-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NvBx/ROx/aw/NWLMTi3YXsRvbRp6MckTwkDLUt2886MTtdMTOsBxa6bVDamw9ycT UKnsuyyitD8lBmCn8rXM3g== 0000815910-05-000061.txt : 20051108 0000815910-05-000061.hdr.sgml : 20051108 20051108164718 ACCESSION NUMBER: 0000815910-05-000061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051108 DATE AS OF CHANGE: 20051108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METROLOGIC INSTRUMENTS INC CENTRAL INDEX KEY: 0000815910 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 221866172 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24712 FILM NUMBER: 051186791 BUSINESS ADDRESS: STREET 1: COLES ROAD AT RTE 42 CITY: BLACKWOOD STATE: NJ ZIP: 08012 BUSINESS PHONE: 609-228-8100 MAIL ADDRESS: STREET 1: COLES ROAD ROUTE 42 CITY: BLACKWOOD STATE: NJ ZIP: 08012 10-Q 1 q32005.txt FOR THE PERIOD ENDED SEPTEMBER 30, 2005 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, 2005 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 of (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 X No __ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X As of November 1, 2005, there were 22,248,171 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 - September 30, 2005 (unaudited) and December 31, 2004 3 Condensed Consolidated Statements of Operations (unaudited) -Three and Nine Months Ended September 30, 2005 and 2004 4 Condensed Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2005 and 2004 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24 Item 4. Controls and Procedures 24 Part II - Other Information Item 1. Legal Proceedings 25 Item 6. Exhibits 26 Signatures 27 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Metrologic Instruments, Inc. Condensed Consolidated Balance Sheets (amounts in thousands except share data) September 30, December 31, 2005 2004 --------- --------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 72,168 $ 64,715 Accounts receivable, net of allowances of $736 and $544, respectively 43,556 35,153 Inventory, net 24,260 23,865 Deferred income taxes 692 692 Other current assets 5,414 3,677 --------- --------- Total current assets 146,090 128,102 Property, plant and equipment, net 19,951 19,468 Goodwill 25,157 24,607 Computer software, net 9,546 11,221 Other intangibles, net 8,451 7,634 Deferred income taxes 1,321 1,332 Other assets 240 163 --------- --------- Total assets $ 210,756 $ 192,527 ========= ========= Liabilities and shareholders' equity Current liabilities: Lines of credit $ 10,791 $ 14,138 Current portion of notes payable 8,990 2,127 Accounts payable 9,069 10,734 Accrued expenses 19,067 16,278 Deferred contract revenue 565 1,507 --------- --------- Total current liabilities 48,482 44,784 Notes payable, net of current portion 7 2,015 Deferred income taxes 5,055 5,055 Other liabilities 2,074 2,657 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; 22,234,633 and 21,782,276 shares issued and outstanding on September 30, 2005 and December 31, 2004, respectively 222 218 Additional paid-in capital 88,952 87,500 Retained earnings 67,416 51,162 Accumulated other comprehensive loss (1,452) (864) ---------- --------- Total shareholders' equity 155,138 138,016 ---------- --------- Total liabilities and shareholders' equity $ 210,756 $ 192,527 ========== ========= See accompanying notes. 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, 2005 2004 2005 2004 ---- ---- ---- ---- Sales $ 54,005 $ 44,156 $ 149,460 $ 124,846 Cost of sales 30,341 24,088 84,118 66,886 --------- ---------- ---------- ---------- Gross profit 23,664 20,068 65,342 57,960 Selling, general and administrative expenses 11,423 10,997 34,957 29,470 Research and development expenses 2,354 1,824 6,524 5,671 ---------- ---------- ---------- ---------- Operating income 9,887 7,247 23,861 22,819 Other income (expenses) Interest income 410 170 1,111 418 Interest expense (287) (107) (854) (320) Foreign currency transaction gain (loss) (183) 331 (909) (135) Litigation settlement 2,250 - 2,250 - Other expense, net (46) (89) (62) (248) ---------- ---------- ---------- ---------- Total other income (expenses) 2,144 305 1,536 (285) ---------- ---------- ---------- ---------- Income before provision for income taxes 12,031 7,552 25,397 22,534 Provision for income taxes 4,331 2,870 9,143 8,563 ---------- ---------- ---------- ---------- Net income $ 7,700 $ 4,682 $ 16,254 $ 13,971 ========== ========== ========== ========== Basic earnings per share: Weighted average shares outstanding 22,202,085 21,554,724 22,081,901 21,403,037 ========== ========== ========== ========== Basic earnings per share $ 0.35 $ 0.22 $ 0.74 $ 0.65 ========== ========== ========== ========== Diluted earnings per share: Weighted average shares outstanding 22,202,085 21,554,724 22,081,901 21,403,037 Net effect of dilutive securities 900,935 1,393,028 1,019,128 1,553,221 ---------- ---------- --------- ---------- Total shares outstanding used in computing diluted earnings per share 23,103,020 22,947,752 23,101,029 22,956,258 ========== ========== ========== ========== Diluted earnings per share $ 0.33 $ 0.20 $ 0.70 $ 0.61 ========== ========== ========== ========== See accompanying notes. Metrologic Instruments, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (amounts in thousands) Nine Months Ended September 30, 2005 2004 -------- -------- Operating activities Net cash provided by operating activities $ 8,475 $13,937 Investing activities Payment for acquired business - (9,100) Purchase of property, plant and equipment (3,203) (3,742) Purchase of minority interest in subsidiary (2,309) (6,139) Patents and trademarks (979) (839) Proceeds from sale of property 79 43 ------- ------- Net cash used in investing activities (6,412) (19,777) Financing activities Proceeds from exercise of stock options and employee stock purchase plan 1,456 2,598 Net borrowings (repayments) on lines of credit 4,269 (325) Principal payments on notes payable (1,658) (142) Capital lease payments (107) (102) Net cash provided by ------- ------- financing activities 3,960 2,029 Effect of exchange rates on cash 1,430 (148) ------- ------- Net increase (decrease) in cash and cash equivalents 7,453 (3,959) Cash and cash equivalents at beginning of period 64,715 48,817 ------- ------- Cash and cash equivalents at end of period $ 72,168 $44,858 ======== ======= Supplemental Disclosure: Cash paid for interest $ 658 $ 194 ======== ======= Cash paid for income taxes $ 5,027 $ 2,705 ======== ======= See accompanying notes. METROLOGIC INSTRUMENTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 (amounts in thousands except per share data) (Unaudited) 1. Business Metrologic Instruments, Inc. and its subsidiaries (collectively, the "Company") design, manufacture and market bar code scanning and high-speed automated data capture solutions using laser, holographic and imaging-based technologies. The Company offers expertise in one-dimensional and two-dimensional bar code reading, portable data collection, 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 electro-optical and opto-mechanical systems which include wavefront correction, industrial inspection, and scanning and dimensioning systems for commercial and government customers. The Company's products are sold in more than 110 countries worldwide through the Company's sales, service and distribution offices located in North and South America, Europe and Asia. 2. Accounting Policies Interim Financial Information The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. The results of the interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The Condensed Consolidated Financial Statements and these Notes should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2004, including the Consolidated Financial Statements and the Notes to Consolidated Financial Statements for the year ended December 31, 2004 contained therein. Stock-Based Compensation The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for stock options. Under APB 25, if the exercise price of the Company's stock options equals or exceeds the market price of the underlying common stock on the date of grant, no compensation expense is recognized. Had compensation expense for the Company's stock option plan been determined based upon the fair value at the grant date using the Black-Scholes pricing model prescribed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," the Company's net income and earnings per share would be as