10-Q 1 q32003.txt FORM 10-Q SEPTEMBER 30, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _____ Commission file number 0-24712 Metrologic Instruments, Inc. (Exact name of registrant as specified in its charter) New Jersey 22-1866172 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 90 Coles Road, Blackwood, New Jersey 08012 (Address of principal executive offices) (Zip Code) (856) 228-8100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X As of November 5, 2003 there were 20,562,686 shares of Common Stock, $.01 par value per share, outstanding. METROLOGIC INSTRUMENTS, INC. INDEX Page No. Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 2003 (unaudited) and December 31, 2002 3 Condensed Consolidated Statements of Operations (unaudited) For the Three and Nine Months Ended September 30, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2003 and 2002 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 Item 4. Controls and Procedures 21 Part II - Other Information Item 1. Legal Proceedings 22 Item 2. Changes in Securities 22 Item 3. Defaults upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements Metrologic Instruments, Inc. Condensed Consolidated Balance Sheets (Amounts in thousands, except share data) September 30, December 31, Assets 2003 2002 -------- -------- (Unaudited) Current assets: Cash and cash equivalents $ 1,360 $ 1,202 Restricted cash - 1,000 Accounts receivable, net of allowance 21,812 20,412 Inventory 16,505 14,039 Deferred income taxes 1,189 268 Other current assets 1,759 2,258 -------- -------- Total current assets 42,625 39,179 Property, plant and equipment, net 12,058 12,600 Patents and trademarks, net of amortization 5,080 4,688 Holographic technology, net of amortization 281 368 Advance license fee, net of amortization 1,206 1,294 Goodwill 16,640 15,175 Deferred income taxes - 190 Other assets 310 758 -------- -------- Total assets $ 78,200 $ 74,252 ======== ======== Liabilities and shareholders' equity Current liabilities: Current portion of lines of credit $ 1,978 $ 1,347 Current portion of notes payable 2,124 4,708 Current portion of notes payable to officers 426 1,000 Accounts payable 6,363 8,719 Accrued expenses 12,921 9,389 Deferred contract revenue - 1,707 -------- -------- Total current liabilities 23,812 26,870 Lines of credit, net of current portion 1,366 - Notes payable, net of current portion 2,939 14,431 Notes payable to officers, net of current portion 3,336 - Deferred income taxes 598 - Other liabilities 4,187 3,480 Shareholders' equity: Preferred stock, $0.01 par value: 500,000 shares authorized; none issued - - Common stock, $0.01 par value: 30,000,000 shares authorized; 17,097,386 and 16,417,666 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively 171 164 Additional paid-in capital 20,477 17,579 Retained earnings 23,246 14,601 Accumulated other comprehensive loss (1,932) (2,873) --------- -------- Total shareholders' equity 41,962 29,471 --------- -------- Total liabilities and shareholders' equity $ 78,200 $ 74,252 ========= ======== See accompanying notes including Note 12 which contains a pro forma balance sheet reflecting proceeds of $56 million from the Company's equity offering that was consummated in October 2003. Metrologic Instruments, Inc. Condensed Consolidated Statements of Operations (Unaudited) (Amounts in thousands, except share and per share data) Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 Sales $32,587 $27,735 $96,309 $84,176 Cost of sales 18,803 17,101 56,352 54,009 ------- ------- ------- ------- Gross profit 13,784 10,634 39,957 30,167 Selling, general and administrative expenses 7,507 7,048 22,727 21,803 Research and development expenses 1,686 1,754 5,210 5,287 Severance costs 40 251 71 602 ------- ------- ------- ------- Operating income 4,551 1,581 11,949 2,475 Other income (expenses) Interest income 13 15 25 70 Interest expense (348) (668) (1,092) (2,235) Foreign currency transaction gain (loss) 184 (530) 339 (306) Gain on extinguishment of debt - - 2,200 - Other, net (114) (34) (824) 20 ------- ------- ------- ------- Total other (expenses) income (265) (1,149) 648 (2,451) ------- ------- ------- ------- Income before income tax provision 4,286 432 12,597 24 Income tax provision 1,630 164 3,952 9 ------- ------- ------- ------- Net income $ 2,656 $ 268 $ 8,645 $ 15 ======= ======= ======= ======= Basic income per share: Weighted average shares outstanding 16,995,066 16,402,737 16,664,168 16,396,614 Basic income per share $ 0.16 $ 0.02 $ 0.52 $ 0.00 Diluted income per share: Weighted average shares outstanding 16,995,066 16,402,737 16,664,168 16,396,614 Net effect of dilutive securities 2,129,804 7,572 1,583,688 2,526 Total shares outstanding used in computing diluted income per share 19,124,870 16,410,309 18,247,856 16,399,140 Diluted income per share $ 0.14 $ 0.02 $ 0.47 $ 0.00 See accompanying notes including Note 12 which contains a pro forma balance sheet reflecting proceeds of $56 million from the Company's equity offering that was consummated in October 2003. Metrologic Instruments, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands) Nine Months ended September 30, 2003 2002 -------- -------- Operating activities Net cash provided by operating activities $ 7,083 $12,304 Investing activities Restricted cash 1,000 2,200 Purchase of property, plant and equipment (1,166) (1,536) Patents and trademarks (677) (733) Purchase of minority interest in subsidiary (864) - ------- ------- Net cash provided used in investing activities (1,707) (69) Financing activities Proceeds from exercise of stock options and employee stock purchase plan 2,658 40 Principal payments on notes payable (13,789) (12,155) Proceeds from issuance of notes payable 4,141 105 Net proceeds from (payments on) lines of credit 2,014 (102) Capital lease payments (45) (131) Issuance of warrants 247 - Increase in deferred financing costs (110) - Net cash used in ------- ------- financing activities (4,884) (12,243) Effect of exchange rates on cash (334) 502 ------- ------- Net increase in cash and cash equivalents 158 494 Cash and cash equivalents at beginning of period 1,202 557 ------- ------- Cash and cash equivalents at end of period $ 1,360 $ 1,051 ======== ======= Supplemental Disclosure Cash paid for interest $ 1,365 $ 2,178 ======== ======= Cash paid for income taxes $ 1,962 $ 164 ======== ======= Noncash investing and financing activities: Equipment acquired through capital leases $ 287 $ - ======== ======= See accompanying notes including Note 12 which contains a pro forma balance sheet reflecting proceeds of $56 million from the Company's equity offering that was consummated in October 2003. METROLOGIC INSTRUMENTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data) 1. Business Metrologic Instruments, Inc. and its subsidiaries (collectively, the "Company") design, manufacture and market bar code scanning and high-speed automated data capture solutions using laser, holographic and vision-based technologies. The Company offers expertise in one-dimensional and two-dimensional bar code reading, optical character recognition, image lift, and parcel dimensioning and singulation detection for customers in retail, commercial, manufacturing, transportation and logistics, and postal and parcel delivery industries. Additionally, through its wholly-owned subsidiary, Adaptive Optics Associates, Inc. ("AOA"), the Company is engaged in developing, manufacturing, marketing and distributing custom optical systems which include precision laser beam delivery, high speed imaging control and data processing, industrial inspection, and scanning and dimensioning systems for the aerospace and defense industry in the United States and Canada. The Company's products are sold in more than 100 countries worldwide through the Company's sales, service and distribution offices located in North and South America, Europe and Asia. 2. Accounting Policies Interim Financial Information The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. The results of the interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The Condensed Consolidated Financial Statements and these Notes should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q and the Company's Registration Statement on Form S-3 filed on October 1, 2003, including the Consolidated Financial Statements and the Notes to Consolidated Financial Statements for the year ended December 31, 2002 contained therein. In October 2003, the Company sold 1,725,000 newly issued shares of its common stock in a public offering (see Note 12 - Subsequent Events). The accompanying financial statements do not reflect the impact of this public offering. The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year. Stock-Based Compensation The Company accounts for stock options under SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. At September 30, 2003, the Company had one stock-based employee compensation plan. The Company accounts for the plan under the recognition and measurement principles of APB No. 25, and related interpretations. Stock-based employee compensation costs are not reflected in net earnings, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation (in thousands, except per share amounts). Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income (loss): As reported $2,656 $ 268 $8,645 $ 15 Deduct: (total stock-based employee compensation expense determined under fair value based method, net of related taxes) (121) (208) (396) (365) ------ ------ ------ ------ Pro forma $2,535 $ 60 $8,249 $ (350) ====== ====== ====== ====== Net income (loss) per share: Basic: As reported $ 0.16 $ 0.02 $ 0.52 $ - Pro forma 0.15 - 0.50 (0.02) Diluted: As reported $ 0.14 $ 0.02 $ 0.47 $ - Pro forma 0.13 - 0.45 (0.02) The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2002; expected volatility of 90%; risk-free interest rate of 3.9%; and expected lives of 5 years. The estimated fair value of the options is amortized to expense over the options' vesting period. No options were granted during the nine months ended September 30, 2003. Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. 3. Stock Splits The Company effected a three-for-two stock split of its common stock through a fifty percent (50%) stock dividend paid on July 3, 2003 to shareholders of record at the close of business on June 23, 2003. The Company effected a two-for-one stock split of its common stock through a one hundred percent (100%) stock dividend paid on October 30, 2003 to shareholders of record at the close of business on October 20, 2003. The accompanying condensed consolidated financial statements have been restated to reflect the effects of both stock splits as if they has happened on January 1, 2002. 4. Accounts Receivable In 2002, Metrologic Instruments GmbH, the Company's German subsidiary, entered into a factoring agreement with a local bank to provide local financing on a non-recourse basis. The factoring charge ranges from .52% to .62% of the receivables assigned to the bank and outstanding advances bear interest at 6.75%. The following amounts due from factor relating to non-recourse factoring were included in accounts receivable: September 30, December 31, 2003 2002 ---- ---- Receivables assigned to factor $ 1,319 $1,645 Less advances from factor $(1,157) (1,091) ------- ------ Due from factor $ 162 $ 554 ======= ====== 5. Inventory Inventory consists of the following: September 30, 2003 December 31, 2002 ------------------ ------------------ Raw materials $ 5,639 $ 5,788 Work-in-process 2,813 1,865 Finished goods 8,053 6,386 ------ ------ 16,505 14,039 ------ ------ 6. Comprehensive Income The Company's total comprehensive income was as follows: Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income (loss) $ 2,656 $ 268 $ 8,645 $ 15 Other comprehensive income (loss): Change in equity due to foreign currency translation adjustments 128 (227) 941 901 ------- ------- ------- ------- Comprehensive income $ 2,784 $ 41 $ 9,586 $ 916 ======= ======= ======= ======= 7. Business Segment Information The Company generates its revenue from the sale of laser bar code scanners primarily to distributors, value-added resellers, original equipment manufacturers and directly to end users, in locations throughout the world. No individual customer accounted for 10% or more of revenues in the three-month and nine-month periods ended September 30, 2003 or 2002. The Company manages its business on a business segment basis dividing the business into two major segments: Industrial scanning and Optical; and Point of Sale ("POS")/Original Equipment Manufacturers ("OEM"). Sales were attributed to business segments as set forth in the following table. Industrial/ Total Optical POS/OEM Consolidated ------- --------- --------- Three months ended September 30, 2003: Sales $ 6,476 26,111 32,587 Income before provision for income taxes $ 417 3,869 4,286 Identifiable assets $ 8,471 46,522 54,993 Three months ended September 30, 2002: Sales $ 6,851 20,884 27,735 Income before provision for income taxes $ 270 162 432 Identifiable assets $ 9,174 44,950 54,124 Nine months ended September 30, 2003: Sales $17,009 79,300 96,309 Income (loss) before (benefit) provision for income taxes $ (113) 12,710 12,597 Identifiable assets $ 8,471 46,522 54,993 Nine months ended September 30, 2002 Sales $21,735 62,441 84,176 Income (loss) before (benefit) provision