
results of operations or cash flows. Further, management is of the opinion that
there are no other 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 July 21, 1999 the Company and six other leading members (Accu-Sort Systems,
Inc., Intermec Technologies Corporation, a wholly-owned subsidiary of UNOVA,
Inc., PSC Inc., Psion Teklogix Corporation, Symbol Technologies, Inc., and Zebra
Technologies Corporation) of the Automatic Identification and Data Capture
Industry (the "Auto ID companies") jointly initiated a litigation against the
Lemelson Medical, Educational, & Research Foundation, Limited Partnership (the
"Lemelson Partnership"). The suit was commenced in the U.S. District Court,
District of Nevada in Reno, Nevada, and later transferred to the District Court
in Las Vegas, Nevada. In the litigation, the Auto ID companies sought, among
other remedies, a declaration that certain patents, which have been asserted by
the Lemelson Partnership against end users of bar code equipment, are invalid,
unenforceable and not infringed.
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 on this matter was held from November 2002 through January 2003. On
January 23, 2004, the Judge issued a decision in favor of the Auto ID companies
finding that the patents in suit were not infringed, invalid and unenforceable.
On February 12, 2003, the Lemelson Partnership filed motions to alter or amend
the Court's judgment and requesting additional findings of fact to support the
findings of law in the court's decision. The Auto ID companies will vigorously
oppose these motions.
B. Metrologic v. PSC Inc.
On October 13, 1999, the Company filed suit for patent infringement against PSC
Inc. (PSC) in United States District Court for the District of New Jersey. The
complaint asserts that at least seven of the Company's patents are infringed by
a variety of point-of-sale bar code scanner products manufactured and sold by
PSC. The patents cited in the complaint cover a broad range of bar code scanning
technologies important to scanning in a retail environment including the
configuration and structure of various optical components, scanner
functionalities and shared decoding architecture. The complaint seeks monetary
damages as well as a permanent injunction to prevent future sales of the
infringing products.
On 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 was pending. The stay was lifted on July 18, 2003, and the Court
issued a ruling on the Markman hearing on August 26, 2003 entering a decision
and order providing an interpretation of the claims in suit. No date has been
set for trial.
C. Symbol Technologies, Inc. v. Metrologic
On May 3, 2002, we were served with a lawsuit that was filed on April 12, 2002
by Symbol Technologies, Inc., in the U.S. District Court for the Eastern
District of New York alleging that we were in breach of the terms of the License
Agreement between us and Symbol (the "Agreement"). The Complaint sought a
declaratory judgment from the Court that we were in breach of the Agreement. On
March 31, 2003, the Court entered its decision on the parties' respective
motions for summary judgment, and finding in our favor, the Court dismissed
certain counts of Symbol's complaint. On April 9, 2003, Symbol voluntarily
dismissed the remaining counts of the complaint. Symbol filed its Notice of
Appeal with the U.S. Court of Appeals for the Second Circuit on May 7, 2003. On
December 23, 2003, the Court of Appeals dismissed Symbol's appeal in this
matter. In the interim, Symbol decided to proceed with the arbitration for which
the Company had filed a Demand in June 2002, which had been stayed pending the
decision by the lower court. On June 26, 2003, Symbol filed an Amended Answer
and Counterclaims asserting that (a) Metrologic's allegedly infringing products
are royalty bearing products, as defined under the Symbol Agreement, and (b) in
the alternative, those products infringe upon one or more of Symbol's patents.
In December 2003, we withdrew our Demand for Arbitration, and the parties have
now briefed the threshold issue of arbitrability in this matter on Symbol's
remaining counterclaims.
D. Metrologic v. Symbol Technologies, Inc.
On June 18, 2003, the Company filed suit against Symbol Technologies, Inc. in
the U.S. District Court for the District of New Jersey alleging claims of patent
infringement of certain of our patents by at least two Symbol products. The
complaint also contains a claim for breach of the 1996 Cross License Agreement
between the parties (the "Cross License Agreement"). Symbol's answer to the
complaint, filed on July 30, 2003, included counterclaims requesting that a
declaratory judgment be entered that patents in suit are invalid, are not
infringed by Symbol and that Symbol is not in breach of the Cross License
Agreement. This matter is in the early stages of discovery.
12. Retirement Plans
The Company maintains a noncontributory defined contribution cash or deferred
profit sharing plan covering substantially all employees. Contributions are
determined by the Chief Executive Officer and are equal to a percentage of each
participant's compensation. No contributions were made to the Plan for the three
years ended December 31, 2003.
Additionally, the Company maintains an employee funded Deferred Compensation
Retirement 401(k) Plan as amended, contributions to which are partially matched
by the Company. In January 2001, the Company amended its Deferred Compensation
Retirement 401(k) Plan to increase the Company's matching contribution to a rate
of 60% on the first six percent of employee's earnings. Contribution expenses
were $347, $402 and $462 in 2003, 2002, and 2001, respectively.
13. Financial Reporting for Business Segments and Geographical Information
The Company generates its revenue from the sale of laser bar code scanners
primarily to distributors, value-added resellers, original equipment
manufacturers and directly to end users, in locations throughout the world. No
individual customer accounted for 10% or more of revenues in 2003, 2002 or 2001.
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"). The accounting policies
of the segments are the same as those described in the summary of the
significant accounting policies. Sales were attributed to business segments in
the following table. The amounts for 2002 and 2001 have been restated to conform
to the current year presentation.
2003 2002 2001
---- ---- ----
Business segment net sales:
POS/OEM $ 112,817 87,929 84,041
Industrial/Optical 25,194 27,877 27,970
--------- ------- -------
Total 138,011 115,806 112,011
--------- ------- -------
Business segment gross profit:
POS/OEM $ 49,954 31,964 18,556
Industrial/Optical 8,403 9,457 9,928
--------- ------- -------
Total 58,357 41,421 28,484
--------- ------- -------
Business segment operating income (loss):
POS/OEM $ 17,786 2,726 (12,457)
Industrial/Optical 2,358 2,893 3,501
--------- ------- -------
Total 20,144 5,619 (8,956)
--------- ------- -------
Total other income (expenses) $ 897 (2,917) (3,596)
--------- ------- -------
Income (loss) before income taxes $ 21,041 2,702 (12,552)
--------- ------- -------
Business segment total assets:
POS/OEM $ 116,631 53,219 61,837
Industrial/Optical 23,269 21,360 23,936
--------- ------- -------
Total 139,900 74,252 85,773
--------- ------- -------
Geographical Information
Geographic results are prepared on a "country of destination" basis, meaning
that net sales are included in the geographic area where the customer is
located. Assets are included in the geographic area in which the selling
entities are located.
The following table details the geographic distribution of the Company's sales
and long-lived assets.
2003 2002 2001
------------------ ------------------- ------------------
Long-Lived Long-Lived Long-Lived
Sales Assets(a) Sales Assets(a) Sales Assets(a)
-------- -------- -------- -------- -------- --------
United States 58,149 32,260 55,179 28,102 49,467 29,598
Europe 57,474 7,128 43,057 4,935 46,377 4,312
Other Export 22,388 1,700 17,570 1,088 16,167 1,073
-------- -------- -------- -------- -------- --------
$138,011 $ 41,088 $115,806 $ 34,125 $112,011 $ 34,983
(a) Represents property, plant and equipment, net, and goodwill and other
intangible assets, net.
14. Incentive Plan
The Company's Board of Directors has granted incentive and non-qualified stock
options and restricted stock pursuant to the Company's Incentive Plan to certain
eligible employees and board members. The shares issued will either be
authorized and previously unissued common stock or issued common stock
reacquired by the Company. The total number of shares authorized for issuance
under the Incentive Plan is 4,800,000 after giving effect to the 2003 stock
splits. Shares canceled for any reason without having been exercised shall again
be available for issuance under the Incentive Plan. An aggregate of 1,006,000
shares were available for grant under the Incentive Plan at December 31, 2003.
Options granted under the Incentive Plan become exercisable over periods ranging
from one to seven years. Each option shall expire four to ten years after
becoming exercisable.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying common stock on
the date of grant, no compensation expense is recognized. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
SFAS 123 requires pro forma information regarding net income and earnings per
share as if the Company had accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of SFAS 123. The
fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 3.9% in 2002 and 6.2% in 2001; dividend
yields of 0.0%; volatility factors of the expected market price of the Company's
common stock of 90% and 60% for 2002 and 2001, respectively, and a
weighted-average expected life of the option of 5 years. No options were granted
during 2003.
A summary of the Company's stock option activity, and related information for
the years ended December 31, 2001, 2002, and 2003 follows:
Options Weighted-Average
(in thousands) Exercise Price
Outstanding - January 1, 2001 2,457 $ 3.94
Granted 543 2.82
Exercised - -
Canceled (348) 3.78
------
Outstanding - December 31, 2001 2,652 $ 3.73
Granted 1,035 1.48
Exercised - -
Canceled (411) 3.81
------
Outstanding, December 31, 2002 3,276 $ 3.01
Granted - -
Exercised (933) 3.60
Canceled (22) 3.40
------
Outstanding, December 31, 2003 2,321 $ 2.78
======
Exercisable at December 31, 2003 1,237
======
Weighted-average fair value of
options granted during 2003 $ -
=======
Approximately 3,522,000 shares of common stock have been reserved for future
issuance, consisting of 2,321,000 shares for outstanding options under the
Company's Incentive Plan, 1,006,000 shares available for grant under the
Company's Incentive Plan and 195,000 shares for warrants issued to Mr. and Mrs.
Knowles in connection with the subordinated note payable.
The following table summarizes the status of stock options outstanding and
exercisable at December 31, 2003:
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Contractual Exercise Exercise
prices per share Shares Life Price Shares Price
- -----------------------------------------------------------------------------
$1.48 - $1.48 864,067 8.69 $ 1.48 220,267 $ 1.48
$2.41 - $3.07 483,900 7.05 $ 2.80 51,000 $ 2.80
$3.44 - $3.80 472,979 5.70 $ 3.45 472,979 $ 3.45
$4.27 - $4.86 478,214 4.24 $ 4.36 478,214 $ 4.36
$5.00 - $5.21 21,866 5.69 $ 5.07 14,666 $ 5.10
--------- ------- ---------- --------- ----------
$1.48 - $5.21 2,321,026 6.80 $ 2.78 1,237,126 $ 3.44
15. Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan whereby eligible employees have
the opportunity to acquire the Company's common stock quarterly through payroll
deductions, at 90% of the lower of (a) the fair market value of the stock on the
first day of the applicable quarterly offering period or (b) the fair market
value of the stock on the last day of the applicable quarterly offering period.
16. Acquisitions
Metrologic do Brasil
On February 4, 2003, the Company paid cash of $71 and signed 3 promissory notes
with a total discounted value of $204 for the remaining 49% interest in
Metrologic do Brasil. The promissory notes are payable on February 4, 2004,
February 4, 2005 and February 4, 2006, respectively.
The Company accounted for this acquisition under the purchase method of
accounting. The total purchase price and costs in excess of assets acquired
(goodwill) was $275.
Metrologic Eria Iberica ("MEI")
On August 5, 2003, the Company entered into a purchasing agreement to purchase
the remaining 49% interest in MEI for a purchase price of 5.9 million euros.
Payments will be made in twelve quarterly installments over three years
commencing August 5, 2003 and maturing April 3, 2006. As of December 31, 2003 we
had purchased 9.90% of MEI for approximately 1.2 million euros.
Metrologic Eria France ("MEF")
On July 18, 2000, the Company paid cash of $2,873 and assumed liabilities of
$2,207 for a 51% interest in MEF.
The Company's 51% joint venture interest in MEF 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 and provides the Company
with a twelve month period in which to find a buyer or negotiate a purchase
price with a default minimum.
Adaptive Optics Associates, Inc. ("AOA")
On January 8, 2001, the Company acquired all of the outstanding stock of AOA, a
developer and manufacturer of custom optical systems which include precision
laser beam delivery, high speed imaging control and data processing, industrial
inspections and scanning and dimensioning systems for the aerospace and defense
industry. The total purchase price including transaction costs was $21,612. The
acquisition was accounted for under the purchase method of accounting, and
accordingly, the results of AOA's operations from January 8, 2001 are reflected
in the 2001 statement of operations. The excess purchase price over the fair
value of net assets acquired was approximately $12,465 and was allocated to
goodwill. Prior to the adoption of SFAS 142, on January 1, 2002, the related
goodwill was being amortized over a straight-line basis and was allocated to
goodwill over 10 years.
