================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2000 OR |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-9919 PSC INC. ------------------------------------------------------ (Exact name of Registrant as Specified in Its Charter) New York 16-0969362 - ----------------------------------- --------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 675 Basket Road, Webster, New York 14580 - ---------------------------------- ------------- (Address of principal executive offices) (Zip Code) (716) 265-1600 -------------------------------------------------- (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 12 months preceding (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 |_| As of August 10, 2000, there were 12,301,801 shares of common stock outstanding. ================================================================================ PSC INC. AND SUBSIDIARIES INDEX PART I: FINANCIAL INFORMATION Item 1 Financial Statements Page Number ----------- Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31, 1999....................3-4 Consolidated Statements of Operations and Retained Earnings for the three and six months ended: June 30, 2000 (Unaudited) and July 2, 1999 (Unaudited) ............5-6 Consolidated Statements of Cash Flows for the six months ended: June 30, 2000 (Unaudited) and July 2, 1999 (Unaudited) ..............7 Notes to Consolidated Financial Statements (Unaudited) ...........8-13 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ....................14-16 PART II: OTHER INFORMATION Item 1 Legal Proceedings ..................................................17 Item 2 Changes in Securities .............................................17 Item 3 Defaults upon Senior Securities ....................................17 Item 4 Submission of Matters to a Vote of Security Holders ...............17 Item 5 Other Information ................................................17 Item 6 Exhibits and Reports on Form 8-K ..................................17 PART I - FINANCIAL INFORMATION Item 1: Financial Statements PSC INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (All amounts in thousands, except per share data) June 30, 2000 December 31, 1999 ------------- ----------------- (Unaudited) (Audited) ASSETS CURRENT ASSETS: Cash and cash equivalents ......................... $ 6,318 $ 1,402 Accounts receivable, net of allowance for doubtful accounts of $727 and $685, respectively.......... 44,217 38,396 Inventories ....................................... 26,165 23,343 Prepaid expenses and other ........................ 3,041 3,514 ---------------- ---------------- TOTAL CURRENT ASSETS .............................. 79,741 66,655 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $26,773 and $23,614, respectively...................................... 27,538 25,994 DEFERRED TAX ASSETS .................................. 21,502 20,762 INTANGIBLE AND OTHER ASSETS, net of accumulated amortization of $33,551 and $27,476, respectively.. 97,342 53,330 ---------------- ---------------- TOTAL ASSETS ......................................... $226,123 $166,741 ================ ================ See accompanying notes to the Consolidated Financial Statements. PSC INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (All amounts in thousands, except per share data) (Continued) June 30, 2000 December 31, 1999 ------------- ----------------- (Unaudited) (Audited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt ................. $ 13,871 $16,281 Accounts payable .................................. 24,456 20,685 Accrued expenses .................................. 9,738 7,086 Accrued payroll and related employee benefits ..... 4,720 5,758 ----------------- ---------------- TOTAL CURRENT LIABILITIES ......................... 52,785 49,810 LONG-TERM DEBT, less current maturities .............. 114,900 57,585 ACCRUED PROVISION FOR DISPUTED ROYALTIES ............. 7,834 6,400 OTHER LONG-TERM LIABILITIES .......................... 1,957 1,613 SHAREHOLDERS' EQUITY: Series A convertible preferred shares, par value $.01; 110 shares authorized, issued and outstanding ($11,000 aggregate liquidation value) .............................. 1 1 Series B preferred shares, par value $.01; 175 authorized, no shares issued and outstanding.. -- -- Undesignated preferred shares, par value $.01; 9,715 authorized, no shares issued and outstanding. -- -- Common shares, par value $.01; 40,000 authorized 12,215 and 12,080 shares issued and outstanding... 122 121 Additional paid-in capital ........................ 73,296 71,843 Retained earnings/(Accumulated deficit) ........... (21,214) (18,065) Accumulated other comprehensive income/(loss) ..... (2,201) (1,210) Less treasury stock repurchased at cost, 180 shares (1,357) (1,357) ----------------- ---------------- TOTAL SHAREHOLDERS' EQUITY ........................... 48,647 51,333 ----------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........... $226,123 $166,741 ================= ================ See accompanying notes to the Consolidated Financial Statements. PSC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (All amounts in thousands, except per share data) (Unaudited) Three Months Ended -------------------------------------------- June 30, 2000 July 2, 1999 ------------- ------------ NET SALES ......................................... $67,418 $58,001 COST OF SALES ..................................... 41,675 33,979 ------------------ --------------- Gross profit ................................... 25,743 24,022 OPERATING EXPENSES: Engineering, research and development .......... 5,415 4,419 Selling, general and administrative ............ 