for income taxes $ (374) 398 24 Identifiable assets $ 9,174 44,950 54,124 8. Credit Facility On January 31, 2003, the Company executed an Amendment (the "Amendment") to the Amended and Restated Credit Agreement dated July 9, 2002. The Amendment, which extended the Amended and Restated Credit Agreement until January 31, 2006, provided for a $13,000 revolving credit facility and a $4,500 term loan. Principal payments on the term loan were $94 a month commencing in March 2003 with the balance due at maturity. The interest rates under the Amendment were prime plus .25% on borrowings under the revolving credit facility and prime plus .75% on the Term Loan. The Amendment contained various negative and positive covenants including minimum tangible net worth requirements and fixed charge coverage ratios. The security interest in the Company's assets and properties granted to the bank pursuant to the Credit Agreement remained in effect under the Amendment. In connection with the Amendment, the personal guarantees of C. Harry Knowles, Chairman and Chief Executive Officer, and his spouse, Janet Knowles, a Director and Vice President, Administration, were released. Outstanding borrowings under the revolving credit facility were $1,366 at September 30, 2003. All outstanding borrowings under the Amendment were paid in October 2003 and the Agreement was terminated. As a result, unamortized deferred financing costs of $86,000 will be recognized as a loss on extinguishment in the fourth quarter of 2003. Subordinated Debt In connection with the acquisition of AOA, the Company entered into Subordinated Promissory Notes ("Subordinated Debt") aggregating $11,000 with United Technologies Optical Systems, Inc. ("UTOS"), the former parent of AOA, with scheduled maturities of $9,000 in 2003 and $1,000 in 2004 and 2005. Interest rates were fixed at 10%. In January 2003, the Company and UTOS entered into a Payoff Agreement to accelerate the principal payments on the Subordinated Debt. In accordance with the Payoff Agreement, the Company paid UTOS $5,000 on January 31, 2003 and $3,800 on March 31, 2003 as payment in full of its obligation under the Subordinated Debt. Accordingly, the Company has recorded a $2,200 gain on the extinguishment of the Subordinated Debt in March 2003. In order to provide the Company with sufficient subordinated financing within the time period required to meet the terms of the Payoff Agreement which provided a $2,200 gain, in January 2003, the Company issued a $4,260 subordinated note to C. Harry Knowles, its Chairman and Chief Executive Officer, and his spouse, Janet H. Knowles, a Director and Vice President, Administration. The subordinated note bore interest at 10.0% and required 60 monthly principal payments of $36 with the balance of $2,130 due in January 2008. In connection with this note, the Company issued a common stock purchase warrant, expiring on January 31, 2013, to Mr. and Mrs. Knowles to purchase 195,000 shares of its common stock at an exercise price of $3.47 per share, which was the fair market value on the date of issuance. These warrants were valued at the time of issue at $247 in aggregate, and the resulting original issue discount will be amortized into interest expense over the life of the subordinated note. The subordinated note to Mr. and Mrs. Knowles was paid in full in October 2003 and the unamortized original issue discount of $214,000 will be recognized as a loss on extinguishment in the fourth quarter of 2003. 9. Recently Issued Accounting Standards In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." In addition to other technical provisions, this Statement rescinds FASB Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of tax. This provision is effective for fiscal years beginning after May 15, 2002, with early adoption permitted. In accordance with the provisions of SFAS 145, the Company has recorded the $2,200 gain on the extinguishment of the Subordinated Debt in Other Income in the Consolidated Statement of Operations for the nine months ended September 30, 2003. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. 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. The provisions of FIN 46, as amended, are effective for the first interim or annual period ending after December 15, 2003 for those variable interests held prior to February 1, 2003. The Company is currently evaluating what impact, if any, adoption of FIN 46 will have on its 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 FAS 150 did not have a material impact on the Company's consolidated financial position at September 30, 2003, or the consolidated results of operations or liquidity for the three months then ended. 10. Legal Matters Symbol Technologies, Inc. v. Metrologic On May 3, 2002, the Company was served with a lawsuit that was filed on April 12, 2002 by Symbol in the United States District Court for the Eastern District of New York alleging that the Company is in breach of the terms of the License Agreement between Symbol and the Company (the "Agreement"). The allegations of breach relate to the dispute between the parties as to which products are covered by the licenses under the Agreement. On May 30, 2002, the Company was served with an amended complaint in this action. The amended complaint also included new claims of patent infringement from the date of the alleged breach against the Company and C. Harry Knowles, the Company's Chairman and CEO. The amended complaint further included claims for injunctive relief and a claim of fraudulent transfer related to the transactions under the Amended Credit Agreement. The parties filed cross motions for summary judgment on the breach of contract claims. On March 31, 2003, the Court entered its decision on the parties' respective motions for summary judgment. In finding for the Company, the Court dismissed certain counts of Symbol's complaint, and granted the Company's motion to compel arbitration regarding certain matters. On April 9, 2003, Symbol voluntarily dismissed the remaining counts of the complaint and requested that the Court enter a final order in the case. The final order was entered on April 23, 2003. Symbol filed its notice of appeal in May 2003 with the Court of Appeals for the Second Circuit. The parties have filed their briefs with the Court and oral argument has been scheduled for December 16, 2003. Management is of the opinion that there are no legal claims against the Company that are expected to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 11. Guarantees The Company's borrowings under the Amendment were secured by a pledge of stock in certain significant subsidiaries owned by and guaranteed by one of its subsidiaries. The subsidiary would be required to perform under the guarantees in the event that the Company failed to make principal or interest payments under the Amendment. The Company's borrowings under the Amendment were $5,210 and $7,345 at September 30, 2003 and December 31, 2002, respectively. All outstanding borrowings under the Amendment were repaid in October 2003 and the agreement was terminated. If any subsidiary were to borrow under new credit arrangements, the Company may be required to provide a similar guarantee with respect to the subsidiary's borrowings. 