Pro forma results of operations, assuming that the AOA acquisition was
consummated on January 1, 2001, would not be materially different from actual
results.
Supplementary Data
The following tables present unaudited quarterly operating results for the
Company for each quarter of 2003 and 2002. This information has been derived
from unaudited financial statements and includes all adjustments, consisting
only of normal recurring accruals, which the Company considers necessary for a
fair presentation of the results of operations for these periods. Such
quarterly operating results are not necessarily indicative of the Company's
future results of operations.
Quarterly Consolidated Operating Results (Unaudited)
(in thousands except share and per share data)
Three Months Ended
March 31, June 30, September 30, December 31,
2003 2003 2003 2003
--------- --------- --------- ---------
Sales $ 31,871 $ 31,851 $ 32,587 $ 41,702
Cost of sales 19,105 18,444 18,803 23,302
--------- --------- --------- ---------
Gross profit 12,766 13,407 13,784 18,400
Selling, general and
administrative expenses 7,380 7,841 7,507 8,650
Research and development
expenses 1,761 1,763 1,686 1,554
Severance costs 27 4 40 -
--------- --------- --------- ---------
Operating income 3,598 3,799 4,551 8,196
Other income (expenses)
Interest income 5 8 13 97
Interest expense (464) (280) (348) (322)
Foreign currency
transaction gain 25 130 184 466
Gain on extinguishment
of debt 2,200 - - -
Other, net (580) (129) (114) 6
--------- --------- --------- ---------
Total other income (expenses) 1,186 (271) (265) 247
--------- --------- --------- ---------
Income before provision
for income taxes 4,784 3,528 4,286 8,443
Provision for
income taxes 982 1,341) 1,630 3,207
--------- --------- --------- ---------
Net income $ 3,802 $ 2,187) $ 2,656 $ 5,236
========= ========= ========= =========
Basic earnings
per share
Weighted average
shares outstanding 16,417,665 16,579,772 16,995,066 20,390,309
========= ========= ========= =========
Basic earnings
per share $ 0.23 $ 0.13 $ 0.16 $ 0.26
========= ========= ========= =========
Diluted earnings
per share
Weighted average
shares outstanding 16,417,665 16,579,772 16,995,066 20,390,309
Net effect of dilutive
securities 65,690 1,975,568 2,129,804 2,218,198
--------- --------- --------- ---------
Total shares outstanding
used in computing diluted
earnings per share 17,063,355 18,555,340 19,124,870 22,608,507
========= ========= ========= =========
Diluted earnings per
share $ 0.22 $ 0.12 $ 0.14 $ 0.23
========= ========= ========= =========
Supplementary Data (Con't)
Quarterly Consolidated Operating Results (Unaudited)
(In thousands except share and per share data)
Three Months Ended
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
--------- --------- --------- ---------
Sales $ 27,278 $ 29,163 $ 27,735 $ 31,630
Cost of sales 17,556 19,352 17,101 20,376
--------- --------- --------- ---------
Gross profit 9,722 9,811 10,634 11,254
Selling, general and
administrative expenses 7,029 7,726 7,048 6,468
Research and development
expenses 1,713 1,820 1,754 1,642
Severance costs 276 75 251 -
--------- --------- --------- ---------
Operating income 704 190 1,581 3,144
Other income (expenses)
Interest income 23 32 15 15
Interest expense (696) (871) (668) (589)
Foreign currency
transaction
(loss) gain (5) 229 (530) 174
Other, net 10 (24) 34 (66)
--------- --------- --------- ---------
Total other expenses (668) (634) (1,149) (466)
--------- --------- --------- ---------
Income (loss) before provision
for income taxes 36 (444) 432 2,678
Provision (benefit) for
income taxes 14 (169) 164 1,018
--------- --------- --------- ---------
Net income (loss) $ 22 $ (275) $ 268 $ 1,660
========= ========= ========= =========
Basic earnings (loss)
per share
Weighted average
shares outstanding 16,390,293 16,396,815 16,402,737 16,410,117
========= ========= ========= =========
Basic earnings (loss)
per share $ - $ (0.02) $ 0.02 $ 0.10
========= ========= ========= =========
Diluted earnings (loss)
per share
Weighted average
shares outstanding 16,390,293 16,396,815 16,402,737 16,410,117
Net effect of dilutive
securities - - 7,572 274,233
--------- --------- --------- ---------
Total shares outstanding
used in computing diluted
earnings per share 16,390,293 16,396,815 16,410,309 16,684,350
========= ========= ========= =========
Diluted earnings (loss) per
share $ - $ (0.02) $ 0.02 $ 0.10
========= ========= ========= =========
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2003, 2002, and 2001
(All dollar amounts in thousands)
2003 2002 2001
------ ------ ------
Allowance for possible losses on accounts and
notes receivable:
Balance at beginning of year $ 341 $ 422 $ 655
Additions charged to expense 123 39 1,042
Write-offs (64) (147) (1,268)
Currency translation and other 85 27 (7)
------ ------ ------
Balance at end of year $ 485 $ 341 $ 422
====== ====== ======
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
No change of accountants and/or disagreement on any matter of accounting
principles or financial statement disclosures has occurred within the last two
years.
Item 9A. Controls and Procedures
As of the end of the period covered by this annual report, an evaluation was
performed under the supervision and with participation of the Company's
management, including our chief executive officer and chief financial officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act rules 13a-15 and 15d-15. Based
upon this evaluation, the Company's management, including the chief executive
officer and the chief financial officer, concluded that our disclosure controls
and procedures are effective as of December 31, 2003.
During the fiscal quarter ended December 31, 2003, there have been no changes in
our internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART III
The information called for by Item 10, Directors and Executive Officers of the
Registrant (except for the information regarding executive officers called for
by Item 401 of Regulation S-K, which is included in Part I hereof in accordance
with General Instruction G(3)), Item 11, Executive Compensation, Item 12,
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters, Item 13, Certain Relationships and Related Transactions,
and Item 14, Principal Accountant Fees and Services, is incorporated herein by
reference to the Registrant's definitive proxy statement for its 2003 Annual
Meeting of Shareholders which shall be filed with the Securities and Exchange
Commission within 120 days from the end of the Registrant's fiscal year ended
December 31, 2003.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) 1. Financial Statements
The Financial Statements listed below are
filed as part of this Annual Report on Form
10-K:
Report of Ernst & Young LLP, Independent
Auditors.
Consolidated Balance Sheets at December 31,
2003 and 2002
Consolidated Statements of Operations for
each of the three years in the period ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders'
Equity for each of the three years in the
period ended December 31, 2003, 2002 and
2001
Consolidated Statements of Cash Flows for
each of the three years in the period ended
December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
Supplementary Data (Unaudited)
2. Financial statement schedules
Schedule II - Valuation and Qualifying
Accounts is filed herewith. All other
schedules are omitted because they are not
applicable, not required, or because the
required information is included in the
consolidated financial statements or notes
thereto.
3. Exhibits required to be filed by Item 601
of Regulation S-K.
2.1 Option Agreement dated as of March 1,
1995 among Metrologic Instruments, Inc. and
the parties listed on schedule A thereto
(incorporated by reference to Exhibit 2.3 to
the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995).
3.1 Amended and Restated Certificate of
Incorporation of Metrologic Instruments,
Inc. (incorporated by reference to Exhibit
3.1 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994).
3.2 Amended and Restated Bylaws of
Metrologic Instruments, Inc. (incorporated
by reference to Exhibit 3.02 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994).
3.3 Certificate of Amendment to the
Certificate of Incorporation of Metrologic
Instruments, Inc. dated October 20, 2003
effecting the two for one stock split
(incorporated by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2003).
3.4 Certificate of Amendment to the Certificate
of Incorporation of Metrologic Instruments,
Inc. dated June 6, 2003 effecting the three for
two stock split.
4.1 Specimen Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-1 (Reg. No.
33-78358)).
10.1 Metrologic Instruments, Inc. 1994
Incentive Plan (incorporated by reference to
Exhibit 99 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 33-89376)).
10.2 Metrologic Instruments, Inc. Employee
Stock Purchase Plan (incorporated by reference
to Exhibit 99 to the Registrant's Post-Effective
Amendment No. 1 to the Registration Statement
on Form S-8 (Reg. No. 33-86670) and Exhibit
10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995).
10.3 Agreement of Settlement between Symbol
Technologies, Inc. and Metrologic Instruments,
Inc. (incorporated by reference to Exhibit 10.5
to the Registrant's Registration Statement on
Form S-1 (Reg. No. 33-78358)).
10.4 Indemnification Agreement between
Metrologic Instruments, Inc. and C. Harry
Knowles and Janet H. Knowles (incorporated by
reference to Exhibit 10.9 to the Registrant's
Registration statement on Form S-1 (Reg. No.
33-78358)).
10.5 Agreement between Symbol Technologies, Inc.
and Metrologic Instruments, Inc. dated December
18, 1996 (incorporated by reference to Exhibit
10 to the Registrant's Current Report on Form
8-K filed on February 14, 1997).
10.6 First Amendment to Metrologic Instruments,
Inc. 1994 Incentive Plan dated July 1, 1997
(incorporated by reference to Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997).
10.7 Stock Purchase Agreement dated December 22,
2000 by and among United Technologies Optical
Systems, Inc., Hamilton Sundstrand Corporation,
MTLG Investments Inc. and Metrologic
Instruments, Inc. (incorporated by reference
to Exhibit 2 to the Registrant's Current Report
on Form 8-K filed January 23, 2001).
10.8 Employment Agreement dated January 8, 2001
between Metrologic Instruments, Inc. and C.
Harry Knowles (incorporated herein by reference
to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March
31, 2001).
10.9 Employment Agreement dated January 8,
2001 between Metrologic Instruments, Inc.
and Thomas E. Mills IV (incorporated herein
by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001).
10.10 Employment Agreement dated as of May
13, 2002 between Metrologic Instruments,
Inc. and Janet H. Knowles (incorporated
herein as exhibit 10.24 to the Company's
Annual Report on Form 10-K/A3 for the period
ended December 31, 2001).
10.11 Registration Rights Agreement dated
January 31, 2003 between Metrologic Instruments,
Inc. and C. Harry Knowles and Janet Knowles
(incorporated herein as exhibit 99.5 to the
Company's Form 8-K for the period ending
January 31, 2003).
10.12 Amended Common Stock Purchase Warrant
dated February 5, 2003 in the amount of 65,000
shares of Metrologic Instruments, Inc.
common stock to C. Harry Knowles and Janet
Knowles (incorporated herein as exhibit
10.31 to the Company's Form 10-K for the
year ending December 31, 2002).
10.13 Agreement of Sale dated December 22, 2003
between Metrologic Instruments, Inc. and C.
Harry and Janet H. Knowles.
14 Code of Ethics approved by the Board of
Directors of the Registrant at a meeting
held on December 11, 2003.
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
31.1 Certification by Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification by Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 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.
32.2 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 Chief Financial Officer of the Company.
(b) Reports on Form 8-K
The following reports were filed during the
fourth quarter of 2003 for the purposes of furnishing
the following financial information:
Date of Report Item No. Item Reported
October 24, 2003 12 Corrected 3rd Quarter
Financial Results
October 23, 2003 12 Press Release for 3rd
Quarter Earnings
October 2, 2003 12 Press Release for
Exceeding 3rd Quarter
Projections
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
METROLOGIC INSTRUMENTS, INC.
By:/s/ C. Harry Knowles
-----------------------------
C. Harry Knowles
Chief Executive Officer
(Principal Executive Officer)
Dated: March 16, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
the report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/C. Harry Knowles Chairman of the Board and March 16, 2004
- -------------------------- Chief Executive Officer
C. Harry Knowles (Principal Executive Officer)
/s/Kevin Bratton Chief Financial Officer March 16, 2004
- -------------------------- (Principal Financial Officer and
Kevin Bratton Principal Accounting Officer)
/s/Richard Close Director March 16, 2004
- --------------------------
Richard Close
/s/Janet H. Knowles Director, Vice President, March 16, 2004
- -------------------------- Administration Secretary,
Janet H. Knowles and Treasurer
/s/John H. Mathias Director March 16, 2004
- --------------------------
John H. Mathias
/s/Stanton L. Meltzer Director March 16, 2004
- --------------------------
Stanton L. Meltzer
/s/Hsu Jau Nan Director March 16, 2004
- --------------------------
Hsu Jau Nan
/s/William Rulon-Miller Director March 16, 2004
- --------------------------
William Rulon-Miller
Exhibit Index
Exhibit
Number Item Page
- ------ -------------------------------------------------------------- -----
2.1 Option Agreement dated as of March 1, 1995 among Metrologic
Instruments, Inc. and the parties listed on schedule A thereto
(incorporated by reference to Exhibit 2.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1995).