follows: Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ------- ------- ------- ------- Net income: As reported $ 7,700 $ 4,682 $16,254 $13,971 Deduct: (total stock-based employee compensation expense determined under fair value based method, net of related taxes) (701) (166) (2,166) (469) ------- ------- ------- ------- Pro forma $ 6,999 $ 4,516 $14,088 $13,502 ======= ======= ======= ======= Earnings per share: Basic: As reported $ 0.35 $ 0.22 $ 0.74 $ 0.65 Pro forma 0.32 0.21 0.64 0.63 Diluted: As reported $ 0.33 $ 0.20 $ 0.70 $ 0.61 Pro forma 0.30 0.20 0.61 0.59 Use of Estimates The preparation of the financial statements in conformity with U.S. generally accepted accounting principles 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. Inventory Inventory consists of the following: September 30, 2005 December 31, 2004 ------------------ ------------------ Raw materials $ 8,315 $ 7,534 Work-in-process 3,216 2,320 Finished goods 12,729 14,011 -------- -------- Total $ 24,260 $ 23,865 -------- -------- 4. Comprehensive Income The Company's total comprehensive income was as follows: Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ---- ---- ---- ---- Net income $ 7,700 $ 4,682 $16,254 $13,971 Other comprehensive income (loss): Change in equity due to foreign currency translation adjustments, net 610 107 (588) (124) ------- ------- -------- ------- Comprehensive income $ 8,310 $ 4,789 $ 15,666 $13,847 ======= ======= ======== ======= 5. Goodwill and Other Intangible Assets Goodwill The changes in the net carrying amount of goodwill for the nine months ended September 30, 2005 consist of the following: Industrial Data Automation/ Capture and Optical Collection Systems Total --------- ---------- --------- Balance as of January 1, 2005 $ 13,929 $ 10,678 $ 24,607 Purchase of minority interest in subsidiaries 1,736 - 1,736 Currency translation adjustments (1,186) - (1,186) --------- --------- --------- Balance as of September 30, 2005 $ 14,479 $ 10,678 $ 25,157 ========= ========= ========= Other Intangibles The Company had identifiable intangible assets with a net book value of approximately $18,000 and $18,900 as of September 30, 2005 and December 31, 2004, respectively. The following table reflects the components of identifiable intangible assets: September 30, 2005 December 31, 2004 --------------------- ---------------------- Amortizable Gross Gross Life Carrying Accumulated Carrying Accumulated (years) Amount Amortization Amount Amortization ----------- --------------------- ---------------------- Computer software 5 11,920 (2,374) 11,810 (589) Patents and trademarks 17 8,989 (2,770) 8,197 (2,400) Holographic technology 10 1,082 (1,034) 1,082 (946) License agreements 17 2,750 (1,033) 2,000 (941) Covenants not to compete 3 700 (233) 700 (58) ------ ------ ------ ------ Total 25,441 (7,444) 23,789 (4,934) ====== ====== ====== ====== The Company has determined that the lives previously assigned to these finite-lived assets are still appropriate and has recorded $2,510 and $499 of amortization expense for the nine months ended September 30, 2005 and 2004, respectively. 6. Business Segment Information The Company generates its revenue from the sale of laser and imaging 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, 2005 or 2004. The Company manages its business on a business segment basis dividing the business into two major segments: Data Capture and Collection and Industrial Automation/Optical Systems. As a result of the growth of our product line, service offerings and geographic reach, our addressable markets and the customer base have grown. Examples include increased sales of our handheld mobile computer, emerging wireless applications and the introduction of handheld imaging products. Accordingly, in December 2004, we adopted the segment title "Data Capture and Collection" to more accurately reflect the suite of products and services offered within the segment historically entitled "POS/OEM". The phrase Data Capture is fairly ubiquitous within our industry. We believe this modification better represents the Company's offerings to its customers and shareholders and better positions us to grow in accordance with our strategic plan. In December 2004 we also renamed our historical "Industrial/Optical Systems" segment to "Industrial Automation / Optical Systems" to better reflect the products and services we offer to our customer base in our industrial markets. Additionally, we believe there is benefit to differentiating the more complex systems sold into this market from certain of our Data Capture and Collection products that may be sold to similar customers via our worldwide distribution channels. Operating data for the three-month and nine-month periods ended September 30, 2005 and 2004 were as follows: Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ---- ---- ---- ---- Business segment net sales: Data Capture and Collection $ 43,962 34,553 119,618 97,742 Industrial Automation/Optical Systems 10,043 9,603 29,842 27,104 --------------------------------------- Total 54,005 44,156 149,460 124,846 --------------------------------------- Business segment gross profit: Data Capture and Collection $ 20,511 17,343 56,869 49,962 Industrial Automation/Optical Systems 3,153 2,725 8,473 7,998 --------------------------------------- Total 23,664 20,068 65,342 57,960 --------------------------------------- Business segment operating income: Data Capture and Collection $ 8,905 6,220 21,734 19,736 Industrial Automation/Optical Systems 982 1,027 2,127 3,083 --------------------------------------- Total 9,887 7,247 23,861 22,819 --------------------------------------- Total other income (expenses) $ 2,144 305 1,536 (285) --------------------------------------- Income before income taxes $ 12,031 7,552 25,397 22,534 --------------------------------------- 7. Acquisitions Omniplanar, Inc. On September 24, 2004, the Company acquired 100% of the common stock of Omniplanar, Inc. ("Omniplanar"), an imaging software company, for $12,851, at present value, including acquisition costs and assumed liabilities. The Company paid $9,050 at closing and $1,950 during the nine months ended September 30, 2005. The Company will pay an additional $1,950 in March 2006. Omniplanar supplies a complete package of bar code reading software for 2D imaging for fixed position, conveyor belt and hand held readers which can be optimized for specific hardware applications. The acquisition of Omniplanar represents a significant addition to the Company's technology portfolio. The Company has licensed the SwiftDecoder software since the year 2000 for use in its iQ(R) line of industrial vision-based products. The Company is currently making use of this software's unique decoding ability in other products as well. The assets acquired have been recorded at their estimated fair values. The consolidated statement of operations includes the results of Omniplanar for the nine months ended September 30, 2005. The results of operations for Omniplanar have been included in the Industrial Automation/Optical Systems business segment. The pro forma results of operations have not been provided because the effects were not material. In connection with the acquisition, the Company allocated $12,620 to identifiable intangible assets comprising $11,920 of computer software which is being amortized over 5 years and $700 to a non-compete agreement which is being amortized over 3 years. The following table summarizes the allocation of the purchase price of assets recorded at the date of acquisition. Assets: Cash and cash equivalents $ 5 Accounts receivable 455 Deferred income taxes 555 Identifiable intangible assets 12,620 ---------- Total assets acquired 13,635 ---------- Liabilities: Accrued expenses 88 Deferred contract revenue 141 Deferred income taxes 555 ---------- Total liabilities assumed 784 ---------- Total purchase price $ 12,851 ========== Metrologic do Brasil On February 4, 2003, the Company paid cash of $71 and signed three promissory notes with a total discounted value of $204 for the remaining 49% interest in Metrologic do Brasil. During the nine months ended September 30, 2005, the Company paid the second promissory note in the amount of $75 with the remaining promissory note payable on February 4, 2006. The Company accounted for this acquisition under the purchase method of accounting. The total purchase price and costs in excess of assets acquired (goodwill) was $275. Metrologic Eria Iberica ("MEI") On August 5, 2003, the Company entered into an agreement to purchase the remaining 49% interest in MEI in twelve quarterly installments over a three year period which commenced August 5, 2003 and ends April 3, 2006. As of September 30, 2005, the Company had purchased an additional 41.6%, of which 7.8% was purchased during the third quarter of 2005 for approximately 900 euros or $1,100 at the exchange rate on September 30, 2005. Metrologic Eria France ("MEF") On March 19, 2004, the Company entered into an agreement to purchase the remaining 49% minority interest of MEF for a purchase price of 3,600 euros, or $4,300 at the exchange rate on March 31, 2004. As of March 31, 2004, the Company owned 100% of MEF. 8. Recently Issued Accounting Standards In November 2004, the FASB issued Statement No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of "so abnormal" as stated in ARB 43. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this statement to have a material effect on its consolidated financial position, consolidated results of operations or liquidity. In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 ("FSP No. 109-2"), "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provisions within the American Jobs Creation Act of 2004" (the "Jobs Act"). FSP No. 109-2 provides guidance with respect to reporting the potential impact of the repatriation provisions of the Jobs Act on an enterprise's income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004, and provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a company's chief executive officer and approved by a company's board of directors. Certain other criteria in the Jobs Act must be satisfied as well. The Company is in the process of finalizing a study of the potential repatriation and reinvestment opportunities. Currently, management expects to execute a dividend reinvestment plan and repatriate up to $8 million of foreign earnings during the quarter ended December 31, 2005. A preliminary assessment indicates that this will provide an income tax benefit up to $1.0 million, as deferred taxes have been provided on a portion of these earnings in prior years. In addition to the amounts above, the Company may repatriate additional foreign earnings; however, this is contingent upon the outcome of certain regulatory approvals. As such, these amounts have not been factored into the estimates above. The Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act in the financial statements for the periods ended September 30, 2005. In December 2004, the FASB issued FASB Staff Position No. SFAS 109-1 ("FSP No. 109-1"), "Application of FASB Statement No.109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004". FSP 109-1 provides guidance on applying the deduction for income from qualified domestic production activities. The deduction will be phased in from 2005 through 2010. The Act also provides for a two-year phase out of the existing extra-territorial income exclusion ("ETI") for foreign sales. The deduction will be treated as a "special deduction" as described in FASB Statement No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on our tax return. We do not expect the net effect of the phase out of the ETI and the phase in of this new deduction to result in a material change in our effective tax rate for fiscal years 2005 and 2006, based on current earnings levels. In December 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which replaces SFAS No. 123 and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." This Statement requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. In accordance with a Securities and Exchange Commission Rule issued in April 2005, companies will be allowed to implement SFAS No. 123R as of the beginning of the first fiscal year beginning after June 15, 2005. The Company currently expects that it will adopt the provisions of SFAS No. 123R on January 1, 2006. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The permitted transition methods include either retrospective or prospective adoption. Under the retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of SFAS No. 123R, while the retrospective methods would record compensation expense for all unvested stock options beginning with the first period presented. The Company is currently evaluating the requirements of SFAS No. 123R and expects that the adoption of SFAS No. 123R will have a material impact on its consolidated financial position, consolidated results of operations and earnings per share. The Company has not yet determined the method of adoption or effect of adopting SFAS No. 123R and has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123. See Note 2 of the Notes to Consolidated Financial Statements. In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS No. 153"). SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21 (b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for periods beginning after June 15, 2005. The adoption of this statement did not have a material effect on its consolidated financial position, consolidated results of operations or liquidity. In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations--an interpretation of FASB Statement No. 143". This Interpretation clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005, for calendar-year enterprises). The Company is evaluating the Interpretation and does not currently expect its adoption to materially impact its consolidated financial position, consolidated results of operations or liquidity. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154") which replaces Accounting Principles Board Opinions No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, unless impracticable, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this statement to have a material effect on its consolidated financial position, consolidated results of operations or liquidity. 9. Legal Matters Symbol Technologies, Inc. et al. v. the Lemelson Partnership 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. In September 2005, the Court of Appeals for the Federal Circuit upheld the trial court's ruling and the Lemelson Partnership has filed a request for a rehearing with the Court of Appeals for the Federal Circuit with the full court. Metrologic v. PSC Inc. and PSC Scanning, Inc. v. Metrologic On October 13, 1999, we filed suit for patent infringement against PSC Inc. in the U.S. District Court for the District of New Jersey. On May 17, 2004, PSC Scanning, Inc. ("PSC") filed suit against the Company in the U.S. District Court for the District of Oregon alleging claims of patent infringement of certain of its patents by at least one Metrologic product. On August 29, 2005, the parties entered into a settlement agreement which resolved all outstanding litigation between the parties. Key features of the settlement include a payment of $2.25 million in cash by PSC, discounts on certain products from PSC and a covenant not to sue each other under defined sets of patent rights for product configurations that were sold prior to March 16, 2005. The cash settlement of $2.25 million has been recorded as income during the third quarter of 2005 and is reflected in Other income (expenses) in our Condensed Consolidated Statement of Operations. The product discount arrangement within the settlement agreement will be recorded in our Condensed Consolidated Statement of Operations when realized through product purchases. Symbol Technologies, Inc. v. Metrologic On May 3, 2002, we were served with a lawsuit that was filed on April 12, 2002 by Symbol Technologies, Inc. ("Symbol"), 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 "Symbol Agreement"). The Complaint sought a declaratory judgment from the Court that we were in breach of the Symbol 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) 11 of Metrologic's 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 February 2005, the arbitrator entered an interim award, finding that eight of the products are not royalty bearing products under the Symbol Agreement but that three of the products are royalty bearing products. On June 30, 2005, the parties had a hearing in front of the arbitrator with regard to determining the amount of any past royalties owed. In August 2005, the arbitrator entered a final ruling in the arbitration awarding Symbol past royalties on certain of the Company's products plus interest, the total of which is in excess of $12 million as of September 30, 2005. Symbol has filed a motion to enter the judgment with the U.S. Federal District Court in the Southern District of New York. The Company has filed its motion to vacate the arbitrator's award in the same court and both motions are currently pending. The Company believes that Symbol's claims for past royalties are wholly without merit and intends to vigorously defend against them; however, if Symbol were to receive a final award in excess of $12 million and such an award were not reversed by the courts it would have a material adverse impact on the Company. Symbol Technologies, Inc. v. Metrologic On September 23, 2005, Symbol filed suit against the Company in the U.S. District Court in the Eastern District of Texas alleging patent infringement. Symbol filed a related case before the International Trade Commission ("ITC") also alleging patent infringement of the same patents. A notice of the investigation instituted by the ITC was served on the Company on October 24, 2005. It is Metrologic's view that its products do not infringe Symbol's patents. Metrologic will vigorously defend these new allegations of patent infringement. This case is in its early stages. 