13,103 10,798 Severance and other costs ...................... (300) -- Merger related costs ........................... 959 -- Amortization of intangibles resulting from business acquisitions ....................... 2,887 1,513 ------------------ --------------- Income from operations ......................... 3,679 7,292 INTEREST AND OTHER INCOME/(EXPENSE): Interest expense ............................... (3,120) (1,908) Interest income ................................ 76 48 Other income/(expense) ......................... 14 (73) ------------------ --------------- (3,030) (1,933) ------------------ --------------- Income before income tax provision ............. 649 5,359 Income tax provision ........................... 648 1,871 ------------------ --------------- Net income ..................................... $ 1 $3,488 ================== =============== NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Basic ....................................... $0.00 $0.29 Diluted ..................................... $0.00 $0.25 WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic ....................................... 12,027 11,928 Diluted ..................................... 13,448 13,894 RETAINED EARNINGS/(ACCUMULATED DEFICIT): Retained earnings/(Accumulated deficit), beginning of period ....................... ($21,215) ($23,936) Net income ..................................... 1 3,488 ------------------ --------------- Retained earnings/(Accumulated deficit), end of period ............................. ($21,214) ($20,448) ================== =============== See accompanying notes to the Consolidated Financial Statements. PSC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (All amounts in thousands, except per share data) (Unaudited) Six Months Ended -------------------------------------------- June 30, 2000 July 2, 1999 ------------- ------------ NET SALES ............................................ $128,857 $117,146 COST OF SALES ........................................ 79,544 67,519 ------------------ --------------- Gross profit ...................................... 49,313 49,627 OPERATING EXPENSES: Engineering, research and development ............. 11,237 8,547 Selling, general and administrative ............... 27,517 23,158 Severance and other costs ......................... 1,674 2,103 Merger related costs .............................. 959 -- Amortization of intangibles resulting from business acquisitions .......................... 5,468 3,212 ------------------ --------------- Income from operations ............................ 2,458 12,607 INTEREST AND OTHER INCOME/(EXPENSE): Interest expense .................................. (6,543) (4,082) Interest income ................................... 222 139 Other income/(expense) ............................ 23 (88) ------------------ --------------- (6,298) (4,031) ------------------ --------------- Income/(loss) before income tax provision/(benefit) (3,840) 8,576 Income tax provision/(benefit) .................... (691) 2,997 ------------------ --------------- Net income/(loss) ................................. ($ 3,149) $ 5,579 ================== =============== NET INCOME/(LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: Basic .......................................... ($0.26) $0.47 Diluted ........................................ ($0.26) $0.41 WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic .......................................... 12,028 11,912 Diluted ........................................ 12,028 13,774 RETAINED EARNINGS/(ACCUMULATED DEFICIT): Retained earnings/(Accumulated deficit), beginning of period .......................... ($18,065) ($26,027) Net income/(loss) ................................. (3,149) 5,579 ------------------ --------------- Retained earnings/(Accumulated deficit), end of period ............................... ($21,214) ($20,448) ================== =============== See accompanying notes to the Consolidated Financial Statements. PSC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (All amounts in thousands) (Unaudited) Six Months Ended -------------------------------------------- June 30, 2000 July 2, 1999 ------------- ------------ (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss) ................................................ ($3,149) $5,579 Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization .................................... 9,238 6,649 Deferred tax assets .............................................. (718) 1,043 (Increase) decrease in assets: Accounts receivable ........................................... 613 (1,196) Inventories ................................................... 1,198 (4,511) Prepaid expenses and other .................................... 527 (151) Increase (decrease) in liabilities: Accounts payable .............................................. 1,217 2,212 Accrued expenses .............................................. (430) 1,376 Accrued provision for disputed royalties ...................... 1,434 -- Accrued payroll and related employee benefits ................. (1,111) 30 Accrued acquisition related restructuring costs ............... -- (283) ------------------ --------------- Net cash provided by operating activities ..................... 8,819 10,748 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net ........................................ (2,151) (2,213) Net cash paid for business ....................................... (53,486) -- Additions to intangible and other assets ......................... (2,771) (5,283) Proceeds from sale and leaseback transaction ..................... -- 8,043 ------------------ --------------- Net cash (used in) provided by investing activities ........... (58,408) 547 CASH FLOWS FROM FINANCING ACTIVITIES: Additions to long-term debt ...................................... 