3.1 Amended and Restated Certificate of Incorporation of Metrologic
Instruments, Inc. (incorporated by reference to Exhibit 3.1 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994).
3.2 Amended and Restated Bylaws of Metrologic Instruments, Inc.
(incorporated by reference to Exhibit 3.02 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994).
3.3 Certificate of Amendment to the Certificate of Incorporation of
Metrologic Instruments, Inc. dated October 20, 2003 effecting
the two for one stock split (incorporated by reference to Exhibit
3.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003).
3.4 Certificate of Amendment to the Certificate of Incorporation of 41
Metrologic Instruments, Inc. dated June 6, 2003 effecting the
three for two stock split.
4.1 Specimen Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on
Form S-1 (Reg. No. 33-78358)).
10.1 Metrologic Instruments, Inc. 1994 Incentive Plan (incorporated
by reference to Exhibit 99 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 33-89376)).
10.2 Metrologic Instruments, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 99 to the Registrant's
Post-Effective Amendment No. 1 to the Registration Statement
on Form S-8 (Reg. No. 33-86670) and Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995).
10.3 Agreement of Settlement between Symbol Technologies, Inc.
and Metrologic Instruments, Inc. (incorporated by reference to
Exhibit 10.5 to the Registrant's Registration Statement on
Form S-1 (Reg. No. 33-78358)).
10.4 Indemnification Agreement between Metrologic Instruments, Inc.
and C. Harry Knowles and Janet H. Knowles (incorporated by
reference to Exhibit 10.9 to the Registrant's Registration
statement on Form S-1 (Reg. No. 33-78358)).
10.5 Agreement between Symbol Technologies, Inc. and Metrologic
Instruments, Inc. dated December 18, 1996 (incorporated
by reference to Exhibit 10 to the Registrant's Current Report
on Form 8-K filed on February 14, 1997).
10.6 First Amendment to Metrologic Instruments, Inc. 1994
Incentive Plan dated July 1, 1997 (incorporated by reference
to Exhibit 10 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
10.7 Stock Purchase Agreement dated December 22, 2000 by
and among United Technologies Optical Systems, Inc.,
Hamilton Sundstrand Corporation, MTLG Investments Inc.
and Metrologic Instruments, Inc. (incorporated by reference
to Exhibit 2 to the Registrant's Current Report on Form 8-K
filed January 23, 2001).
10.8 Employment Agreement dated January 8, 2001 between Metrologic
Instruments, Inc. and C. Harry Knowles (incorporated herein
by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001).
10.9 Employment Agreement dated January 8, 2001 between Metrologic
Instruments, Inc. and Thomas E. Mills IV (incorporated herein
by reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001).
10.10 Employment Agreement dated as of May 13, 2002 between
Metrologic Instruments, Inc. and Janet H. Knowles
(incorporated herein as exhibit 10.24 to the Company's
Annual Report on Form 10-K/A3 for the period ended
December 31, 2001).
10.11 Registration Rights Agreement dated January 31, 2003 between
Metrologic Instruments, Inc. and C. Harry Knowles and Janet
Knowles (incorporated herein as exhibit 99.5 to the Company's
Form 8-K for the period ending January 31, 2003).
10.12 Amended Common Stock Purchase Warrant dated February 5, 2003 in
the amount of 65,000 shares of Metrologic Instruments, Inc.
common stock to C. Harry Knowles and Janet Knowles
(incorporated herein as exhibit 10.31 to the Company's
Form 10-K for the year ending December 31, 2002).
10.13 Agreement of Sale dated December 22, 2003 between Metrologic
Instruments, Inc. and C. Harry and Janet H. Knowles. 42
14 Code of Ethics approved by the Board of Directors of the
Registrant at a meeting held on December 11, 2003. 59
21 Subsidiaries of the Registrant 62
23.1 Consent of Ernst & Young LLP 63
31.1 Certification by Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. 64
31.2 Certification by Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. 65
32.1 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. 66
32.2 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 Chief Financial Officer of the Company. 67
Exhibit 3.4
NEW JERSEY DEPARTMENT OF STATE
DIVISION OF COMMERCIAL RECORDING
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
METROLOGIC INSTRUMENTS, INC.
Pursuant to the provisions of Section 14A:7-15.1, Corporations,
General, of the New Jersey Statutes, the undersigned corporation
executes the following Certificate of Amendment to its Certificate of
Incorporation:
1. The name of the Corporation is: Metrologic Instruments, Inc.
2. The following amendment (the "Amendment") to the Certificate of
Incorporation was approved by the directors of the corporation on the 6th day
of June, 2003:
RESOLVED, that Article FOURTH, paragraph (a) of the
Corporation's Certificate of Incorporation be amended to read
as follows:
"(a) 15,000,000 shares of Common Stock with a par value
of $.01 per share; and"
3. The Amendment to the Certificate of Incorporation will not adversely
affect the rights or preferences of the holders of outstanding shares of any
class or series of the Corporation and will not result in the percentage of
authorized shares of the Corporation that remains unissued after the share
dividend exceeding the percentage of authorized shares that was unissued before
the share dividend.
4. All shares of the Corporation's Common Stock issued and outstanding
on the date (the "Effective Date") this Amendment is filed with the New Jersey
Department of State and all shares of Common Stock reserved for issuance but
unissued pursuant to any Corporation stock option plan, other employee benefit
plan or security convertible into Common Stock on the Effective Date shall be
entitled to the dividend (collectively, the "Shares"). The Corporation shall
issue one and one-half shares of Common Stock for each such Share.
5. The dividend shall be payable on July 3, 2003.
METROLOGIC INSTRUMENTS, INC.
By: /s/ C. H. Knowles
----------------------------
Name: C. Harry Knowles
Title: Chief Executive Officer
Dated this 23rd day of June, 2003
May be executed by the Chairman of the Board, or the President, or a Vice
President of the Corporation.
Exhibit 10.13
AGREEMENT OF SALE
C. HARRY KNOWLES and JANET H. KNOWLES
AND
METROLOGIC INSTRUMENTS, INC.
Table of Contents
1. Sale and Purchase of Property.......................................1
-----------------------------
2. Purchase Price......................................................2
--------------
3. Quality of Title....................................................2
----------------
4. Representations, Covenants and Warranties of Seller and Buyer.......4
-------------------------------------------------------------
5. Assessments; Violations.............................................8
-----------------------
6. Risk of Loss........................................................9
------------
7. Condemnation........................................................9
------------
8. As-Is Purchase; Condition of Property..............................10
-------------------------------------
9. Escrow.............................................................11
------
10. Conditions to Obligations..........................................12
-------------------------
11. Closing............................................................13
-------
12. Provisions with Respect to Closing.................................14
----------------------------------
13. Brokerage..........................................................16
---------
14. Operations Prior to Closing........................................17
---------------------------
15. Default............................................................18
-------
16. Time of Essence....................................................18
---------------
17. Waiver of Conditions...............................................19
--------------------
18. Further Assurances.................................................19
------------------
19. Integration-Merger.................................................19
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20. No Recording.......................................................19
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21. Notice.............................................................19
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22. Miscellaneous......................................................20
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23. Severability of Provisions.........................................22
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24. Rules of Interpretation............................................22
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Exhibit A: Legal Description of Real Property
Exhibit B: Exclusions from Personal Property
Exhibit C: Bill of Sale
Exhibit D: Lease Termination Agreement
AGREEMENT OF SALE
THIS AGREEMENT OF SALE ("Agreement") is made as of the 22 day of
December, 2003 (the "Execution Date"), by and among C. HARRY KNOWLES and JANET
H. KNOWLES, husband and wife (collectively, "Seller"), and METROLOGIC
INSTRUMENTS, INC., a New Jersey corporation ("Buyer").
WITNESSETH:
INTENDING TO BE legally bound hereby, Seller and Buyer agree as
follows:
1. Sale and Purchase of Property.
Seller agrees to sell and convey to Buyer, and Buyer agrees to
purchase from Seller, subject to the terms of this Agreement, those certain
improved parcels of land known as 90 Coles Road, consisting of approximately
9.48 acres, identified as Block 11001 Lots 49 and 50 on the Tax Map of
Gloucester Township, located in Gloucester Township, Camden County, New Jersey,
as more fully described by legal description(s) attached hereto as Exhibit "A"
and incorporated herein by reference (the "Land"), together with the following:
(a) all buildings and other improvements presently erected on the Land
(the "Improvements");
(b) all rights, privileges, grants and easements appurtenant to the
Land; all of Seller's right, title and interest in and to all land lying in the
bed of any public street, road or alley adjoining the Land; and all mineral and
water rights, and all easements, licenses, covenants and rights-of-way and other
appurtenances used in connection with the beneficial use and enjoyment of the
Land (the Land, the Improvements and all such rights, privileges, easements,
grants and appurtenances being sometimes referred to herein as the "Real
Property");
(c) all personal property, equipment and fixtures owned by Seller and
located on or at the Real Property, or used exclusively in connection with the
Real Property, except for those items of personal property set forth on Exhibit
"B" attached hereto and made a part hereof (the "Personal Property");
(d) all of Seller's right, title and interest, if any, in all (i)
permits, licenses, guaranties, approvals, certificates and warranties heretofore
obtained by Seller relating to the Real Property and/or the Personal Property
(collectively, the "Permits and Licenses"), and (ii) the Service Contracts (as
hereinafter defined) (the Permits and Licenses and the Service Contracts being
sometimes referred to herein as the "Intangible Property");
(e) all of Seller's right, title and interest in all books, records,
keys, plans, specifications, reports, tests and other materials of any kind
owned by or in the possession of Seller which are or may be used by Seller in
connection with its ownership of the Real Property and/or the Personal Property,
subject in all cases to any copyrights and other proprietary rights therein of
third parties. The items described in this subparagraph (e) are hereinafter
referred to collectively as the "Books and Records"; and
(f) all other rights, privileges and appurtenances owned by Seller, if
any, and in any way related to the rights and interests described above in this
Paragraph.
The Real Property, the Personal Property, the Intangible
Property, the Books and Records and the other property interests being conveyed
hereunder are hereinafter collectively referred to as the "Property".
2. Purchase Price.
The total purchase price (the "Purchase Price") for the
Property is FOUR MILLION SEVEN HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS
($4,750,000.00), and shall be payable as follows:
(a) The sum of FIFTY THOUSAND AND 00/100 DOLLARS ($50,000.00) (the
"Deposit") shall be paid to the Escrow Agent (as hereinafter defined) by wire
transfer of immediately collectible funds or the delivery of Buyer's good check
on the Execution Date, to be held pursuant to Paragraph 9; and
(b) The balance of the Purchase Price, subject to adjustment as
provided herein, shall be paid at Closing (as hereinafter defined) by wire
transfer of immediately collectible funds.
3. Quality of Title.
(a) Title to the Real Property (including Buyer's rights to use
any easements appurtenant to the Real Property) at the Closing shall be conveyed
in fee simple and shall be (i) good and marketable and free and clear of all
liens, encumbrances, restrictions, easements, leases and other exceptions or
objections to title, except for the Permitted Exceptions (as hereinafter
defined), and (ii) insurable as aforesaid in the full amount of the Purchase
Price by Commonwealth Land Title Insurance Company (the "Title Company") at
regular standard rates (the "Title Policy").