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) changes from the expected gross margin percentage due to a number of factors including customer and product mix; (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 and regulations governing the manufacture of our products; (viii) continued or prolonged capacity constraints that may hinder our ability to deliver ordered products 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) technological changes in the data capture industry, including the adoption of vision-based technologies and RFID; (xi) the costs and potential outcomes of legal proceedings or assertions by or against us relating to intellectual property rights and licenses; (xii) our ability to successfully defend against challenges to our patents and our ability to develop products which avoid infringement of third parties' patents; (xiii) 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; (xiv) the potential impact of terrorism, international hostilities and possible natural disasters, and (xv) the effect of current and pending legislation on our effective annual tax rate. 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, 2004 contained in our Annual Report on Form 10-K for the year ended December 31, 2004. The Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2005 and 2004 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 imaging-based technologies designed to provide superior functionality and a compelling value proposition for our customers. Executive Overview We are experts in optical image capture and processing solutions. In recent years, we have increased sales, cash flow from operations and net income primarily through the introduction of new products, penetration into new markets and a focus on cost reduction activities to maintain a competitive advantage. Success factors critical to our business include sales growth through continued penetration within our existing markets by new product introductions and expanded sales efforts, entering into new markets, maintaining a highly responsive and cost efficient infrastructure, achieving the financial flexibility to ensure that we can respond to new market opportunities in order to return value to our shareholders, and selectively pursuing strategic acquisitions. In order to continue our penetration into new and existing markets, our strategy involves expanding our sales channels and our product development activities. We have increased our direct sales efforts to further penetrate some of the largest retailers in the United States as well as focusing on the adoption of bar coding technology in the healthcare industry. During fiscal 2004 and the first nine months of 2005, we continued to see increased orders with new and existing key retail accounts which contributed to our quarter over quarter sales growth. Another key factor in achieving this sales growth is expanding our geographic reach by capitalizing on our presence throughout Asia and emerging markets in Central and Eastern Europe. We believe these geographic areas will continue to be an opportunity for continued growth, as evidenced by our investment in the expansion of our Suzhou manufacturing facility which was completed in 2004 as well as the opening of new sales offices in these territories. During the first nine months of 2005, we added an office in Indonesia, Taiwan, India, Korea and a fifth sales office in China. Our plans are to open additional offices in the Asia/Pacific region as we continue to implement and build upon our "globally local" philosophy. In addition, we continue to invest in developing new and improved products to meet the changing needs of our existing customers. We are continuing to focus on executing our core strategy of leveraging our engineering expertise to produce new bar code scanners and industrial automation products that will allow us to penetrate markets that we have not previously served and gain market share in our existing markets. Furthermore, we currently have several promising new products in the pipeline. We continue to believe sales for 2005 and beyond will be positively affected as these new products either begin to ship or 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 continue to focus on our strategy for margin expansion through specific engineering initiatives to reduce product and manufacturing costs. In addition, the expansion of our manufacturing facility in Suzhou, China nearly doubled the size of the existing China operations and more importantly, is providing cost efficiencies through lower direct labor costs as we continue to produce more of our products in this facility. During fiscal 2004, approximately 65.2% of our Data Capture and Collection products were manufactured in our Suzhou, China manufacturing facility. Closely linked to the success factors discussed above is our continued focus to achieve financial flexibility. As of September 30, 2005, we had cash and cash equivalents of approximately $72.2 million, total debt of approximately $19.8 million resulting in a net cash position of $52.4 million. 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. In addition to our internal development and organic growth, we may selectively pursue strategic acquisitions and/or investments 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. On August 31, 2005, we entered into a cross-license agreement with Intermec IP Corp. The cross license agreement provides us full access to a number of portfolios of patented RFID technology, including RFID tags, fixed and portable readers, and fixed and portable printers. We anticipate that this program will allow us in the future to offer our customers a broad Auto-ID product portfolio from a single supplier, including RFID-enabled systems and devices. In September 2004, our acquisition of Omniplanar, Inc., which supplies a complete package of bar code reading software for 2D imaging for fixed position, conveyor belt and hand held readers which can be optimized for specific hardware applications broadened and strengthened our portfolio of decoding software to include robust omnidirectional decoding of linear, matrix and postal bar code images. Metrologic had licensed from Omniplanar the SwiftDecoder software since the year 2000 for use in our iQ(R) line of industrial vision-based products. We also make use of the software in other products as well. By acquiring this 2D imaging technology, we have been able to reduce our licensing costs for our current and future imaging-based products. Results of Operations Our business is divided into two major segments: Data Capture and Collection, and Industrial Automation and Optical Systems. 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 automation products are comprised of fixed position systems that are either laser- or imaging-based. These systems range from simple, one-scanner solutions to complex, integrated systems incorporating multi-scanner, image capture and dimensioning technologies. Optical Systems are comprised of advanced electro-optical systems including wavefront sensors, adaptive optics systems and custom instrumentation. 