112,000 7,000 Payments of long-term debt ....................................... (57,693) (19,182) Additions to other long-term liabilities, net .................... 339 39 Purchase of treasury stock -- (72) Exercise of options and issuance of common shares ................ 822 1,253 Tax benefit from exercise or disposition of stock options ........ 28 27 ------------------ --------------- Net cash provided by (used in) financing activities ........... 55,496 (10,935) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ............................................. (991) (1,076) ------------------ --------------- NET INCREASE/(DECREASE) IN CASH AND ................................. 4,916 (716) CASH EQUIVALENTS CASH AND CASH EQUIVALENTS: Beginning of period ........................................... 1,402 6,180 ------------------ --------------- End of period ................................................. $ 6,318 $5,464 ================== =============== See accompanying notes to the Consolidated Financial Statements. PSC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999 (All amounts in thousands, except per share data) (Unaudited) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared by the Company without audit. In the opinion of management, these financial statements include all adjustments necessary to present fairly the Company's financial position as of June 30, 2000, the results of operations for the three and six months ended June 30, 2000 and July 2, 1999 and its cash flows for the six months ended June 30, 2000 and July 2, 1999. The results of operations for the three and six months ended June 30, 2000 are not necessarily indicative of the results to be expected for the full year. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1999 annual report on Form 10-K. INVENTORIES Inventories are stated at the lower of cost or market using the first-in, first-out method. Inventory costs include material, direct labor and overhead and consist of the following: June 30, 2000 December 31, 1999 ------------------- ------------------------ Raw materials $15,907 $14,358 Work-in-process 5,342 5,238 Finished goods 4,916 3,747 ------------ ------------ $26,165 $23,343 ============ ============ (2) LONG-TERM DEBT Long-term debt consists of the following: June 30, 2000 December 31, 1999 ------------------- ---------------------- Senior term loan $70,000 $42,000 Revolving line of credit 27,000 -- Subordinated term loan 29,637 29,607 Subordinated promissory note 1,563 2,188 Other 571 71 ------------ ------------ 128,771 73,866 Less: current maturities 13,871 16,281 ------------ ------------ $114,900 $57,585 ============ ============ PSC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999 (All amounts in thousands, except per share data) (Unaudited) The Company borrowed an additional $58.0 million under its amended senior term loan and revolving credit facilities to finance the acquisition of Percon Incorporated (Percon). See Note 3 "Acquisition". The amended revolving credit facilities provide for borrowings up to $50.0 million, of which, $27.0 million was utilized toward the acquisition. (3) ACQUISITION On January 19, 2000, the Company acquired all of the outstanding shares of Percon, a manufacturer of wireless and batch portable data terminals, decoders, input devices and data management software, for approximately $57.0 million. The acquisition was accounted for under the purchase method of accounting and accordingly, the results of Percon's operations are included in the 2000 consolidated statements of operations since the date of acquisition. The excess purchase price over the fair value of net assets acquired was approximately $46.0 million and is being amortized on a straight-line basis over 10 years. The following unaudited pro forma condensed results of operations combine the operations of the Company with those of Percon as if the acquisition was consummated on January 1, 1999. The pro forma information is presented after giving effect to certain adjustments for amortization of goodwill, incremental interest expense on acquisition financing and the related income tax effects. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results that would have been achieved during the periods indicated and are not intended to be indicative of future results. Pro Forma Six Months Ended ----------------------------------- June 30, 2000 July 2, 1999 ----------------- ------------- Net sales ........................... $129,616 $133,589 Income from operations .............. 151 12,515 Net income/(loss) ................... (4,433) 3,375 Net income/(loss) per common and common equivalent share: Basic .......................... ($0.37) $0.28 Diluted ........................ ($0.37) $0.24 Weighted average number of common and common equivalent shares outstanding: Basic .......................... 12,028 11,912 Diluted ........................ 