(b) Promptly after the Execution Date, Buyer shall, at its
expense, obtain from the Title Company a commitment for title insurance in the
amount of the Purchase Price (the "Commitment"). Promptly upon receipt, Buyer
shall furnish to Seller a copy of the Commitment. No later than thirty (30) days
after Buyer's receipt of the Commitment, Buyer shall give written notice to
Seller of any matters affecting title to the Property and disclosed in the
Commitment which are disapproved by Buyer and not otherwise expressly permitted
as exceptions to title under the terms of this Agreement. The failure of Buyer
to deliver any such written notice of disapproval within the aforesaid period
shall be deemed to constitute Buyer's approval of the condition of title of the
Property as shown in the Commitment, excepting Liquidated Liens (as hereinafter
defined), which Liquidated Liens Seller shall be responsible to pay and satisfy
(or otherwise obtain the discharge and release of the Property therefrom) at
Closing (subject to any adjustments of any such items, such as real estate taxes
and water and sewer rents, expressly provided for hereunder).
(c) If Buyer disapproves of any matter or matters shown in the
Commitment by delivering timely written notice of such disapproval to Seller, as
provided above, and if Seller notifies Buyer within five (5) business days after
receipt of Buyer's written notice of disapproval that Seller is unwilling or
unable by the exercise of its reasonable efforts to eliminate such matter or
matters, or if Seller fails to notify Buyer within the aforesaid period (in
which case Seller shall be deemed not to agree to eliminate such matter or
matters), Buyer may elect as Buyer's sole remedy, by written notice to Seller
delivered within five (5) business days after Buyer's receipt of written notice
from Seller of Seller's unwillingness or inability to eliminate such matter(s)
(or if no such notice is delivered to Buyer, within five (5) business days after
the expiration of the aforesaid five (5) business day period during which Seller
may have provided such notice), but not later than the final date for Closing
hereunder, either:
(i) to waive such disapproval and to accept title to the Real
Property subject to such uncured title matters (without abatement of the
Purchase Price, but subject to Seller's obligation, nevertheless, to eliminate
Liquidated Liens, as hereinafter defined); or
(ii) to terminate this Agreement, in which event the Deposit
shall be immediately returned to Buyer by Escrow Agent, with any interest earned
thereon, whereupon this Agreement shall be null and void and the parties hereto
shall have no further rights, duties, obligations or liabilities hereunder;
provided, that the provisions of Paragraph 15(b) shall apply if such failure to
convey title arose from the willful default of Seller occurring after the
Execution Date.
"Liquidated Liens" means all unpaid mortgages, judgments,
mechanic's liens and claims (filed or unfiled), whether or not any of the same
shall be contested, and comparable liens, claims, encumbrances and other defects
of title of a nature susceptible of satisfaction, discharge, release or removal
at or prior to Closing by the payment of an ascertainable and liquidated sum of
money or by the posting of a judicial bond for an ascertainable and liquidated
sum of money, and otherwise without any judicial or quasi-judicial proceedings
on the part of Seller, and all of Seller's share of real estate taxes,
assessments and utility charges as otherwise allocated to, and to be borne by,
Seller pursuant to the terms of this Agreement; provided, however, that Buyer is
obligated to pay all real estate taxes pursuant to the terms of the Lease.
All title matters disclosed by the Commitment and either
approved or deemed to be approved by Buyer pursuant to this Paragraph 3,
together with the Lease (as hereinafter defined), public and private rights and
easements within adjoining public streets and public rights of way, utility
easements for service to the Real Property (provided that such utility easements
do not materially interfere with Buyer's intended use of the Real Property), and
standard printed "Exclusions from Coverage" under Buyer's policy of title
insurance, and also including any exception shown on the survey of the Real
Property dated February 19, 2001, prepared by Lord Anderson, Worrell and
Barnett, Inc., shall be "Permitted Exceptions" for purposes of this Agreement.
(d) Title to the Personal Property at Closing shall be good and
free and clear of all liens, security interests and other encumbrances excepting
the Permitted Exceptions.
(e) If the Deed (as hereinafter defined) is required to contain a
notification of any environmental condition of the Real Property under any
statute or governmental regulation, such requirement shall be a condition of
title to which Buyer may disapprove pursuant to Paragraph 3(b).
4. Representations, Covenants and Warranties of Seller and Buyer.
(a) Seller represents, covenants and warrants as of the date
hereof (and, as a condition to Buyer's obligation to complete Closing, Seller
shall reaffirm the following in writing at and as of the date of Closing), and
all such representations, covenants and warranties contained in this Paragraph 4
and elsewhere in this Agreement shall survive the Closing unless otherwise
expressly provided in this Agreement, and those surviving Closing shall survive,
unless expressly provided elsewhere in this Agreement, for a period of six (6)
months as follows:
(i) Seller has fee simple title to the Real Property. This
representation shall merge into the Deed at Closing and shall not survive
Closing.
(ii) No material legal action or proceeding is pending against
Seller that would impair Seller's ability to perform its obligations under this
Agreement or adversely affect the Property, nor has Seller received any written
notice threatening such litigation or proceeding, and, to the best of Seller's
knowledge, there is no other litigation or proceeding pending involving the
Property.
(iii) Seller has the full right to enter into and perform its
obligations under this Agreement and to sell and convey the Property to Buyer as
herein provided. The joinder of no person or entity other than Seller will be
necessary to convey, on the terms set forth herein, the Property fully and
completely to Buyer at Closing. The representation contained in the
immediately-preceding sentence of this subparagraph shall merge into the Deed at
Closing and shall not survive Closing.
(iv) This Agreement, when executed by Seller, shall constitute
a valid, legal and binding obligation of Seller, enforceable against Seller in
accordance with its terms.
(v) There are now no leases, lettings, tenancies, licenses or
other rights of occupancy affecting any part of the Property except that certain
Lease Agreement by and between Seller, as landlord, and Buyer, as tenant, dated
January 1, 2003 (the "Lease"), which shall be terminated at Closing.
(vi) Except as may be pledged pursuant to any existing mortgage
covering the Property, which pledge shall be terminated on or before the Closing
Date, neither the Lease nor any of the rents or other amounts payable thereunder
have been assigned, pledged or encumbered. All brokerage, leasing and other
commissions and fees payable in connection with the Lease have been or will be
by Closing fully paid.
(vii) There are now no contracts for the supply of goods or
services of any kind to or for the Real Property or any part thereof (the
"Service Contracts") that are in the name of Seller and Seller is not a party
to, has not entered in to, and has no rights or obligations under any Service
Contract.
(viii) The consummation of the transaction contemplated by this
Agreement including, but not limited to, the termination of the Lease, shall not
result in any breach of the provisions of or constitute a default under any
agreement, mortgage, contract or other instrument to which Seller is a party or
by which Seller may be bound.
(ix) Seller has no written notice that it has not already
provided to Buyer of (A) any Environmental Claim (as hereinafter defined) that
has been asserted or overtly threatened against or with respect to the Real
Property; (B) any above-ground storage tanks or Underground Storage Tanks (as
hereinafter defined) that are now, or have been in the past, located in or under
the Real Property, whether or not the same have been registered; (C) Hazardous
Materials (as hereinafter defined) having been discharged, located, stored,
generated, produced, processed, treated or disposed of in, on or under the Real
Property in any quantities, concentrations or manner of use that violates any
presently applicable Environmental Laws (as hereinafter defined) and would now
or hereafter (under existing Environmental Laws as presently applied) require
remediation under Environmental Laws; (D) the presence on the Real Property of
any asbestos or asbestos containing material in any friable state or otherwise
in violation of Environmental Laws; and/or (E) the presence on the Real Property
of any transformers or capacitators containing polychlorinated biphenyls
("PCBs"), and which are not in compliance with all Environmental Laws.
The term "Hazardous Materials" shall mean any substance,
material, waste, gas or particulate matter which is regulated by any
governmental authority, the State of New Jersey, or the United States
Government, including any material or substance which is: (i) defined as a
"hazardous waste", "hazardous material", "hazardous substance", "extremely
hazardous waste", or "restricted hazardous waste" or words of similar import
under any provision of any applicable Environmental Law; (ii) petroleum or
petroleum products; (iii) asbestos; (iv) polychlorinated biphenyl; (v)
radioactive material; (vi) radon gas; (vii) designated as a "hazardous
substance" pursuant to Section 311 of the Clean Water Act, 33 U.S.C. ss. 1251 et
seq. (33 U.S.C. ss.1317); (viii) defined as a "hazardous waste" pursuant to
Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901
et seq. (42 U.S.C. ss. 6903); or (ix) defined as a "hazardous substance"
pursuant to Section 101 of the Comprehensive Environmental Response,
Compensation and Liability Act, 41 U.S.C. ss. 9601 et seq. (42 U.S.C. ss. 9601).
The term "Environmental Laws" shall mean all statutes specifically described in
the foregoing sentence and all other federal, state and local environmental,
health and safety statutes, ordinances, codes, rules, regulations, orders and
decrees regulating, relating to or imposing liability or standards concerning or
in connection with Hazardous Materials. The term "Environmental Claim" shall
mean any written administrative, regulatory or judicial action, suit, demand,
demand letter, claim, lien, notice of non-compliance or violation, investigation
or proceeding relating in any way to any applicable Environmental Law or any
permit issued under any such applicable Environmental Law including (a) by
governmental or regulatory authorities for enforcement, cleanup, removal,
response, remedial or other actions or damages pursuant to any applicable
Environmental Law, and (b) by any third party seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive relief resulting from
Hazardous Materials or arising from alleged injury or threat of injury to
health, safety or the environment as a result of the presence of Hazardous
Materials. "Tank Laws" shall mean the federal Underground Storage Tank Law
(Subtitle I) of the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901
et seq., together with all substitutions thereof, and any successor legislation
and regulations. "Underground Storage Tank" shall mean each and every
"underground storage tank", whether or not subject to the Tank Laws, as well as
the "monitoring system", the "leak detection system", the "discharge detection
system" and the "tank system" associated with the "underground storage tank", as
those terms are defined by the Tank Laws.
(x) Seller has not received written notice that it has not
already provided to Buyer from any governmental or municipal authority informing
Seller that any condition on or relating to the Real Property constitutes an
uncorrected violation(s) of any applicable municipal code or of any other
federal, state or municipal law, ordinance or regulation and Seller has no
knowledge of any such condition. Seller has not received any written notice that
any of the Permits and Licenses are subject to, or in jeopardy of, revocation or
non-renewal. All bills and claims for labor performed and materials furnished on
behalf of Seller to or for the benefit of the Real Property will be paid in full
on the Closing Date or Seller shall make adequate provision for the payment
thereof to the extent any of the same are unpaid. To the best of Seller's
knowledge, all required state and local certificates of occupancy were duly
issued with respect to the Improvements, and all of Seller's obligations to
Gloucester Township in connection with the land development approvals for the
Real Property have been performed.
(xi) Seller has not granted to any person or entity any option,
right of first refusal or similar right to purchase all or any portion of the
Property which is outstanding.
(xii) Seller has not filed any voluntary petition in bankruptcy
or suffered the filing of any involuntary petition by Seller's creditors.
(xiii) Seller has not instituted any proceedings for a
reduction in the assessed valuation of the Real Property. Seller shall not
initiate any such proceedings without Buyer's prior written consent, not to be
unreasonably withheld, if such litigation or settlement shall affect the current
tax year or any future tax year. Seller has received no written notice of any
proposed or actual increase in the real estate tax assessment(s) affecting the
Real Property.
(xiv) Seller has received no written notice of any taking or
condemnation of all or any part of the Property.
(xv) To the best of Seller's knowledge, there are no private
restrictions or agreements that affect the uses which may be made of the Real
Property, including size or cost of buildings, limitations on use and
restrictions in regard to heights of buildings, agreements to submit
architectural plans to an association, community organization, or other group,
provisions requiring improvements or provisions requiring the joining with
others in group actions, which have not been disclosed in writing to Buyer by
Seller.
(xvi) To the best of Seller's knowledge, there are no contracts
or other agreements which have not been disclosed in writing to Buyer by Seller
relating to the Property that will be binding upon Buyer after Closing except
the Service Contracts and certain of the Permitted Exceptions.
(xvii) The copies of all records and documents to be provided
by Seller to Buyer pursuant to this Agreement will be true and correct.
(b) Seller shall indemnify, defend with counsel reasonably
acceptable to Buyer and hold harmless Buyer from and against all claims,
liabilities, losses, damages, penalties and costs, foreseen or unforeseen,
including reasonable counsel, engineering and other professional or expert fees,
resulting from any breach of any of the representations or warranties by Seller
contained in this Agreement and/or breach of the covenant contained in Paragraph
14(d).