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, 2005 2004 2005 2004 ---- ---- ---- ---- (in thousdands) (in thousands) Data Capture and Collection $ 43,962 $ 34,553 119,618 97,742 Industrial Automation/Optical Systems Industrial Automation 3,017 3,763 11,031 12,592 Optical Systems 7,026 5,840 18,811 14,512 -------- -------- ------- -------- Total Industrial Automation/ Optical Systems 10,043 9,603 29,842 27,104 -------- -------- ------- -------- Total Company $ 54,005 $ 44,156 $149,460 $ 124,846 ======== ======== ======= ======== Most of our product sales in Western Europe, Brazil and Asia are billed in foreign currencies and are subject to currency exchange rate fluctuations. For the three and nine months ended September 30, 2005, 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, when compared to the comparable period in 2004. The following table sets forth certain information as to our sales by geographic location: Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ---------------------------- 2005 % 2004 % 2005 % 2004 % ---- ---- ---- ---- ($ in Thousands) The Americas 27,686 51.3% 21,683 49.1% 73,452 49.2% 60,407 48.4% EMEA 19,185 35.5% 16,160 36.6% 57,438 38.4% 49,474 39.6% Asia/Pacific 7,134 13.2% 6,313 14.3% 18,570 12.4% 14,965 12.0% ------------- ------------- ------------- ------------- Total $54,005 100.0% $44,156 100.0% $149,460 100.0% $124,846 100.0% ============= ============= ============== ============== Three Months Ended September 30, 2005 Compared with Three Months Ended September 30, 2004 Sales increased 22.3% to $54.0 million in the three months ended September 30, 2005 from $44.2 million in the three months ended September 30, 2004. Sales of our data capture and collection products increased by 27.2%, sales of industrial automation products decreased by 19.8% and sales of optical systems increased by 20.3%. Data capture and collection sales increased approximately $11.3 million due to increased unit sales of handheld and in-counter scanners, including new product offerings. These factors were partially offset by a decrease of approximately $0.1 million resulting from the weakening of the euro against the U.S dollar and approximately $2.0 million resulting from lower average selling prices and increased promotional programs due to competitive pricing pressures experienced in the retail sector, primarily in the United States and Europe. The decrease in industrial automation products sales is attributable to revenues under certain fixed price and other contracts during the third quarter of 2004 with no comparable amount in the third quarter of 2005. Our industrial automation business has exhibited a greater degree of volatility than our data capture and collection business due to the timing and size of related contracts in this business. The increase in optical systems sales in the third quarter of 2005 reflects an increase in customer funded research and development programs and the execution of contract backlog accumulated over the past few quarters. Sales to "The Americas" region increased $6.0 million, or 27.7%, in the three months ended September 30, 2005 when compared to the comparable period in 2004. This increase is primarily attributed to ongoing penetration into new vertical markets and Tier 1 retailers, higher demand in our South America markets, and consistent growth with our key distributors and channel partners. EMEA sales increased $3.0 million, or 18.7%, in the three months ended September 30, 2005 when compared to the same period a year ago despite challenging macro-economic conditions. The increase in EMEA sales is attributable to increased unit volume offset by lower average selling prices. The increased unit volume, in part, reflects penetration into Tier 1 retailers and continued growth with our channel partners. Asia/Pacific sales increased $0.8 million, or 13.0%, in the three months ended September 30, 2005 when compared with the comparable period in 2004. We continue to experience sizable growth in this region as a result of continued penetration into both new and existing key markets. In addition, our focused expansion of our customer base has yielded significant numbers of new customers across the region. No individual customer accounted for 10.0% or more of sales in the three months ended September 30, 2005 or 2004. Cost of sales increased to $30.3 million in the three months ended September 30, 2005 from $24.1 million in the three months ended September 30, 2004. As a percentage of sales, cost of sales increased to 56.2% in 2005 from 54.6% in 2004. The increase in the percentage of cost of sales can be primarily attributed to the following key factors: o Increase in the contribution of our Optical Systems revenues to the total revenues. o Competitive pricing on direct sales to Tier I retailers in the United States and EMEA. o Less favorable product mix within our data capture and collection business segment from increased sales of our new product offerings and certain non-Metrologic manufactured products that have lower margins. o Higher freight costs to ensure timely delivery of products to our international locations. The factors mentioned above were partially offset by a decrease in direct material costs for selected products resulting from product redesigns and our engineering efforts to reduce bill of material costs. Selling, general and administrative ("SG&A") expenses increased 3.9% to $11.4 million in the three months ended September 30, 2005 from $11.0 million for the three months ended September 30, 2004. As a percentage of sales, SG&A expenses decreased from 24.9% of sales in the three months ended September 30, 2004 to 21.2% of sales in the corresponding period in 2005. The increase in SG&A expenses was attributed to increased variable selling expenses associated with the higher sales volume in 2005, an increase in personnel costs resulting from our increase in infrastructure needed to support the increased sales volume during 2005 and beyond, partially offset by lower legal fees. R&D expenses increased 29.1% to $2.4 million in the three months ended September 30, 2005 from $1.8 million in the corresponding period in 2004; as a percent of sales, R&D expenses increased slightly to 4.4% of sales from 4.1% of sales. In absolute dollars, the increase in R&D expenses, which consists mainly of higher salaries and related fringe benefits, professional fees and R&D material costs, was the result of ongoing new product development efforts. Net interest income/expense reflects net interest income of $0.1 million for the three months ended September 30, 2005 and 2004, respectively. Other income/expense reflects net other income of $2.0 million for the three months ended September 30, 2005 compared with net other income of $0.2 million for the comparable period in 2004. The change can be attributed to the PSC litigation settlement pursuant to which we received $2.25 million during the third quarter of 2005, offset by $0.5 million of higher net foreign exchange losses in 2005 when compared with the comparable period in 2004 as a result of volatility in exchange rates (primarily the euro). Net income was $7.7 million, or $0.33 per diluted share for the three months ended September 30, 2005 compared with net income of $4.7 million or $0.20 per diluted share in 2004. Net income reflects a 36% effective tax rate for 2005 as compared with an effective tax rate of 38% in 2004. Nine Months Ended September 30, 2005 Compared with Nine Months Ended September 30, 2004 Sales increased 19.7% to $149.5 million in the nine months ended September 30, 2005 from $124.8 million in the nine months ended September 30, 2004. Sales of our data capture and collection products increased by 22.4%, sales of industrial automation products decreased by 12.4% and sales of optical systems increased by 29.6%. Approximately $1.8 million of the increase in the data capture and collection sales resulted from the strengthening of the euro against the U.S. dollar. Data capture and collection sales increased approximately $27.6 million due to increased unit sales of handheld and in-counter scanners, including new product offerings. These factors were partially offset by a decrease of approximately $7.3 million resulting from lower average selling prices and increased promotional programs due to competitive pricing pressures experienced in the retail sector, primarily in the United States and Europe. The decrease in industrial automation products sales is attributable to the following