12. Subsequent Events In October 2003, the Company sold 1,725,000 newly issued shares of its common stock in a public offering. Proceeds after deducting underwriting commissions were $56,166. The proceeds were used to repay all outstanding borrowings under the Amendment and the subordinated note to Mr. and Mrs. Knowles. The Company will also purchase its headquarters and manufacturing facility from Mr. and Mrs. Knowles during the quarter ending December 31, 2003 for $4,750, which is less than the values determined by two independent appraisals. The following proforma condensed consolidated balance sheet reflects the financial position of the Company as if the public offering of the Company's common stock had closed as of September 30, 2003 and the net proceeds were used to purchase $4,750 for the Company's Blackwood, New Jersey facility, repay $9,472 of bank and subordinated debt and write-off $300 of unamortized deferred financing costs and the unamortized original issue discount on warrants. Pro Forma Condensed Consolidated Balance Sheet September 30, 2003 (amounts in thousands) Assets Current assets: Cash and equivalents $ 42,090 Accounts receivable, net 21,812 Inventory 16,505 Other current assets 2,948 ---------- Total current assets 83,355 Property, plant and equipment, net 16,808 Goodwill and other intangible assets 23,207 Other assets 224 ---------- Total assets $ 123,594 ========== Liabilities and shareholders equity Current liabilities: Current portion of debt $ 2,477 Accounts payable 6,363 Accrued expenses 12,921 ---------- Total current liabilities 21,761 Long-term debt 220 Other liabilities 4,785 Shareholder's equity 96,828 ---------- Total liabilities and shareholder's equity $ 123,594 ========== Item 2. 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 United States 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 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; and (xiii) 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. General The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with our Condensed Consolidated Financial Statements and the related Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and the Notes to Consolidated Financial Statements for the year ended December 31, 2002 appearing in our Registration Statement on Form S-3 filed on October 1, 2003. The Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2003 and 2002 are unaudited. Metrologic Instruments, Inc. and its subsidiaries (collectively, "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. We believe we have been able to increase our market share in our point-of-sale, commercial and industrial markets by offering products with superior performance and features at price points that are extremely competitive with the products offered by others. Additionally, through our wholly-owned subsidiary, Adaptive Optics Associates, Inc. ("AOA"), we have broadened our product offering to include laser beam delivery and control products for semiconductor and fiber optic manufacturing equipment, wavefront sensor products and adaptive optics systems for certain government applications. AOA also adds significant capabilities and expertise in vision, image processing, systems integration, adaptive optics and high-end refractive optical disciplines. 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. Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ------------------- ------------------ (in Thousands) POS/OEM $ 26,111 $ 20,884 $ 79,300 $ 62,441 Industrial & Optical: Industrial 3,916 3,147 9,692 7,341 Optical 2,560 3,704 7,317 14,394 -------- -------- -------- -------- Total Industrial 6,476 6,851 17,009 21,735 -------- -------- -------- -------- Total Company $ 32,587 $ 27,735 $ 96,309 $ 84,176 ======== ======== ======== ======== Results of Operations Most of our product sales in Western Europe, Brazil and Asia are billed in foreign currencies and are subject to currency exchange rate fluctuations. Currently, a significant percentage of 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 such foreign currencies. We expect, however, that the manufacture of our point-of-sale ("POS") products in our Suzhou, China facility to increase in 2003, which will result in reduced labor costs in our POS scanners. In the three and nine months ended September 30, 2003, 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: Three Months Ended Nine Months Ended September 30, September 30, 2003 % 2002 % 2003 % 2002 % --------------------------- ------------------------------ ($ in Thousands) North America POS/OEM $ 7,903 24.3% $ 6,006 21.7% $23,989 25.0% $19,129 22.7% AOA 6,330 19.4% 6,821 24.5% 16,706 17.3% 21,437 25.5% Europe 12,288 37.7% 9,703 35.0% 39,885 41.4% 30,129 35.8% Rest of World 6,068 18.6% 5,205 18.8% 15,729 16.3% 13,481 16.0% ------- ------ ------- ------ ------- ------ ------- ------ Total $32,587 100.0% $27,735 100.0% $96,309 100.0% $84,176 100.0% ======= ====== ======= ====== ======= ====== ======= ====== Three Months Ended September 30, 2003 Compared with Three Months Ended September 30, 2002 Sales increased 17.5% to $32.6 million in the three months ended September 30, 2003 from $27.7 million in the three months ended September 30, 2002. Sales of our POS and original equipment manufacturers ("OEM") products increased by 25.0%, sales of industrial products increased by 24.4%, while sales of optical systems decreased by 30.9%. Approximately $1.5 million of the increase in POS/OEM sales resulted from the strengthening of the euro against the U.S. dollar in the third quarter of 2003. POS/OEM sales increased approximately $5.1 million due to increased unit sales of handheld scanners, principally to major retail customers. These factors were partially offset by a decrease of approximately $1.2 million resulting from lower average selling prices. The increase in industrial products sales is attributable to increased sales to a large systems integrator for use in a new automated parcel and package system for the U.S. Postal Service. The decrease in optical systems 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 the cancellation of certain purchase orders from a customer involved in the semiconductor manufacturing industry. Revenue from these customers was $3.0 million in the three months ended September 30, 2002 as compared with $1.3 million in 2003. 