(c) Buyer represents, covenants and warrants as of the date hereof
(and, as a condition to Seller's obligation to complete Closing, Buyer shall
reaffirm the following in writing at and as of the date of Closing), and all
such representations, covenants and warranties contained in this Paragraph 4 and
elsewhere in this Agreement shall survive the Closing unless otherwise expressly
provided elsewhere in this Agreement, for a period of six (6) months as follows:
(i) Buyer is a corporation duly organized, validly existing and
in good standing under the laws of the State of New Jersey;
(ii) Buyer has the full right, power and authority to enter into
and perform this Agreement and to purchase and accept the conveyance of the
Property to Buyer as herein provided. The person(s) executing this Agreement on
behalf of Buyer has full and complete authority to do so and to bind Buyer
thereby, and such execution has been duly authorized by all requisite corporate
and other action of Buyer.
(iii) This Agreement, when executed by Buyer, shall constitute
a valid, legal and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms.
(iv) The consummation of the transaction contemplated by this
Agreement, including, but not limited to, the termination of the Lease, shall
not result in any breach of the provisions of or constitute a default under any
agreement, mortgage, contract or other instrument to which Buyer is a party or
by which Buyer may be bound.
(v) Buyer has not assigned the Lease or otherwise sublet all or
any portion of the Premises.
(vi) Buyer has no written notice that it has not already
provided to Seller of (A) any Environmental Claim that has been asserted or
overtly threatened against or with respect to the Real Property; (B) any
above-ground storage tanks or Underground Storage Tanks that are now, or have
been in the past, located in or under the Real Property, whether or not the same
have been registered; (C) Hazardous Materials having been discharged, located,
stored, generated, produced, processed, treated or disposed of in, on or under
the Real Property in any quantities, concentrations or manner of use that
violates any presently applicable Environmental Laws (as hereinafter defined)
and would now or hereafter (under existing Environmental Laws as presently
applied) require remediation under Environmental Laws; (D) the presence on the
Real Property of any asbestos or asbestos containing material in any friable
state or otherwise in violation of Environmental Laws; and/or (E) the presence
on the Real Property of any transformers or capacitators containing PCBs, and
which are not in compliance with all Environmental Laws.
(d) Buyer shall indemnify, defend with counsel reasonable
acceptable to Seller and hold harmless Seller from and against all claims,
liabilities, losses, damages, penalties and costs, foreseen or unforeseen,
including reasonable counsel, engineering and other professional or expert fees,
resulting from any breach of any of the representations or warranties by Buyer
contained in this Agreement.
(e) If a representation, warranty or covenant in this Agreement
has a specific survival period, commencement of a legal action within the
applicable survival period described shall preserve a party's rights with
respect to the breach of a representation, warranty or covenant by the other
party.
5. Assessments; Violations.
Seller represents and warrants that except for those real
estate taxes and other assessments that Buyer is obligated to pay pursuant to
the Lease, Seller has paid all assessments made against the Property during its
ownership, and that to the best of its knowledge there are no other assessments
outstanding against the Property. Unless such assessment(s) is the
responsibility of Buyer under the Lease, Seller shall pay for all installments
of municipal and other governmental assessments levied against the Property and
due prior to the Execution Date; provided, however, if the benefit of any
improvements made pursuant to such assessment(s) continues after Closing, Buyer
shall pay for such assessment(s). If, at the time of Closing, any portion of the
Property shall be affected by any assessments which are required to be paid by
Seller pursuant to the provisions of this Paragraph 5 which are or may be
payable in annual or other installments of which the first installment is then
due or is a lien, then for the purposes of this Agreement, all of the unpaid
installments of any such assessments, including those which would become due and
payable after Closing shall be deemed to be due and payable and liened upon the
Property as of the date of Closing and shall be paid and discharged by Seller at
Closing. If any notice of any violation of any municipal code or of any other
federal, state or municipal law, ordinance or regulation affecting the Property
is issued after the Execution Date (and before the date of Closing), Seller
shall, at Seller's sole expense, cause the same to be cured and dismissed of
record before Closing unless the cure and dismissal of such violation is Buyer's
responsibility under the Lease. The provisions and obligations under this
Paragraph 5 shall survive Closing.
6. Risk of Loss.
(a) Buyer shall keep in full force and effect through the Closing Date all the
existing fire and extended coverage and other existing insurance policies that
Buyer currently maintains under the Lease (or substantially similar policies),
in amounts at least equal to the amounts now maintained. In the event of any
Material Loss (as hereinafter defined), Buyer shall have the right to terminate
this Agreement by written notice to Seller or to Seller's counsel within fifteen
(15) days after the date of such loss or damage, and in that event Buyer shall
receive the immediate return of the Deposit in full, with accrued interest, this
Agreement shall be deemed terminated as of the date of the notice, and all
rights, duties, obligations and liabilities of the parties hereunder shall cease
and terminate. "Material Loss" shall mean any loss or damage which shall cost in
excess of $200,000 to restore fully or replace (including the costs of property
protection, licenses, permits, architectural fees and other "soft costs", in
addition to actual costs of materials and labor). If Buyer does not elect to
terminate this Agreement as provided in this Paragraph 6(a), or in the event of
any loss or damage which does not constitute a Material Loss, Seller shall
convey the Property to Buyer at the Closing in its damaged condition (or in its
condition existing at the Closing Date if repairs or restoration shall have been
commenced but remain unfinished), and assign or turn over to Buyer all proceeds
of insurance or recoveries from third parties actually received by Seller as of
the Closing Date, together with the amount of any applicable deductible, and
also together with all of Seller's right, title and interest in and to (1) any
unpaid claim Seller has under the insurance policies covering the Real Property,
and (2) any unpaid claim Seller has against any other third party as a result of
the loss or damage.
(b) Except as Buyer may otherwise be obligated under the Lease, in the
event of the occurrence of casualty damage to the Real Property, Seller shall
cause such temporary repairs to be made to the Real Property as shall be
required to prevent further deterioration and damage to the Real Property before
the Closing; provided, however, that Seller shall have the right to be
reimbursed from the proceeds of any insurance with respect to the Real Property
for the reasonable cost of all such repairs. Such repairs shall be performed in
a good and workmanlike manner and in compliance with all regulations, codes and
orders of all governmental authorities.
(c) Except as otherwise provided in the Lease, in the case of any
casualty damage and provided that this Agreement shall be in full force and
effect, Seller shall not settle or compromise any insurance claims without
Buyer's prior written consent, which consent shall not be unreasonably withheld,
conditioned or delayed.
7. Condemnation.
(a) If, before Closing, any part of the Property is condemned or
otherwise taken by governmental or other lawful authority, or Seller receives
notice of any proposed or actual condemnation, taking by eminent domain, or
similar proceeding with respect to all or any part of the Property, Seller shall
promptly notify Buyer in writing; and, if such taking shall constitute a
Material Taking (as hereinafter defined), both Buyer and Seller shall have the
option, by written notice to the other party or to such other party's counsel
within fifteen (15) days after such party receives written notice from the other
party or the other party's counsel concerning such taking, of (i) terminating
this Agreement, whereupon the Deposit, with all interest accrued thereon, shall
be returned to Buyer by the Escrow Agent, this Agreement shall be deemed
terminated as of the date of notice, and all rights, duties, obligations and
liabilities of the parties hereunder shall cease and terminate, or (ii)
proceeding with the Closing.
(b) If neither Buyer nor Seller elects (or does not have the right to
elect) to terminate this Agreement pursuant to Paragraph 7(a), then Seller shall
not consent to a negotiated or compromise settlement of any condemnation,
eminent domain or other similar proceeding without the prior written consent of
Buyer, which consent shall not be unreasonably withheld and, notwithstanding
anything contained in the Lease to the contrary, Seller shall not exercise its
right under the Lease to terminate the Lease. If neither party elects to
terminate this Agreement as aforesaid, this Agreement shall remain in full force
and effect as to the portion of the Property not taken or proposed to be taken
by condemnation or eminent domain or other similar proceedings and Seller shall
credit the entire amount of any condemnation or eminent domain awards or
proceeds to Buyer at Closing; provided, however, that Seller shall retain the
amount of any proceeds received in excess of the Purchase Price, or, in the
event such proceeds have not been paid to Seller as of the date of Closing,
Seller shall irrevocably assign to Buyer, at Closing, Seller's right to receive
such proceeds, and Buyer shall, after Closing, have the sole right to settle any
claim in connection therewith.
(c) A "Material Taking" shall mean any condemnation, taking by eminent
domain or any similar proceeding which adversely affects the Real Property by:
(i) reducing the area of any existing building on the Real Property; (ii)
eliminating access to the Real Property from any public roads abutting the Real
Property; (iii) diminishing materially the number of parking spaces available on
the Real Property, or reducing the number of such spaces below that required by
applicable zoning and/or other governmental requirements and such reduction
would constitute a violation in the absence of a valid waiver, exception or
variance from such applicable zoning and/or other governmental requirements; or
(iv) otherwise materially and adversely affecting the utility of the Real
Property for Buyer's intended use.
8. As-Is Purchase; Condition of Property.
AS A MATERIAL INDUCEMENT TO SELLER TO EXECUTE THIS AGREEMENT, BUYER
ACKNOWLEDGES THAT, SUBJECT TO THE REPRESENTATIONS, WARRANTIES AND COVENANTS OF
SELLER CONTAINED IN THIS AGREEMENT AND/OR ANY DOCUMENT EXECUTED BY SELLER IN
CONNECTION WITH THE CLOSING: (I) THE PROPERTY WILL BE PURCHASED BY BUYER "AS-IS"
AND "WHERE IS" AND WITH ALL FAULTS AND, UPON CLOSING, BUYER WILL ASSUME
RESPONSIBILITY FOR THE PHYSICAL CONDITION OF THE PROPERTY; (II) BUYER HAS
DECIDED TO PURCHASE THE PROPERTY SOLELY BASED UPON ITS OWN INDEPENDENT
INVESTIGATION AND ITS OWN INDEPENDENT BUSINESS JUDGMENT; AND (III) OTHER THAN AS
SET FORTH IN THIS AGREEMENT, SELLER HAS NOT MADE AND DOES NOT HEREBY MAKE ANY
REPRESENTATIONS, WARRANTIES OR OTHER STATEMENTS AS TO THE CONDITION OF THE
PROPERTY, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR FUTURE,
OF, AS TO, CONCERNING OR WITH RESPECT TO (A) THE VALUE, NATURE, QUALITY OR
CONDITION OF THE PROPERTY, INCLUDING, WITHOUT LIMITATION, THE WATER, SOIL AND
GEOLOGY, (B) THE INCOME TO BE DERIVED FROM THE PROPERTY, (C) THE SUITABILITY OF
THE PROPERTY FOR ANY AND ALL ACTIVITIES AND USES WHICH BUYER MAY CONDUCT
THEREON, (D) THE COMPLIANCE OF OR BY THE PROPERTY OR ITS OPERATION WITH ANY
LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE GOVERNMENTAL AUTHORITY
OR BODY, (E) THE MERCHANTABILITY, MARKETABILITY, PROFITABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OF THE PROPERTY, (F) THE MANNER OR QUALITY OF THE
CONSTRUCTION OR MATERIALS, IF ANY, INCORPORATED INTO THE PROPERTY, (G) THE
MANNER, QUALITY, STATE OF REPAIR OR LACK OF REPAIR OF THE PROPERTY, OR (H) ANY
OTHER MATTER WITH RESPECT TO THE PROPERTY, AND SPECIFICALLY, THAT SELLER HAS NOT
MADE, DOES NOT MAKE AND SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS REGARDING
COMPLIANCE WITH ANY ENVIRONMENTAL PROTECTION, POLLUTION OR LAND USE LAWS, RULES,
REGULATIONS, ORDERS OR REQUIREMENTS. BUYER FURTHER ACKNOWLEDGES AND AGREES THAT
HAVING BEEN GIVEN THE OPPORTUNITY TO INSPECT THE PROPERTY AND BEING THE CURRENT
TENANT OF THE PROPERTY PURSUANT TO THE LEASE, EXCEPT AS EXPRESSLY PROVIDED IN
THIS AGREEMENT, BUYER IS RELYING SOLELY ON ITS OWN INVESTIGATION AND OCCUPANCY
OF THE PROPERTY. BUYER FURTHER ACKNOWLEDGES AND AGREES THAT ANY INFORMATION
PROVIDED OR TO BE PROVIDED WITH RESPECT TO THE PROPERTY WAS OBTAINED FROM A
VARIETY OF SOURCES AND THAT SELLER HAS NOT MADE ANY INDEPENDENT INVESTIGATION OR
VERIFICATION OF SUCH INFORMATION AND MAKES NO REPRESENTATIONS AS TO THE ACCURACY
OR COMPLETENESS OF SUCH INFORMATION, EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT. BUYER FURTHER ACKNOWLEDGES AND AGREES THAT, EXCEPT AS EXPRESSLY
PROVIDED IN THIS AGREEMENT, TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE SALE OF
THE PROPERTY AS PROVIDED FOR HEREIN IS MADE ON AN "AS IS" CONDITION AND BASIS
WITH ALL FAULTS. IT IS UNDERSTOOD AND AGREED THAT THE PURCHASE PRICE HAS BEEN
ADJUSTED BY PRIOR NEGOTIATION TO REFLECT THAT ALL OF THE PROPERTY IS SOLD BY
SELLER AND PURCHASED BY BUYER SUBJECT TO THE FOREGOING. THE PROVISIONS OF THIS
SECTION 8 SHALL SURVIVE THE CLOSING.