factors: (1) a contract with a major airline customer for bar code scanning equipment and installation services in the nine months ended September 30, 2004 with no comparable amount in 2005, (2) winding down of certain fixed price and other contracts during the nine months ended September 30, 2005 and (3) the loss of certain projects on which we had been working. Our Industrial Automation business has exhibited a greater degree of volatility than our data capture and collection business due to the timing and size of related contracts in this business. The increase in optical systems sales in 2005 reflects an increase in customer funded research and development programs and the execution of contract backlog accumulated over the recent quarters. Sales to "The Americas" region increased $13.0 million, or 21.6%, in 2005 when compared to the comparable period in 2004. This increase is primarily attributed to ongoing penetration into new vertical markets and Tier 1 retailers, higher demand in our South America markets, and consistent growth with our key distributors and channel partners. EMEA sales increased $8.0 million, or 16.1%, in 2005 when compared to the same period a year ago despite weaker market conditions. The increase in EMEA sales is attributable to increased unit volume and the strengthening of the euro against the U.S. dollar, offset by lower average selling prices. The increased unit volume, in part, reflects penetration into Tier 1 retailers and continued growth with our channel partners. Asia/Pacific sales increased $3.6 million, or 24.1%, in 2005 when compared with the comparable period in 2004. We continue to experience sizable growth in this region as a result of continued penetration into both new and existing key markets. In addition, our focused expansion of our customer base has yielded significant numbers of new customers across the region. During the nine month period ended September 30, 2005, we added offices in Indonesia, Korea, Taiwan and a fifth sales office in China, partly contributing to the sales growth in this region. No individual customer accounted for 10.0% or more of sales in the nine months ended September 30, 2005 or 2004. Cost of sales increased to $84.1 million in the nine months ended September 30, 2005 from $66.9 million in the nine months ended September 30, 2004. As a percentage of sales, cost of sales increased to 56.3% in 2005 from 53.6% in 2004. The increase in the percentage of cost of sales can be primarily attributed to the following key factors: o Increase in the contribution of our Optical Systems revenues to the total revenues. o Completion of certain lower fixed price contracts in the nine months ended September 30, 2005 within our Industrial Automation business, as well as an unsustainable mix attributed to a contract with a major airline customer that resulted in a favorable impact for the nine months ended September 30, 2004 when compared to the same period in 2005. o Competitive pricing on direct sales to Tier 1 retailers in the United States and EMEA. o Less favorable product mix within our data capture and collection business segment from increased sales of our new product offerings that have lower margins. o Higher freight costs to ensure timely delivery of products to our international locations. The factors mentioned above were partially offset by the following key factors: 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 A decrease in direct material costs for selected products resulting from product redesigns and our engineering efforts to reduce bill of material costs. Selling, general and administrative ("SG&A") expenses increased 18.6% to $35.0 million in the nine months ended September 30, 2005 from $29.5 million for the nine months ended September 30, 2004. As a percentage of sales, SG&A expenses decreased from 23.6% of sales in the nine months ended September 30, 2004 to 23.4% of sales in the corresponding period in 2005. The increase in SG&A expenses was due to increased variable selling expenses associated with the higher sales volume in 2005, the strengthening of the euro against the U.S. dollar on euro denominated expenses, increased legal fees associated with ongoing litigation matters, and an increase in personnel costs resulting from our increase in infrastructure needed to support the increased sales volume during 2005 and beyond. R&D expenses increased 15.0% to $6.5 million in the nine months ended September 30, 2005 from $5.7 million in the corresponding period in 2004; as a percent of sales, R&D expenses decreased slightly to 4.4% of sales from 4.5% of sales. The decrease in R&D expenses as a percent of sales can be attributed to more engineers within our Optical Systems/Industrial Automation business segment working specifically on customer funded research programs during 2005. Costs of the engineers working on such programs are charged to costs of sales for the time spent on the programs. These costs were partially offset by higher R&D expenses within our data capture and collection business segment as the result of ongoing new product development efforts. Net interest income/expense reflects net interest income of $0.3 million for the nine months ended September 30, 2005 compared with net interest income of $0.1 million for the comparable period in 2004. The increase can be attributed to higher interest income due to higher cash and cash equivalent balances, partially offset by higher interest expense and related borrowings outstanding under our European credit facilities in 2005. Other income/expense reflects net other income of $1.3 million for the nine months ended September 30, 2005 compared with net other expense of $0.4 million for the comparable period in 2004. The change can be attributed primarily to the PSC litigation settlement pursuant to which we received $2.25 million in 2005, offset by $0.8 million of higher net foreign exchange losses in 2005 when compared with the comparable period in 2004 as a result of volatility in exchange rates (primarily the euro). Net income was $16.3 million, or $0.70 per diluted share for the nine months ended September 30, 2005 compared with net income of $14.0 million or $0.61 per diluted share in 2004. Net income reflects a 36% effective tax rate for 2005 as compared with an effective tax rate of 38% in 2004. Inflation and Seasonality Inflation and seasonality have not had a material impact on our results of operations. However, our sales are typically impacted by decreases in seasonal demand from European customers in our third quarter. In addition, our first quarter is also impacted by factors, such as: (i) the establishment of new customer budgets, (ii) the expiration of legislative calendar-year programs and (iii) start-up investment of pilot efforts. Finally, we have historically experienced our strongest quarter during the fourth quarter of the fiscal year, representing approximately 30% of our consolidated annual revenues. Liquidity and Capital Resources Operating activities Net cash provided from operations was $8.5 million and $13.9 million for the nine-month periods ended September 30, 2005 and 2004, respectively. Net cash provided by operating activities for the nine months ended September 30, 2005 can be attributed primarily to net income of $16.3 million and depreciation and amortization of $5.1 million, offset by increases in accounts and other receivables of approximately $12.0 million. Our working capital increased $14.3 million or 17.2% to $97.6 million as of September 30, 2005 from $83.3 million as of December 31, 2004. The key component of the increase in working capital was an increase in accounts receivable of $8.4 million as a result of higher sales levels as well as timing of certain contracts in our optical systems business, offset by an increase in our current portion of debt of $3.5 million due to increased borrowings by our foreign subsidiaries and the transfer from long-term debt of the Omniplanar scheduled note payment due in March 2006 (See "Outstanding debt and financing arrangements" below). Investing activities Cash used in investing activities was $6.4 million for the nine months ended September 30, 2005 as compared to $19.8 million for the comparable period in 2004. The decrease in cash used in investing activities is primarily due to (i) a decrease of $9.1 million for the acquisition of Omniplanar, Inc. in September 2004 (See Note 7 "Acquisitions") and (ii) a