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 $18.4 million, or 56.3% of total sales, in the three months ended September 30, 2003 and $14.9 million, or 53.8% of total sales, in the three months ended September 30, 2002. The largest portion of the growth in international sales was from increased sales in Europe. The increase in European sales is attributable to increased unit volume plus the strengthening of the euro against the U.S. dollar. No individual customer accounted for 10.0% or more of sales in the three months ended September 30, 2003 or 2002. Cost of sales increased to $18.8 million in the three months ended September 30, 2003 from $17.1 million in the three months ended September 30, 2002. As a percentage of sales, cost of sales decreased from 61.7% in 2002 to 57.7% in 2003. The decrease in the percentage of cost of sales was due to the following: o The strengthening of the euro against the U.S. dollar, as discussed above, net of the effect of decreases in average selling prices. o Lower direct labor costs as a result of increased unit production in our Suzhou, China facility. o Decreased material costs due to engineering efforts to reduce bill of material costs. o More favorable product mix resulting from increased sales of certain more profitable handheld scanners in 2003. Selling, general and administrative ("SG&A") expenses increased 6.5% to $7.5 million in the three months ended September 30, 2003 from $7.0 million for the three months ended September 30, 2002. As a percentage of sales, SG&A expenses decreased from 25.4% of sales in the three months ended September 30, 2002 to 23.0% of sales in the corresponding period in 2003. 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, and increased incentive compensation expense. Severance costs of $251,000 in 2002 were due to workforce reductions in August and September 2002. Other income/expense reflects net other expense of $265,000 in 2003 compared with net other expense of $1.1 million in 2002. The decrease in net other expense is due to lower net interest expense as a result of lower outstanding borrowings plus lower interest rates in 2003, and foreign currency transaction losses of $530,000 in 2002 attributable to the weakening value of the Brazilian real in relation to the U.S. dollar. Net income was $2.7 million, or $0.14 per diluted share for the three months ended September 30, 2003 compared with net income of $268,000 or $0.02 per diluted share in 2002. Net income reflects a 38% effective tax rate for both periods. The decrease in the value of the U.S. dollar relative to other foreign currencies favorably affected diluted earnings per share by approximately $0.04 per diluted share as compared to the corresponding period in 2002. Nine Months Ended September 30, 2003 Compared with Nine Months Ended September 30, 2002 Sales increased 14.4% to $96.3 million in the nine months ended September 30, 2003 from $84.2 million in the nine months ended September 30, 2002. Sales of our point-of-sale and OEM products increased by 27.0%, sales of industrial products increased by 32.0%, while sales of optical systems decreased by 49.2%. Approximately $5.8 million of the increase in POS/OEM sales resulted from the strengthening of the euro against the U.S. dollar in the first nine months of 2003. POS/OEM sales increased approximately $16.5 million due to increased unit sales of handheld scanners and portable data terminals principally to major retail customers. These factors were partially offset by a decrease of approximately $5.2 million resulting from lower average selling prices. The increase in industrial products sales is attributable to increased sales to a large systems integrator for use in a new automated parcel and package system for the U.S. Postal Service. The decrease in optical systems 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 $12.1 million including a $4.6 million negotiated settlement for cancellation of the purchase orders by the customer in the first nine months of 2002 as compared with $4.4 million in 2003. 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 $55.6 million, or 57.7% of total sales, in the nine months ended September 30, 2003 and $43.6 million or 51.8% of total sales, in the nine months ended September 30, 2002. The largest portion of the growth in international sales was from increased sales in Europe. The increase in European sales is attributable to the strengthening of the euro against the U.S. dollar plus increased unit volume. No individual customer accounted for 10% or more of sales in the nine months ended September 30, 2003 or 2002. Cost of sales increased by $2.3 million to $56.3 million for the nine months ended September 30, 2003 from $54.0 million for the corresponding period in 2002. As a percentage of sales, cost of sales was 58.5% in 2003 compared with 64.2% in 2002. The decrease in the percentage of cost of sales was due to the following: o The strengthening of the euro against the U.S. dollar, as discussed above, net of the effect of decreases in average selling prices. o Decreased direct labor costs as a result of increased unit production in our Suzhou, China facility and workforce reductions in March and April 2002. o Decreased material costs due to engineering efforts to reduce bill of material costs. 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 4.2% to $22.7 million for the nine months ended September 30, 2003 from $21.8 million for the nine months ended September 30, 2002. SG&A expenses in 2002 included $732,000 of non-recurring expenses incurred prior to the finalization of the Amended and Restated Credit Agreement that was completed on July 9, 2002. Excluding these expenses, SG&A expenses were $21.1 million for the nine months ended September 30, 2002. As a percentage of sales, SG&A expenses were 23.6% of sales in 2003 compared with 24.2% (excluding the non-recurring expenses of $732,000) 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 a $548,000 increase in incentive compensation expense. These increases were partially offset by lower personnel costs resulting from workforce reductions in March, April, August and September 2002. R&D expense remained relatively constant in dollars in the nine months ended September 30, 2003 and 2002, although as a percentage of sales, R&D expenses were 5.4% of sales in 2003 compared with 6.3% in 2002. Severance costs were $602,000 in the nine months ended September 30, 2002. The