9. Escrow.
The Deposit paid by Buyer under Paragraph 2 shall be held in
escrow in an interest-bearing account by Commonwealth Land Title Insurance
Company, as escrow agent (the "Escrow Agent"). Seller, on the one part, and
Buyer, on the other part, shall each pay one-half (1/2) of the charges, if any,
of the Escrow Agent for the escrow of the Deposit. Escrow Agent shall deliver
the Deposit to Buyer or Seller, as the case may be, as follows:
(a) At Closing, Escrow Agent shall pay over to Seller the
amount of the Deposit and all interest earned thereon, which amount shall be
credited against the Purchase Price; or
(b) To Seller, after receipt of Seller's demand in which
Seller certifies either that (i) Buyer has defaulted under this Agreement, or
(ii) this Agreement has otherwise been terminated or cancelled, and Seller is
thereby entitled to receive the Deposit; provided, however, that Escrow Agent
shall not honor Seller's demand until more than ten (10) days after Escrow Agent
has given a copy of Seller's demand to Buyer in accordance with subparagraph (d)
below, nor thereafter if Escrow Agent receives a Notice of Objection (as
hereinafter defined) from Buyer within such ten (10) day period; or
(c) To Buyer, after receipt of Buyer's demand in which Buyer
certifies either that (i) Seller has defaulted under this Agreement, or (ii)
this Agreement has otherwise been terminated or cancelled, and Buyer is thereby
entitled to receive the Deposit; provided, however, that Escrow Agent shall not
honor Buyer's demand until more than ten (10) days after Escrow Agent has given
a copy of Buyer's demand to Seller in accordance with subparagraph (d) below,
nor thereafter if Escrow Agent receives a Notice of Objection from Seller within
such ten (10) day period.
(d) Upon receipt of a written demand from Seller or Buyer
under subparagraphs (b) or (c) above, Escrow Agent shall send a copy of such
demand to the other party. Within ten (10) days after the date of receiving
same, but not thereafter, the other party may object to delivery of the Deposit
to the party making such demand by giving a notice of objection (a "Notice of
Objection") to Escrow Agent. After receiving a Notice of Objection, Escrow Agent
shall send a copy of such Notice of Objection to the party who made the demand;
and thereafter, in its sole discretion, Escrow Agent may elect either to (i)
continue to hold the Deposit until Escrow Agent receives a written agreement
executed by Seller and Buyer directing the disbursement of the Deposit, in which
case Escrow Agent shall disburse the Deposit in accordance with such agreement,
or (ii) deposit the Deposit with a court of competent jurisdiction in connection
with the commencement of an interpleader action and thereby be relieved of all
liability to either party hereto
Buyer and Seller hereby jointly agree to indemnify and hold harmless
the Escrow Agent from and against any and all liability hereunder except as a
result of the Escrow Agent's willful misconduct or negligence. The covenants and
provisions of this Paragraph 9 shall survive Closing.
10. Conditions to Obligations.
(a) Buyer's and Seller's respective obligations under this Agreement
are contingent upon:
(i) all of the representations and warranties of the other party
contained herein being true and correct in all material respects, and the same
shall remain true and correct in all material respects as though made as of the
Closing Date;
(ii) the performance by the other party in all material
respects of all of its covenants and obligations herein contained; and
(iii) the execution and delivery at Closing by the other party
hereto of a lease termination agreement with respect to the Lease (the "Lease
Termination Agreement"), in the form attached hereto as Exhibit "D".
(b) As additional preconditions to Buyer's obligations under this
Agreement, including, but not limited to, Buyer's obligation to pay the Purchase
Price and to complete Closing:
(i) Title to the Property shall be in the condition required
under Paragraph 3 hereof, and if title to the Property is not so provided, Buyer
shall have the option set forth in Paragraph 3(c) hereof to waive such failure
or terminate this Agreement; and
(ii) On or before Closing, Seller shall deliver to Buyer either
(A) a letter from the New Jersey Department of Environmental Protection and
Energy or its successor ("DEP") stating that the provisions of the Industrial
Site Recovery Act, N.J.S.A. 13:1K-6 et seq., the regulations promulgated
thereunder and any successor legislation and regulations (collectively, "ISRA")
are inapplicable to the Property or this transaction ; (B) confirmation from DEP
that the operations at the Property qualify for a deminimis quantity exemption
under ISRA; or (C) provided that ISRA is applicable to the operations at the
Property or to the transaction, a remediation agreement (as defined by ISRA, the
"Remediation Agreement") by and between Seller and DEP, and if necessary Buyer,
permitting the transaction to close in compliance with ISRA, such Remediation
Agreement to be acceptable to each party hereto in its sole discretion. The
Remediation Agreement shall identify Buyer as the party responsible for the
remediation of the Property. Seller shall commence to obtain the items specified
in (A), (B) and (C) above promptly after the Execution Date, and shall pursue
same diligently and in good faith. Buyer shall execute all applications,
affidavits and other documents, including the Remediation Agreement itself, and
otherwise cooperate with Seller (with no out-of-pocket cost to Buyer), as may be
necessary for Seller to obtain a fully executed Remediation Agreement before
Closing and otherwise name Buyer as the responsible party under the Remediation
Agreement and to otherwise ensure compliance with ISRA. If a fully executed
Remediation Agreement has not been delivered before Closing, Seller shall have
the right to extend Closing by an additional forty-five (45) days upon written
notice to Buyer prior to the date of Closing.
11. Closing.
Subject to the following sentence, closing of the transaction
described in this Agreement ("Closing") will be held at the offices of Buyer
located at 90 Coles Road, Blackwood, New Jersey 08012, at 10:00 AM local time on
the day which is sixty (60) days after the Execution Date, or on the next
business day thereafter if such day is not a business day, or at such other
definite place and time and/or prior date as Seller and Buyer may agree upon in
writing. Buyer and Seller shall use diligent efforts to cause Closing to occur
on or before the day which is sixty (60) days after the Execution Date, or on
the next business day thereafter if such day is not a business day. The date of
the occurrence of Closing is called the "Closing Date". Unless otherwise agreed
between Buyer and Seller, the transaction contemplated hereby shall also be
closed by means of the concurrent delivery of the documents of title and the
conveyancing documents, and the payment of the Purchase Price, subject to the
adjustments expressly provided for under the terms of this Agreement. Seller and
Buyer shall each pay one-half (1/2) of any administrative charges or closing
fees, if any, of the Title Company for the conduct of Closing.
12. Provisions with Respect to Closing.
(a) At Closing, Seller shall deliver possession of the Property to
Buyer in its current condition, reasonable wear and tear excepted, subject to
the obligations of Buyer with respect to its space under its Lease, and in
vacant condition, excepting possession by Buyer under its Lease, and Seller
shall deliver, or cause to be delivered, to Buyer the following, in addition to
all other documents mentioned elsewhere in this Agreement:
(i) A bargain and sale deed to the Real Property in form
reasonably acceptable to Buyer with covenants against grantor's acts (the
"Deed"), executed and acknowledged by Seller.
(ii) Copies of all records which are in the possession or
control of Seller and which are reasonably necessary for the operation of the
Property. The unapplied security deposit under the Lease, and all interest
earned thereon, shall be retained by Seller at Closing as a termination fee
under the Lease, and not as additional consideration for the purchase of the
Property. Seller also shall deliver to Buyer original counterparts of the
Service Contracts, Permits and Licenses and Books and Records, or certified
copies of same if Seller, using its good faith reasonable efforts, is unable in
any instance to deliver originals, and all keys to the Improvements in Seller's
possession or control.
(iii) An affidavit duly executed by Seller and confirming that
Seller is a "U.S. person" and not a "foreign person" within the meaning of
Section 1445 of the Internal Revenue Code of 1986, as amended (the "Code").
(iv) If required under applicable law to be delivered by Seller
for the transfer of commercial property in Gloucester Township, a certificate
issued by the appropriate official of Gloucester Township and dated no earlier
than twenty (20) days before Closing, certifying (1) the zoning of the Real
Property and that the current use of the Real Property is legal, and/or (2)
there are no outstanding notices of any electrical, housing, fire, building or
other ordinances, codes or regulations with respect to the Real Property.
(v) Such information, if any, as may be required by the closing
agent for Real Estate 1099-B Report Filing pursuant to Section 6045 of the Code.
(vi) Bill of Sale duly executed by Seller, in the form of
Exhibit "C" attached hereto and made a part hereof.
(vii) A title affidavit duly executed by Seller in customary
form, in favor of the Title Company, together with delivery by Seller of such
reasonable and customary affidavits and other instruments, that are reasonably
requested by the Title Company evidencing the right of Seller to convey title to
the Property as required under this Agreement, and to enable the Title Company
to insure title as contemplated in Paragraph 3.
(viii) A certificate duly executed by Seller stating that the
representations and warranties of Seller made in Paragraph 4 and elsewhere in
this Agreement are true and correct in all material respects as of the Closing
Date, or if there have been any changes, a description thereof.
(ix) A settlement statement duly executed by Seller setting
forth the Purchase Price and all credits and adjustments.
(x) The Lease Termination Agreement (as defined in Paragraph
10(a)(iii)), executed by Seller.
In the event Buyer shall be entitled to receive any proceeds
of insurance, or the proceeds of any award arising out of any condemnation or
eminent domain proceeding, or any unpaid claim(s) for such award or proceeds,
under Paragraphs 6 or 7, Seller shall execute and deliver to Buyer such proper
instruments as shall be reasonably required for the transfer to Buyer of all
right, title and interest, of Seller in and to any such award, proceeds or claim
to the full extent of Buyer's entitlement thereto.
(b) At Closing, Buyer shall deliver, or cause to be delivered, to
Seller the following, in addition to all other documents mentioned elsewhere in
this Agreement:
(i) A certificate duly executed by Buyer stating that the
representations and warranties of Buyer made in Paragraph 4 and elsewhere in
this Agreement are true and correct in all material respects as of the Closing
Date, or if there have been any changes, a description thereof.
(ii) A settlement statement duly executed by Buyer setting
forth the Purchase Price and all credits and adjustments.
(iii) The Lease Termination Agreement (as defined in Paragraph
10(a)(iii)), executed by Buyer.
(iv) The Purchase Price, subject to adjustment at Closing as
provided herein.
(c) At Closing, Escrow Agent shall deliver the Deposit and
interest thereon to Seller, to be applied to the Purchase Price; Buyer shall
deliver to Seller the balance of the Purchase Price in accordance with Paragraph
2(b); and Buyer shall execute and deliver a settlement statement setting forth
the Purchase Price and all credits and adjustments.
(d) The following items shall be prorated and adjusted as of
midnight of the date preceding the date of the Closing (i.e., Buyer is entitled
to income and responsible for expenses on the date of Closing). To the extent
that the amounts of the items to be adjusted are not reasonably ascertainable as
of the date of Closing, they shall be adjusted as promptly after Closing as the
amounts thereof can be ascertained:
(i) Rent and additional rent under the Lease, including fixed
rents, charges and fees, if any, for the use, operation and maintenance of any
common-area facilities. Prepaid rents (including taxes, utility and other
pass-throughs), as well as rents actually paid under the Lease for the month of
Closing, shall be prorated.