decrease in purchases of minority interest in subsidiaries of $3.8 million this year, as compared to the prior year (See "Acquisition of Minority Interests" below for additional information). Financing activities Cash provided by financing activities was $4.0 million for the nine months ended September 30, 2005 as compared to $2.0 million for the comparable period in 2004. Cash provided by financing activities for the nine months ended September 30, 2005 consists primarily of (i) $1.5 million of proceeds from the exercise of stock options and employee stock purchase plan and (ii) net borrowings on outstanding lines of credit of $4.3 million, offset by (iii) net principal payments of $1.7 million on outstanding notes payable. Outstanding debt and financing arrangements In connection with the acquisition of Omniplanar, the Purchase Agreement set forth a schedule of payments over 18 months. We paid $9.1 million at closing, $0.7 in March 2005, $1.3 million in September 2005 and will pay an additional $2.0 million in March 2006. During the quarter ended September 30, 2005, the Company entered into a Cross-License Agreement with Intermec IP Corp., which includes a license origination fee of $0.8 million. Some of our European subsidiaries have entered into working capital and invoice discounting agreements with HypoVereinsbank, Dresdner, Societe Generale, La Caixa and HSBC Bank. Outstanding borrowings under the working capital agreement with HypoVereinsbank, Dresdner and HSBC have been guaranteed by Metrologic Instruments, Inc., the parent company. These agreements provide the Company with availability of up to $13.6 million, using September 30, 2005 exchange rates, at interest rates ranging from 3.1% to 6.5%. In addition, our subsidiary Metrologic do Brasil has a working capital agreement with Banco Bradesco SA with availability of up to 0.6 million real or $0.3 million, using September 30, 2005 exchange rates. At September 30, 2005, $10.8 million was outstanding under such agreements and accordingly is included in lines of credit in our Condensed Consolidated Balance Sheet. During the quarter ended September 30, 2005, approximately $6.0 million of the European credit line was converted to a short term note payable agreement maturing November 2005 at an interest rate of 3.6%. In addition, one of our Asia Pacific subsidiaries has short-term note payable agreements at interest rates of 4.75% with maturity dates expiring before December 31, 2005. At September 30, 2005, $6.3 million was outstanding under such agreements and accordingly is included in current portion of notes payable in our Condensed Consolidated Balance Sheet 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, 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 nine 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, 2005. Acquisition of Minority Interests Our original 51.0% interest in Metrologic Eria Iberica contained an option for us to purchase the remaining 49.0% interest. In 2003, we agreed to purchase the 49.0% of Metrologic Eria Iberica that we did not own for approximately 5.9 million euros. Purchase of the shares is being made over three years and commenced in August 2003. As of September 30, 2005, we had purchased an additional 41.6%, of which 7.8% was purchased during the third quarter of 2005 for approximately 0.9 million euros, or $1.1million, at the exchange rate on September 30, 2005. In March 2004, we entered into an agreement to purchase the 49% minority interest of Metrologic Eria France for approximately 3.6 million euros, or $4.3 million at the exchange rate on March 31, 2004. As of March 31, 2004, we owned 100% of Metrologic Eria France. Impact of Recently Issued Accounting Standards In November 2004, the FASB issued Statement No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of "so abnormal" as stated in ARB 43. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this statement to have a material effect on its consolidated financial position, consolidated results of operations or liquidity. In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 ("FSP No. 109-2"), "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provisions within the American Jobs Creation Act of 2004" (the "Jobs Act"). FSP No. 109-2 provides guidance with respect to reporting the potential impact of the repatriation provisions of the Jobs Act on an enterprise's income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004, and provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a company's chief executive officer and approved by a company's board of directors. Certain other criteria in the Jobs Act must be satisfied as well. The Company is in the process of finalizing a study of the potential repatriation and reinvestment opportunities. Currently, management expects to execute a dividend reinvestment plan and repatriate up to $8 million of foreign earnings during the quarter ended December 31, 2005. A preliminary assessment indicates that this will provide an income tax benefit up to $1.0 million, as deferred taxes have been provided on a portion of these earnings in prior years. In addition to the amounts above, the Company may repatriate additional foreign earnings; however, this is contingent upon the outcome of certain regulatory approvals. As such, these amounts have not been factored into the estimates above. The Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act in the financial statements for the periods ended September 30, 2005. In December 2004, the FASB issued FASB Staff Position No. SFAS 109-1 ("FSP No. 109-1"), "Application of FASB Statement No.109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004". FSP 109-1 provides guidance on applying the deduction for income from qualified domestic production activities. The deduction will be phased in from 2005 through 2010. The Act also provides for a two-year phase out of the existing extra-territorial income exclusion ("ETI") for foreign sales. The deduction will be treated as a "special deduction" as described in FASB Statement No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on our tax return. We do not expect the net effect of the phase out of the ETI and the phase in of this new deduction to result in a material change in our effective tax rate for fiscal years 2005 and 2006, based on current earnings levels. In December 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which replaces SFAS No. 123 and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." This Statement requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. In accordance with a Securities and Exchange Commission Rule issued in April 2005, companies will be allowed to implement SFAS No. 123R as of the beginning of the first fiscal year beginning after June 15, 2005. The Company currently expects that it will adopt the provisions of SFAS No. 123R on January 1, 2006. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The permitted transition methods include either retrospective or prospective adoption. Under the retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of SFAS No. 123R, while the retrospective methods would record compensation expense for all unvested stock options beginning with the first period presented. The Company is currently evaluating the requirements of SFAS No. 123R and expects that the adoption of SFAS No. 123R will have a material impact on its consolidated financial position, consolidated results of operations and earnings per share. The Company has not yet determined the method of adoption or effect of adopting SFAS No. 123R and has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123. See Note 2 of the Notes to Consolidated Financial Statements. In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS No. 153"). SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21 (b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for periods beginning after June 15, 2005. The adoption of this statement did not have a material effect on its consolidated financial position, consolidated results of operations or liquidity. In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations--an interpretation of FASB Statement No. 143". This Interpretation clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005, for calendar-year enterprises). The Company is evaluating the Interpretation and does not currently expect its adoption to materially impact its consolidated financial position, consolidated results of operations or liquidity. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154") which replaces Accounting Principles Board Opinions No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, unless impracticable, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this statement to have a material effect on its consolidated financial position, consolidated results of operations or liquidity. Item 3- Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in our quantitative and qualitative disclosure about market risk since the Company's Annual Report on Form 10-K for the year ended December 31, 2004. Item 4- Controls and Procedures As required by Rule 13a-15(e) under the Exchange Act, as of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Management, including our principal executive officer and principal financial officer. Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by this report. There have been no changes in the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 1. 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, except as noted below. A. Symbol Technologies, Inc. et al. v. the Lemelson Partnership 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. In September 2005, the Court of Appeals for the Federal Circuit upheld the trial court's ruling and the Lemelson Partnership has filed a request for a rehearing with the Court of Appeals for the Federal Circuit with the full court. B. Metrologic v. PSC Inc. and PSC Scanning, Inc. v. Metrologic On October 13, 1999, we filed suit for patent infringement against PSC Inc. in the U.S. District Court for the District of New Jersey. On May 17, 2004, PSC Scanning, Inc. ("PSC") filed suit against the Company in the U.S. District Court for the District of Oregon alleging claims of patent infringement of certain of its patents by at least one Metrologic product. On August 29, 2005, the parties entered into a settlement agreement which resolved all outstanding litigation between the parties. Key features of the settlement include a payment of $2.25 million in cash by PSC, discounts on certain products from PSC and a covenant not to sue each other under defined sets of patent rights for product configurations that were sold prior to March 16, 2005. The cash settlement of $2.25 million has been recorded as income during the third quarter of 2005 and is reflected in Other income (expenses) in our Condensed Consolidated Statement of Operations. The product discount arrangement within the settlement agreement will be recorded in our Condensed Consolidated Statement of Operations when realized through product purchases. C. Symbol Technologies, Inc. v. Metrologic On June 30, 2005 the parties had a hearing in front of the arbitrator with regard to determining the amount of any past royalties owed. In August 2005, the arbitrator entered a final ruling in the arbitration awarding Symbol past royalties on certain of the Company's products plus interest, the total of which is in excess of $12 million as of September 30, 2005. Symbol has filed a motion to enter the judgment with the U.S. Federal District Court in the Southern District of New York. The Company has filed its motion to vacate the arbitrator's award in the same court and both motions are currently pending. The Company believes that Symbol's claims for past royalties are wholly without merit and intends to vigorously defend against them; however, if Symbol were to receive a final award in excess of $12 million and such an award were not reversed by the courts it would have a material adverse impact on the Company. D. Symbol Technologies, Inc. v. Metrologic On September 23, 2005, Symbol filed suit against the Company in the U.S. District Court in the Eastern District of Texas alleging patent infringement. Symbol filed a related case before the International Trade Commission ("ITC") also alleging patent infringement of the same patents. A notice of the investigation instituted by the ITC was served on the Company on October 24, 2005. Metrologic stands firm, in its belief, that its products do not infringe Symbol's patents. Metrologic will vigorously defend these new allegations of patent infringement. This case is in its early stages. Item 6. Exhibits 10.1 Compensatory Arrangements with Board Committees 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Act of 1934. 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Act of 1934. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the Chief Executive Officer of the Company. 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the Chief Financial Officer of the Company. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. METROLOGIC INSTRUMENTS, INC. Date: November 8, 2005 By:/s/ Benny A. Noens ----------------- ---------------------------------------- Benny A. Noens Chief Executive Officer and President (Principal Executive Officer) Date: November 8, 2005 By:/s/ Kevin J. Bratton ----------------- ----------------------------------------- Kevin J. Bratton Chief Financial Officer (Principal Financial and Accounting Officer) Exhibit Index Page Number 10.1 Compensatory Arrangements with Board Committees 29 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Act of 1934. 30 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Act of 1934. 31 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 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 executed by the Chief Financial Officer of the Company. 33 Exhibit 10.1 Compensatory Arrangements with Board Committees On October 3, 2005, the Registrant approved several changes to the compensation payable to non-employee members of the Board of Directors for their service on the committees of the Board. These changes, which are described below, are effective as of July 1, 2005. Committee members will receive (i) $1,500 per committee meeting, whether attended in person or via telephone (increased from $1,000 per in-person meeting and $500 for attendance via telephone), (ii) $500 for subsequent committee meetings on the same day, (iii) $5,000 to chair a committee (increased from $2,500) and (iv) $1,500 for any day where a substantial portion of the day was spent on committee-related tasks. Exhibit 31.1 CERTIFICATION I, Benny A. Noens, Chief Executive Officer and President of Metrologic Instruments, Inc., certify that: 1. I have reviewed this 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. 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 d. 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 officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Benny A Noens ------------------------------------------------ Name: Benny A. Noens Title: Chief Executive Officer and President Date: November 8, 2005 Exhibit 31.2 CERTIFICATION I, Kevin J. Bratton, Chief Financial Officer of Metrologic Instruments, Inc., certify that: 1. I have reviewed this 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. 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 d. 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 officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Kevin J. Bratton ---------------------------------- Name: Kevin J. Bratton Title: Chief Financial Officer Date: November 8, 2005 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 Report of Metrologic Instruments, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Benny A. Noens, 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/ Benny A. Noens - ------------------------------------ Benny A. Noens Chief Executive Officer November 8, 2005 The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for the purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent that this certification is expressly incorporated by reference into any such filing. A signed original of this written statement required by 18 U.S. C. Section 1350 has been provided to the Company and will be retained by the Company 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 Report of Metrologic Instruments, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2005 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 8, 2005 The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for the purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent that this certification is expressly incorporated by reference into any such filing. A signed original of this written statement required by 18 U.S. C. Section 1350 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----