severance costs in 2002 were due to workforce reductions in March, April, August and September 2002. Other income/expense reflects net other income of $648,000 in the nine months ended September 30, 2003 compared with net other expense of $2.5 million in the corresponding period in 2002. Net other income in 2003 included a $2.2 million gain on the early extinguishment of debt in connection with early repayment of subordinated debt related to the acquisition of AOA. This debt was repaid in full in the first quarter of 2003. Net interest expense decreased from $2.2 million to $1.1 million due to lower outstanding borrowings and lower interest rates in 2003. Other expenses in 2003 include costs of $463,000 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 the early extinguishment of debt. Net income was $8.6 million, or $0.47 per diluted share, for the nine months ended September 30, 2003 compared with net income of $15,000, or $0.00 per diluted share, in 2002. Net income reflects a 31.4% effective income tax rate for the nine months ended September 30, 2003 and a 38.0% effective tax rate in 2002. The decrease in the effective tax rate was a result of 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. The decrease in the value of the U.S. dollar relative to other foreign currencies favorably affected diluted earnings per share by approximately $0.16 per diluted share as compared to the corresponding period in 2002. Inflation and Seasonality Inflation and seasonality have not had a material impact on our results of operations. However, our sales are typically impacted by fluctuations in seasonal demand from European customers in the quarter ending September 30 for quarterly results of operations. See Supplementary Data following the Notes to our Consolidated Financial Statements included in our Registration Statement on Form S-3 filed on October 1, 2003. Liquidity and Capital Resources Operating activities Net cash provided from operations was $7.1 million and $12.3 million for the nine-month periods ended September 30, 2003 and 2002, respectively. Net cash provided by operating activities for the nine months ended September 30, 2003 resulted primarily from (i) net income of $8.6 million plus (ii) $2.6 million of depreciation and amortization and (iii) a $3.0 million increase in accrued expenses offset by (iv) a $2.2 million gain on early extinguishment of debt (v) increases of $600,000 in accounts receivable (vi) $1.9 million in inventory and (vii) a $2.5 million decrease in accounts payable. Our working capital increased $6.5 million or 52.8% to $18.8 million as of September 30, 2003 from $12.3 million as of December 31, 2002 as a result of our profitable operations, reduction in accounts receivable and the debt restructuring discussed below. The significant balance sheet changes included an (i) increase in inventory of $2.5 million as a result of a buildup in the inventory levels resulting from longer delivery cycle of finished goods from the Suzhou, China facility as we increase our production volume in Suzhou, (ii) increase of $1.4 million in accounts receivable as a result of increased revenue, (iii) decrease of $2.9 million in the current portion of notes payable as a result of payment of subordinated promissory notes to UTOS, (iv) decrease of $1.7 million in deferred contract revenue as a result of the recognition of revenue for services performed on a specific contract that was recognized as deferred contract revenue in 2002 and (v) a decrease of $1.0 million of cash previously restricted according to the January 31, 2003 Amendment to the Amended Credit Agreement. Investing activities Cash used in investing activities was $1.7 million and $69,000 for the nine-month periods ended September 30, 2003 and 2002, respectively. The increase in cash used by investing activities is primarily due to the first installment of $864,000 to purchase the 49% minority interest of Metrologic Eria Iberica and the release of $1.0 million of cash previously restricted according to the January 31, 2003 Amendment to the Amended Credit Agreement. The above increases are offset by a $400,000 reduction in cash used for property, plant and equipment purchases. The credit facility and the subsequent amendments and restructuring are more fully described below under outstanding debt and financing arrangements. Financing activities Cash used in financing activities was $4.9 million and $12.2 million for the nine-month periods ended September 30, 2003 and 2002, respectively. The decrease in cash used by financing activities is primarily due to proceeds of (i) $4.1 million from the issuance of notes payable, (ii) $2.0 million from line of credit borrowings and (iii) $2.7 million from the exercise of stock options and employee stock purchase plan. The above decreases are offset by additional principal payments of $1.6 million on notes payable. In October 2003, the Company sold 1,725,000 newly issued shares of its common stock in a public offering. Proceeds after deducting underwriting commissions were $56.2 million. The proceeds were used to repay all outstanding borrowings under the Amended Credit Agreement and the subordinated note to Mr. and Mrs. Knowles. The Company will also purchase its Blackwood, New Jersey headquarters and manufacturing facility from Mr. and Mrs. Knowles during the quarter ending December 31, 2003 for $4.75 million, which is less than the values determined by two independent appraisals. Outstanding debt and financing arrangements 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 will be recognized as a loss on extinguishment 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 will be recognized as a loss on extinguishment in the fourth quarter of 2003. The Board engaged Janney Montgomery Scott LLC ("JMS") to assist it in connection with this transaction. Further, the disinterested Board members concluded that the subordinated debt obtained from Mr. and Mrs. Knowles was on terms at least as favorable to us as could have been obtained from independent third parties with respect to interest rate, warrants and payment terms. William Rulon-Miller, a Director of the Company, is Senior Vice President of JMS. JMS received a fee of $225,000 for its work in connection with the Amendment and the subordinated debt. The subordinated note to Mr. and Mrs. Knowles was paid in full in October 2003. In addition to the revolving credit facility the Company entered into recourse factoring discounting agreements with various banks in Europe. At September 30, 2003, $1,978 was outstanding under such agreements. 