(ii) Subject to Buyer's obligation to pay real estate taxes
under the Lease, real estate taxes (based on the fiscal year of the applicable
taxing authority) for the fiscal tax year(s) in which the Closing shall occur
(and Seller shall pay all real estate taxes for all prior fiscal tax years
unless Buyer is required to pay such real estate taxes under the Lease).
(iii) Utility charges (including electricity, gas, steam,
telephone and, water and sewer charges), if any, not otherwise the Buyer's
responsibility under the Lease, by utility providers. If necessary, Buyer shall
furnish readings of the water, electric and other utility meters at the Property
on or as near as reasonably possible to the date of Closing.
(e) All real estate transfer taxes shall be paid by Buyer. Buyer
shall pay for all recording fees for the recording of the Deed. Buyer shall pay
for the cost of all title searches, the Title Commitment and the Title Policy
and any title endorsements. Each party shall bear the expense of its own
counsel.
(f) At or before Closing, Seller shall pay all brokerage, leasing
and other commissions and fees due and payable or which will become due during
the current term (and any preceding terms) of the Lease, and any prior lease
with respect to the Real Property. At or prior to Closing, Seller shall provide
to Buyer written statements from all parties to be paid brokerage, leasing and
other commissions and fees for which Seller is responsible under this
subparagraph (f), confirming that all such brokerage, leasing and other
commissions and fees have been paid by Seller in full.
(g) The proration provisions of this Paragraph 12 shall survive
Closing; provided, that any claim with respect thereto must be made on or before
the date which is six (6) months after the Closing Date.
13. Brokerage.
Each of the parties hereto represents and warrants that it has
not dealt with any broker, finder or real estate consultant in connection with
this transaction. Seller shall indemnify Buyer against, hold Buyer harmless from
and defend Buyer with counsel reasonably acceptable to Buyer against any claim
for brokerage commissions made against Buyer in connection with this transaction
by any person or entity claiming a commission through its relationship with
Seller. Buyer shall indemnify Seller against, hold Seller harmless from and
defend Seller with counsel reasonably acceptable to Seller against any and all
claims for brokerage commissions made against Seller by any person or entity
claiming a commission in connection with this transaction through its
relationship with Buyer. This Paragraph 13 shall survive Closing through the
date which is six (6) months after the Closing Date.
14. Operations Prior to Closing.
Until the Closing or earlier termination of this Agreement:
(a) Seller will not make any commitment with respect to the Property on
behalf of or which would be binding upon Buyer without first obtaining Buyer's
written consent, which shall not be unreasonably withheld, conditioned or
delayed;
(b) Seller (i) to the extent required of Seller under the Lease, will
keep and maintain the Property in the same order, repair and condition as shall
exist at the time of the execution of this Agreement, ordinary wear and tear
excepted, (ii) will not cause or knowingly permit any change in use or condition
of the Property which shall violate or breach any laws, zoning ordinances or
building permits or commit any waste or nuisance, (iii) will promptly advise
Buyer of any litigation, arbitration, or administrative hearing before any
governmental agency concerning or affecting the Property arising or threatened
after the Execution Date, and (iv) will maintain in full force and effect, and
shall pay all premiums for, the policies of insurance now in effect with respect
to the Property, if any;
(c) Buyer (i) will promptly advise Seller of any litigation,
arbitration, or administrative hearing before any governmental agency concerning
or affecting the Property arising or threatened after the Execution Date; and
(ii) will not cause or knowingly permit any change in use or condition of the
Property which shall violate or breach any laws, zoning ordinances or building
permits or commit any waste or nuisance.
(d) Seller will not sell, assign, or convey any right, title or interest
whatsoever in or to the Property or any part thereof or enter into any agreement
to do so or create or permit to exist any lien, encumbrance, or charge thereon
without promptly discharging the same;
(e) Buyer will not enter into any agreement to assign the Lease or
sublet the Property, in whole or in part;
(f) Neither Seller nor Buyer will modify, amend, enter into or renew
any lease, Service Contract or other obligation pertaining to the Property or
the operation thereof without the prior written consent of the other party; no
contract for or on behalf of or affecting the Property shall be negotiated or
entered into by Seller that is not terminated as of Closing without charge,
cost, penalty, or premium to Buyer. Seller shall not remove any Personal
Property located in or on the Real Property, except as may be required for
repair and replacement. All replacements shall be free and clear of liens and
encumbrances and shall be of quality at least equal to the replaced items and
shall be deemed included in this sale.
(g) Seller and Buyer shall observe and keep in full force and effect all
licenses and permits now in effect with respect to the Property and shall
perform all their respective obligations under the Lease, and shall not
voluntarily terminate any agreement that is necessary to carry on and conduct
the present business being conducted upon the Property, and shall carry on and
conduct such business in substantially the same manner as such business is now
and has heretofore been carried on.
(h) Seller and Buyer promptly shall provide copies to the other party
upon such party's receipt hereafter of any notice from any party alleging that
Seller or Buyer, as the case may be, is in default of its obligations under any
of the Service Contracts, or any permit affecting the Property or any portion
thereof or any agreement that will be binding upon Buyer after the Closing; any
notice of assessment or notice of change in a tax rate or assessment affecting
the Property; any notice of a taking or condemnation affecting or relating to
the Property; any notice instituting or asserting any material claim, action,
investigation or proceeding affecting the Property; any notice from any
governmental authority asserting any violation of law with respect to the
Property; and any notice of an Environmental Claim affecting the Property.
(i) Notwithstanding anything contained in this Agreement to the
contrary, Seller shall not be responsible for any default of Buyer under the
Lease.
15. Default.
(a) If Buyer fails to complete Closing when required under the terms of
this Agreement, then Seller's sole remedy shall be to retain the Deposit with
any interest earned thereon, as liquidated damages and not as a penalty, and
thereupon this Agreement shall terminate and thereafter neither party shall have
any further rights, duties, obligations or liabilities hereunder. Seller waives
any right to specific performance or actual damages it may have on account of
any default by Buyer hereunder.
(b) If Seller defaults hereunder before completion of Closing, then
Buyer shall be entitled, at Buyer's election, to the return by the Escrow Agent
of the Deposit, together with any interest earned thereon and reimbursement of
all reasonable costs and expenses incurred by Buyer in connection with this
Agreement, including the cost of the Commitment, costs of consultants' and
appraisers' reports and legal fees, up to a maximum amount of Seven Thousand
Dollars ($7,000.00) (collectively, "Buyer's Costs") or specific performance of
Seller's obligations under this Agreement; provided, however, that if Seller
willfully defaults or takes any action to prevent the completion of Closing
hereunder, Buyer shall be entitled to sue for damages.
16. Time of Essence.
The time for the Closing and all other times referred to for
the performance of any of the obligations of either party under this Agreement
are agreed to be of the essence to this Agreement; and time wherever mentioned
herein is not to be extended except by consent in writing signed by both
parties.
17. Waiver of Conditions.
Buyer shall have the right, in the sole and absolute exercise
of its discretion, to waive any of the terms or conditions of this Agreement
which are strictly for the benefit of Buyer and to purchase the Property in
accordance with the terms and conditions of this Agreement which have not been
so waived. Any such waiver shall be made by notice in writing to Seller
delivered at or before the Closing. Seller shall have the right, in the sole and
absolute exercise of its discretion, to waive any of the terms or conditions of
this Agreement which are strictly for the benefit of Seller and to sell and
convey the Property in accordance with the terms and conditions of this
Agreement which have not been so waived. Any such waiver shall be made by notice
in writing to Buyer delivered at or before the Closing.
18. Further Assurances.
Upon request, at any time after Closing, Seller and Buyer
shall execute and deliver such further instruments of conveyance and transfer
and take such other action as the requesting party may reasonably request to
convey and transfer effectively to Buyer any of the Property, or otherwise to
effectuate the intentions of the parties as set forth in this Agreement. The
provisions and obligations under this Paragraph 18 shall survive Closing.
19. Integration-Merger.
This Agreement contains the final and entire agreement between
the parties hereto with respect to the subject matter hereof and they shall not
be bound by any terms, conditions, statements or representations, oral or
written, not contained herein. All understandings and agreements heretofore made
between the parties are merged in this Agreement, which alone fully and
completely express the agreement of the parties and which may not be changed,
modified or terminated except by a written instrument signed by both parties.
20. No Recording.
This Agreement shall not be recorded in any place or office of
public record and any action in violation of this provision shall be deemed to
be a default hereunder and shall permit the other party to terminate this
Agreement immediately by written notice; provided, however, that the filing or
recording of this Agreement as part of any proceedings instituted in any court
of competent jurisdiction to enforce the provisions of this Agreement shall not
be deemed to be a breach of this Paragraph 20.
21. Notice.
All notices, demands or requests required or permitted to be
made pursuant to, under or by virtue of this Agreement must be in writing and
mailed, postage prepaid and by certified or registered mail, return receipt
requested, or delivered by Federal Express, UPS or other reputable independent
overnight delivery service providing written evidence of delivery, or by hand
delivery with written evidence of delivery, addressed as follows:
To Seller: C. Harry Knowles
Janet H. Knowles
425 East Linden Street
Morrestown, NJ 08057
With a copy sent as Buchanan Ingersoll PC
above to: 1835 Market Street, 14th Floor
Philadelphia, PA 19103
Attention: Nancy Sabol Frantz, Esquire
To Buyer: Metrologic Instruments, Inc.
90 Coles Road
Blackwood, NJ 08012
Attention: Nancy Smith, Esquire
With a copy sent as Ballard Spahr Andrews & Ingersoll, LLP
above to: 1735 Market Street
51st Floor
Philadelphia, PA 19103-7599
Attention: Justin P. Klein, Esquire
Such notices, demands or requests shall be deemed to have been
given and delivered on the earlier of the date of actual receipt thereof or (i)
if delivered by Federal Express or other reputable overnight delivery service,
on the business day next succeeding the date on which the same was delivered by
the sender to such courier, or (ii) if by United States certified or registered
mail, as of two (2) business days after the date of mailing, or on the date of
actual receipt, whichever is earlier. Either party may change the address to
which such notices, demands or requests shall be mailed hereunder by written
notice of such new address mailed to the other party hereto in accordance with
the provisions of this Paragraph 21. Notice given by legal counsel on behalf of
any party shall be deemed to be given by such party.
22. Miscellaneous.
(a) No waiver by either party of any failure or refusal by the other
party to comply with its obligations hereunder shall be deemed a waiver of any
other obligation or as of a subsequent failure or refusal by the other party so
to comply.
(b) Buyer may not assign its interest under this Agreement without the
prior written consent of Seller, except as provided in Paragraph 22(h); and this
Agreement shall inure to the benefit of and shall bind the heirs, executors,
administrators, successors and permitted assigns of the respective parties.
(c) Any headings preceding the text of Paragraphs of this Agreement are
inserted solely for convenience of reference and shall not constitute a part of
this Agreement nor shall they affect its meaning, construction or effect. All
exhibits and schedules annexed hereto and referenced in this Agreement are
incorporated herein.
(d) This Agreement may be executed in counterparts, each of which shall
be deemed an original.
(e) Any Closing costs not specifically described and allocated herein
shall be apportioned between Buyer and Seller according to the custom prevailing
in the metropolitan area in which the Real Property is situated, for similar
types of real estate transactions.
(f) This Agreement shall be interpreted and enforced in accordance with
the laws of the State of New Jersey, without reference to choice of law
principles.
(g) Formal tender of an executed deed or of purchase money is hereby
waived.
(h) This Agreement may not be assigned by Buyer without Seller's prior
written consent, except that Buyer's rights and obligations hereunder may be
assigned, without Seller's consent but with notice to Seller before or at the
time of Closing, to the following (each a "Permitted Assignee"): to any
partnership (general or limited), limited liability company, corporation or
other business entity or business trust controlled (directly or indirectly) by
Buyer. "Control" shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of a person or
entity, whether through the ownership of voting securities, by contract or
otherwise, including the power to elect a majority of the directors or trustees
of a corporation or trust, as the case may be. At Closing, Seller shall deliver
the Deed to Buyer, or the Permitted Assignee, as Buyer shall designate in
writing at least three (3) business days before Closing. If this Agreement is
assigned by Buyer pursuant to the terms of this Agreement, Buyer shall
nevertheless remain liable under this Agreement.
