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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 2