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 have selectively entered into derivative financial instruments to offset its exposure to foreign currency risks. Derivative financial instruments may include (i) foreign currency forward exchange contracts with its primary bank for periods not exceeding six months, which partially hedge sales to 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 September 30, 2003. Acquisition of Interests in Joint Ventures Our 51% joint venture interests in Metrologic Eria Iberica and Metrologic Eria France contain options for us to purchase the remaining 49% minority interests. The purchase 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. The default minimum for Metrologic Eria France is 2.9 million euros. In August 2003, we entered into an agreement to purchase the 49% minority interest of Metrologic Eria Iberica for approximately 5.9 million euros, or $6.8 million at the exchange rate on September 30, 2003, over three years commencing in August 2003. In August 2003, we purchased 5.76% of Metrologic Eria Iberica for $790,000. Critical Accounting Policies For a discussion of our critical accounting policies and use of estimates, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Registration Statement on Form S-3 filed on August 1, 2003. The only change in critical accounting policies during the three or nine month periods ended September 30, 2003 is the adoption of SFAS 145 during the first quarter of 2003, and the adoption of SFAS 150 during the third quarter of 2003. Disclosures about Contractual Obligations and Commercial Commitments(1) Less than 1 1-3 4-5 After Contractual Obligations Total Year Years Years 5 Years ----------------------- ----- ---- ----- ----- ----- Long-Term Debt 8,506 2,435 4,013 2,058 - Capital Lease Obligations 319 115 204 - - Operating Leases(1) 13,361 2,457 5,690 1,421 3,793 Obligation to purchase minority interest in joint venture 5,974 2,257 3,717 - - --------- ------- -------- ------- --------- Total Contractual Cash Obligations $ 28,160 $ 7,264 $ 13,624 $3,479 $ 3,793 ========= ======= ======== ====== ======== Total Less Amounts than 1 1-3 4-5 Over 5 Other Commercial Commitments Committed Year Years Years Years ---------------------------- --------- ---- ----- ----- ----- Revolving Credit Facility $ 3,344 $1,978 $1,366 $ - $ - ======== ====== ====== ===== ===== (1)Based on information as of September 30, 2003 except information regarding operating leases, which is as of December 31, 2002. Item 3- Quantitative and Qualitative Disclosures about Market Risk The information contained in Quantitative and Qualitative Disclosures about Market Risk contained in our Registration Statement on Form S-3 filed on October 1, 2003 is hereby incorporated herein by reference. Item 4- Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures The Company's management, with the participation of the Company's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer concluded that the Company's disclosure controls and procedures as of the end of the period covered by this report were designed and were functioning effectively to ensure that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. (b) Change in Internal Control over Financial Reporting No change in the Company's internal control over financial reporting occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings We are currently involved in matters of litigation arising in the normal course of business as well as the matters described below. The information below updates disclosure contained in prior periodic reports. Management is of the opinion that there are no legal claims against us, which are expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows. A. Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research Foundation, Limited Partnerships On September 25, 2002, the District Court issued a trial order allocating thirty-four (34) days for the trial on this matter commencing November 18, 2002. The trial was commenced on that date and continued through January 17, 2003. At the conclusion of the trial, the parties submitted a joint post-trial brief on June 30, 2003. It is expected that the judge will issue a final ruling within the next several months, but no specific date for a ruling has been set. B. Metrologic v. PSC Inc. On November 22, 2002, PSC filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Court issued an automatic stay in this case while the bankruptcy is pending. The Court lifted the stay on July 18, 2003, and the Court issued a decision on the Markman hearing entering its ruling on the interpretation of the claims in suit. It is expected that the parties will refile their motions for summary judgment during the next several months. C. Symbol Technologies, Inc. v. Metrologic On March 31, 2003, the Court entered its decision on the parties' respective motions for summary judgment. In finding for us, the Court dismissed certain counts of Symbol's complaint, and granted us motion to compel arbitration regarding certain matters. On April 9, 2003, Symbol voluntarily dismissed the remaining counts of the complaint and requested that the Court enter a final order in the case. The final order was entered on April 16, 2003. Symbol filed its notice of appeal in May 2003 with the Court of Appeals for the Second Circuit. The parties have filed their briefs with the Court and oral argument has been scheduled for December 16, 2003. D. Metrologic v. Symbol Technologies, Inc. On June 18, 2003, we filed suit against Symbol Technologies, Inc. in the U.S. District Court for the District of New Jersey with claims for patent infringement of certain of our patents by at least two (2) Symbol products. The complaint also contains a claim for breach of the 1996 Cross License Agreement between the parties (the "Agreement"). Symbol's answer to the complaint, filed on July 30, 2003, included counterclaims requesting that a declaratory judgment be entered that the patents in suit are invalid, or are not infringed by Symbol and that Symbol is not in breach of the Agreement. The case is now in the early stages of discovery. Item 2. Changes in Securities Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3.1 Certificate of Amendment to the Certificate of Incorporation of Metrologic Instruments, Inc. dated October 20, 2003 effecting the two for one stock split. 31.1 Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") executed by the Chief Executive Officer of the Company. 31.2 Certification pursuant to Rule 13a-14(a) of the Exchange Act executed by the President and Chief Operating Officer of the Company. 31.3 Certification pursuant to Rule 13a-14(a) of the Exchange Act executed by the Chief Financial Officer of the Company. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the Chief Executive Officer of the Company. 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the President and Chief Operating Officer of the Company. 32.3 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the Chief Financial Officer of the Company. (b) Reports on Form 8-K. On July 3, 2003, we filed a Current Report on Form 8-K to furnish certain information pursuant to Item 12 of Form 8-K regarding our Results of Operations and Financial Condition. On July 14, 2003, we filed a Current Report on Form 8-K pursuant to Item 5 to report the Company's intent to offer up to 1.5 million newly issued shares of common stock in a public offering. On July 30, 2003, we filed a Current Report on Form 8-K to furnish certain information pursuant to Item 12 of Form 8-K regarding our Results of Operations and Financial Condition. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. METROLOGIC INSTRUMENTS, INC. Date: November 14, 2003 ----------------------- By:/s/C. Harry Knowles ---------------------------------------- C. Harry Knowles Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: November 14, 2003 ----------------------- By:/s/Thomas E. Mills IV ---------------------------------------- Thomas E. Mills IV President and Chief Operating Officer Date: November 14, 2003 ----------------------- By:/s/Kevin J. Bratton ---------------------------------------- Kevin J. Bratton Chief Financial Officer (Principal Financial and Accounting Officer) Exhibit Index Page Number 3.1 Certificate of Amendment to the Certificate of Incorporation of Metrologic Instruments, Inc. dated October 20, 2003 effecting the two for one stock split. 31.1 Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") executed by the Chief Executive Officer of the Company. 24 31.2 Certification pursuant to Rule 13a-14(a) of the Exchange Act executed by the President and Chief Operating Officer of the Company. 25 31.3 Certification pursuant to Rule 13a-14(a) of the Exchange Act executed by the Chief Financial Officer of the Company. 26 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the Chief Executive Officer of the Company. 27 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the President and Chief Operating Officer of the Company. 28 32.3 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the Chief Financial Officer of the Company. 29 EXHIBIT 3.1 NEW JERSEY DEPARTMENT OF STATE DIVISION OF COMMERCIAL RECORDING CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF METROLOGIC INSTRUMENTS, INC. Pursuant to the provisions of Section 14A:7-15.1, Corporations, General, of the New Jersey Statutes, the undersigned corporation executes the following Certificate of Amendment to its Certificate of Incorporation: 1. The name of the Corporation is: Metrologic Instruments, Inc. 2. The following amendment (the "Amendment") to the Certificate of Incorporation was approved by the directors of the corporation on the 7th day of October, 2003: RESOLVED, that Article FOURTH, paragraph (a) of the Corporation's Certificate of Incorporation be amended to read as follows: "(a) 30,000,000 shares of Common Stock with a par value of $.01 per share; and" 3. The Amendment to the Certificate of Incorporation will not adversely affect the rights or preferences of the holders of outstanding shares of any class or series of the Corporation and will not result in the percentage of authorized shares of the Corporation that remains unissued after the share dividend exceeding the percentage of authorized shares that was unissued before the share dividend. 4. All shares of the Corporation's Common Stock issued and outstanding on the date (the "Effective Date") this Amendment is filed with the New Jersey Department of State and all shares of Common Stock reserved for issuance but unissued pursuant to any Corporation stock option plan, other employee benefit plan or security convertible into Common Stock on the Effective Date shall be entitled to the dividend (collectively, the "Shares"). The Corporation shall issue two shares of Common Stock for each such Share. 5. The dividend shall be payable on October 30, 2003. METROLOGIC INSTRUMENTS, INC. By: /s/ C. H. Knowles ---------------------------- Name: C. Harry Knowles Title: Chief Executive Officer Dated this 20th day of October, 2003 May be executed by the Chairman of the Board, or the President, or a Vice President of the Corporation. CERTIFICATION Exhibit 31.1 I, C. Harry Knowles, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Metrologic Instruments, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors; (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/C. Harry Knowles ------------------------ CERTIFICATION Exhibit 31.2 I, Thomas E. Mills IV, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Metrologic Instruments, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors; (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/Thomas E. Mills IV --------------------- CERTIFICATION Exhibit 31.3 I, Kevin Bratton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Metrologic Instruments, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors; (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/Kevin J. Bratton ---------------------- EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Metrologic Instruments, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, C. Harry Knowles, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/C. Harry Knowles ------------------------------------ C. Harry Knowles Chief Executive Officer November 14, 2003 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Metrologic Instruments, Inc. and will be retained by Metrologic Instruments, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Metrologic Instruments, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas E. Mills IV, President and Chief Operating Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/Thomas E. Mills IV ------------------------------------ Thomas E. Mills IV President and Chief Operating Officer November 14, 2003 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Metrologic Instruments, Inc. and will be retained by Metrologic Instruments, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EXHIBIT 32.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Metrologic Instruments, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin J. Bratton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/Kevin J. Bratton ------------------------------------ Kevin J. Bratton Chief Financial Officer November 14, 2003 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Metrologic Instruments, Inc. and will be retained by Metrologic Instruments, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.