(i) In any litigation between the parties regarding this Agreement
(including any litigation regarding the proper disposition of the Deposit), and
in addition to any liquidated, stipulated or other damages permitted hereunder,
the losing party shall pay to the prevailing party all reasonable expenses and
court costs, including reasonable attorneys fees incurred by the prevailing
party. A party shall be considered the prevailing party if: (a) it initiated the
litigation and substantially obtains the relief it sought, either through a
judgment or the losing party's voluntary action before arbitration (after it is
scheduled), trial or judgment; (b) the other party withdraws its action without
substantially obtaining the relief it sought; or (c) it did not initiate the
litigation and judgment is entered for either party, but without substantially
granting the relief sought. A party's right to the foregoing shall not merge
with but shall survive the entry of judgment, and shall extend to appeals and
collection. The obligations of the parties under this subparagraph shall survive
Closing or earlier termination of this Agreement.
(j) Nothing contained in this Agreement shall be deemed to create any
joint venture or partnership or similar association between Buyer and Seller,
and, except pursuant to the terms of the Lease, the relationship between Buyer
and Seller is only that of purchaser and seller.
(k) The obligations and liabilities of Seller hereunder shall be the
joint and several obligations and liabilities of each of the parties
collectively identified herein as "Seller", if more than one.
23. Severability of Provisions.
In case any one or more of the provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, then unless such provision or provisions shall be of the essence
of this Agreement such invalidity, illegality or unenforceability shall not
affect any other provision hereof, and this Agreement shall be construed as if
the invalid, illegal or unenforceable provision had never been contained herein.
24. Rules of Interpretation.
The following shall govern the interpretation of this
Agreement:
(a) Words importing the singular include the plural and words importing
the plural include the singular and words importing gender include the
masculine, feminine and neuter genders.
(b) A reference to any agreement means the agreement as amended,
modified or supplemented from time to time.
(c) A reference to any law includes any amendment or modification
thereto, all rules and regulations promulgated under such law, and all
administrative and judicial authority exercisable thereunder.
(d) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole,
including all exhibits and schedules hereto, and not to any particular
provisions of this Agreement, and article, paragraph, subparagraph, schedule,
and exhibit references are to this Agreement unless otherwise specified.
(e) The word "includes" or "including" shall mean "including, without
limitation.
IN WITNESS WHEREOF, this Agreement has been duly executed by
the parties hereto, intending to be legally bound hereby, as of the day and year
first above written.
SELLER: BUYER:
C. HARRY KNOWLES and METROLOGIC INSTRUMENTS, INC.,
JANET H. KNOWLES, husband and a New Jersey Corporation
wife
/s/ C.H. Knowles By: /s/T.E. Mills
- -------------------------------- -------------------------------
/s/ Janet H. Knowles
- --------------------------------
The undersigned, intending to be legally bound hereby, agrees
to hold the Deposit in accordance with the terms of this Agreement.
COMMONWEALTH LAND TITLE INSURANCE COMPANY
By:/s/Sharon B. Rohm
------------------------------------
Sharon B. Rohm
Date: December 22, 2003
Exhibit 14
Metrologic Instruments, Inc.
Code of Ethics for CEO and Senior Financial Officers
The Chief Executive Officer ("CEO") and all senior financial and
accounting officers of Metrologic Instruments, Inc. (the "Company") have
important and vital roles in the corporate governance of the Company. This Code
of Ethics (the "Code") has been adopted by the Board of Directors of the Company
to establish standards of conduct designed to promote (1) honest and ethical
conduct by such senior officers, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships,
(2) full, fair, accurate, timely and understandable disclosure in the Company
periodic reports filed with the Securities and Exchange Commission (the "SEC")
and (3) compliance by such senior officers with applicable governmental laws,
rules and regulations.
The provisions of this Code shall apply to the Company's CEO,
President, Chief Operating Officer ("COO"), Chief Financial Officer ("CFO"),
Controller principal accounting officer, and persons performing similar
functions (each individually, a "Senior Officer" and collectively, the "Senior
Officers"). Each Senior Officer must conduct himself or herself in accordance
with this Code and seek to avoid even the appearance of improper behavior.
Senior Officers should also refer to the Company's Employee Handbook, which
supplements and is in addition to this Code.
Each Senior Officer shall certify, promptly upon the adoption of this
policy and from time to time thereafter, but no less than annually, that he or
she has read and understood this Code and will abide by it. A form of the
certification is attached hereto as Exhibit A. Any waiver, including an implicit
waiver, of this Code may be made only by the Board of Directors, and any such
waiver will be promptly publicly disclosed as required by law and/or stock
exchange regulation. Any amendment or other change to this Code will also be
promptly publicly disclosed as required by law and/or stock exchange regulation.
The following standards shall apply to the Senior Officers under this Code:
I. Honest and Ethical Conduct.
Each Senior Officer shall:
1. always conduct himself or herself in an honest and ethical manner;
2. act with the highest standards of personal and professional integrity;
3. respect the confidentiality of information acquired during the course of
employment with the Company and not use any such confidential information for
personal gain;
4. ensure responsible use of and control over all assets and resources employed
or entrusted to him or her;
5. proactively promote and advocate ethical behavior in the Company's work
environment; and
6. ensure that he or she discloses, to the Board of Directors, or a designated
committee of the Board, any material facts or information that come into the
Senior Officer's possession concerning any "related party" transaction with the
Company. A "related party" is any director, executive officer, nominee for
election as director or securityholder who is known to hold more than five
percent of any class of the Company's voting securities, and any member of the
immediate family (as such term is defined under the NASDAQ corporate governance
rules as any person who is a relative by blood, marriage or adoption or who has
the same residence) of any of the foregoing persons. A related party also
includes any entity that is affiliated with a director, executive officer, a
nominee for election as a director or significant securityholder.
All actual or apparent conflicts of interest between personal and professional
relationships must be handled honestly, ethically and in accordance with the
policies specified in this Code.
II. Rules to Promote Full, Fair, Accurate, Timely and Understandable
Disclosure.
To the extent consistent with each Senior Officer's duties and responsibilities,
each Senior Officer must take the following steps to ensure full, fair,
accurate, timely and understandable disclosure in the reports and documents that
the Company files with the SEC and in other public communications made by the
Company:
1. Carefully review a draft of each periodic SEC report and related documents
for accuracy and completeness before each such report is filed with the SEC,
with particular focus on disclosure issues within his or her area of
responsibility.
2. Carefully review a draft of each press release or other public communications
by the Company before each such communication is released to the public.
3. Upon request of the Company's Audit Committee, meet with its members and
others involved in the financial reporting and audit processes to discuss the
draft report referred to in item (1) above.
4. Bring to the attention of the Audit Committee matters that such Senior
Officer believes could (a) compromise the integrity of the Company's financial
reports, (b) evidence disagreements on accounting matters and/or (c) constitute
a possible violation of this Code.
5. Actively support the Company's CFO to help establish and maintain disclosure
controls and procedures that ensure that material information is included in
each periodic SEC report (by cooperating fully with periodic SEC report reviews,
proactively identifying potential areas of weaknesses in such controls and
procedures and providing corrective policy recommendations).
6. Consult with the Audit Committee on a regular basis to identify any
short-comings or concerns with respect to the Company's internal financial
reporting or disclosure controls.
7. Confirm that neither the Company's internal finance personnel, nor its
outside auditors, are aware of any material misstatements or omissions in any
draft periodic SEC report referred to in item (1) above, or have any concerns
about the "Management's Discussion and Analysis" section of such periodic
report.
8. Always act in good faith, responsibly, with due care, competence and
diligence, without misrepresenting material facts, allowing material facts to be
omitted or allowing independent judgment to be subordinated.
III. Compliance with Applicable Governmental Laws, Rules and Regulations.
Compliance with applicable governmental laws, rules and regulations, both in
letter and in spirit, is one of the foundations on which the Company's ethical
policies are built, and accordingly, each Senior Officer must strive to:
1. Understand and take responsibility to comply with the governmental rules and
regulations of the countries, states and communities in which the Company
operates, with particular focus on understanding the governmental rules and
regulations applicable to disclosures in the Company's periodic SEC reports.
2. If a federal, state, local, international or foreign law conflicts with a
policy in this Code, a Senior Officer must comply with the law; however, if a
local custom or policy in the territory in which a Senior Officer works
conflicts with this Code, then the Senior Officer must comply with this Code.
Any questions regarding such conflicts or the interpretation of policies
contained in this Code should be brought to the attention of the Audit Committee
or the General Counsel in order to determine the most appropriate course of
action.
IV. Reporting any Violations of this Code.
If a Senior Officer believes that actions have occurred, may be occurring or may
be about to occur that violate or would violate this Code, he or she must bring
the matter to the attention of the Company in accordance with the procedures
established under the Company's Complaint Procedures for Auditing and
Accounting, Internal Control Matters and Illegal or Unethical Behavior. Senior
Officers are encouraged to talk to the General Counsel or securities counsel to
the Company or the Audit Committee about observed illegal or unethical behavior
and, when in doubt, about the best course of action in a particular situation.
V. Remedial Action.
A violation of this Code will subject a Senior Officer to disciplinary action,
up to and including a discharge from the Company and, where appropriate, may
subject the Senior Officer to civil liability and criminal prosecution.
Adopted by the Board of Directors on December 11, 2003.
EXHIBIT A
Certification Regarding Code of Ethics
for CEO and Senior Financial Officers
Metrologic Instruments, Inc.
The undersigned hereby certifies that he or she has read and will abide
by the Code of Ethics for CEO and Senior Financial Officers (the "Code") dated
December 11, 2003, or as subsequently amended, and that he or she knows such
failure may constitute a violation of federal securities laws and regulations
which may subject him or her to civil liabilities and criminal penalties. The
undersigned acknowledges that he or she has read and understood the Code and
will abide by it. The undersigned further acknowledges that failure to observe
the provisions of the Code shall be a basis for dismissal for cause and/or
referral to appropriate authorities.
- -------------------------------------------------------
Name
- -------------------------------------------------------
Date
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Metrologic do Brasil Ltda., a Brazil corporation
Metrologic Asia (PTE) Ltd., a Singapore corporation
MTLG Investments Inc., a Delaware corporation
Metrologic Instruments GmbH, a German corporation
Metro (Suzhou) Technologies Co., Ltd., a China corporation
Metrologic Eria Iberica SL, a Spain corporation
Metrologic Italia S.r.l., an Italy corporation
Metrologic Eria France S.A., a France corporation
Metrologic Instruments UK Limited, a United Kingdom corporation
Adaptive Optics Associates, Inc., a Delaware corporation
Metrologic Japan Co. Ltd., a Japan corporation
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-89376) pertaining to the Metrologic Instruments, Inc. 1994 Incentive
Plan and the Registration Statement (Form S-8 No. 33-86670) pertaining to the
Metrologic Instruments, Inc. Employee Stock Purchase Plan of our report dated
February 12, 2004, with respect to the consolidated financial statements and
schedule of Metrologic Instruments, Inc. included in this Annual Report (Form
10-K) for the year ended December 31, 2003.
Philadelphia, Pennsylvania
March 15, 2004
Exhibit 31.1
CERTIFICATION
I, C. Harry Knowles, Chief Executive Officer of Metrologic
Instruments, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Metrologic
Instruments, Inc.;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we 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 annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this annual report based on such evaluation; and
c. disclosed in this annual report any change in the
registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize, and report financial information; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.
By: /s/C. Harry Knowles
---------------------------------
Name: C. Harry Knowles
Title: Chief Executive Officer
Date: March 16, 2004
Exhibit 31.2
CERTIFICATION
I, Kevin J. Bratton, Chief Financial Officer of Metrologic
Instruments, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Metrologic
Instruments, Inc.;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we 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 annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this annual report based on such evaluation; and
c. disclosed in this annual report any change in the
registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize, and report financial information; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.
By: /s/Kevin J. Bratton
----------------------------------
Name: Kevin J. Bratton
Title: Chief Financial Officer
Date: March 16, 2004
EXHIBIT 32.1
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 Annual Report of Metrologic
Instruments, Inc. (the "Company") on Form 10-K for the Year ending December 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
March 16, 2004
EXHIBIT 32.2
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 Annual Report of Metrologic
Instruments, Inc. (the "Company") on Form 10-K for the Year ending December 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
March 16, 2004