12,028 13,774 PSC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999 (All amounts in thousands, except per share data) (Unaudited) (4) SEVERANCE AND OTHER COSTS During the first quarter of 2000, the Company recorded a pretax charge of $2.0 million for employee severance and benefit costs for the elimination of approximately 35 positions resulting from integration activities associated with the Percon acquisition and reorganization actions in connection with the Company's sales force. Excluding $0.3 million reversed in the second quarter of 2000, the Company utilized $1.0 million of the accrual in 2000. As of June 30, 2000, the amount of the severance accruals was approximately $0.7 million, which relates to current contractual obligations. Including $0.3 million reversed in the second quarter, these costs reduced 2000 income/(loss) before income tax provision/(benefit), net income/(loss), basic EPS and diluted EPS by $1.7 million, $1.1 million, $0.09 and $0.09, respectively. (5) MERGER RELATED COSTS On June 5, 2000, the Company, Mohawk Corp. (Parent) and Mohawk Acquisition Corp., a wholly owned subsidiary of Parent (Purchaser), entered into an Agreement and Plan of Merger. Pursuant to the agreement, Purchaser commenced a cash tender offer to purchase all outstanding shares of common stock, all outstanding shares of Series A Convertible Preferred Stock and all outstanding warrants, in each case, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase dated June 19, 2000 and in the related Letters of Transmittal. On July 24, 2000, Parent, Purchaser and the Company executed a Termination Agreement whereby the parties agreed to terminate the offer effective on such date. The Company recorded a pre-tax charge of approximately $1.0 million during the second quarter of 2000 for expenses related to the merger activities. (6) SHAREHOLDERS' EQUITY Comprehensive income, which includes net income/(loss), foreign currency translation adjustments and unrealized gain/(loss) on securities, was ($256) and $3,414 for the three months ended June 30, 2000 and July 2, 1999, respectively, and ($4,140) and $4,340 for the six months ended June 30, 2000 and July 2, 1999, respectively. During the six month period ended June 30, 2000, employees purchased approximately 73 shares at $6.27 per share under the provisions of the Company's Employee Stock Purchase Plan. PSC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999 (All amounts in thousands, except per share data) (Unaudited) Changes in the status of options under the Company's stock option plans are summarized as follows: January 1, 2000 Weighted January 1, 1999 Weighted to Average to Average June 30, 2000 Price December 31, 1999 Price -------------------- ------------ ----------------------- ------------- Options outstanding at beginning of period ............ 3,221 $7.84 3,027 $7.98 Options granted ................... 154 6.73 432 7.28 Options exercised ................. (54) 5.87 (82) 7.24 Options forfeited/canceled ........ (329) 8.17 (156) 9.24 -------- -------- Options outstanding at end of period .................. 2,992 $7.79 3,221 $7.84 ======== ======== Number of options at end of period: Exercisable .................... 1,922 $8.17 2,058 $8.13 Available for grant ............ 645 693 During the six month period ended June 30, 2000, 222 forfeited options were cancelled due to the expiration of the 1987 Stock Option Plan in December 1997. These options are not available for future grants. (7) NET INCOME/(LOSS) PER COMMON AND COMMON EQUIVALENT SHARE Basic EPS was computed by dividing reported earnings available to common shareholders by weighted average shares outstanding during the year. Diluted EPS for the three months ended June 30, 2000 and July 2, 1999 was determined on the following assumptions: (1) Preferred Shares and related warrants issued in connection with the private placement of equity were converted upon issuance on January 1, 1999 and (2) warrants issued in connection with the acquisition of Spectra were converted on January 1, 1999. The following options and warrants were not included in the computation of diluted EPS since the exercise prices were greater than the average market price of Common Shares. Options to purchase 3,960 and 497 common shares at an average price of $7.17 and $10.49 per share were outstanding for the three months ended June 30, 2000 and July 2, 1999, respectively. Options to purchase 2,914 and 551 common shares at an average price of $7.81 and $10.08 per share were outstanding for the six months ended June 30, 2000 and July 2, 1999, respectively. Warrants to purchase 180 common shares at a price of $8.00 per share were outstanding for the three and six months ended June 30, 2000. PSC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999 (All amounts in thousands, except per share data) (Unaudited) Three Months Ended ---------------------------------------------------------------------------------------- June 30, 2000 July 2, 1999 ----------------------------------------- ------------------------------------------- Per Per Income Shares Share Income Shares Share (numerator) (denominator) Amount (numerator) (denominator) Amount ----------- ------------- ------ ----------- ------------- ------ Basic EPS: Income available to common shareholders $ 1 12,027 $0.00 $3,488 11,928 $0.29 Effect of dilutive securities: ===== ===== Options -- 2 -- 425 Warrants -- 44 -- 166 Preferred Shares -- 1,375 -- 1,375 ------------ --------------- --------- ------------ Diluted EPS: Income available to common shareholders and assumed conversions $ 1 13,448 $0.00 $3,488 13,894 $0.25 === ====== ===== ====== ====== ===== Six Months Ended --------------------------------------------------------------------------------------- June 30, 2000 July 2, 1999 ------------------------------------------------ ----------------------------------- Per Per Income Shares Share Income Shares Share (numerator) (denominator) Amount (numerator) (denominator) Amount ----------- ------------- ------ ----------- ------------- ------ Basic EPS: Income available to common shareholders ($3,149) 12,208 ($0.26) $5,579 11,912 $0.47 Effect of dilutive securities: Options -- -- -- 361 Warrants -- -- -- 126 Preferred Shares -- -- -- 1,375 ------------ ------------- ---------- ---------- Diluted EPS: Income available to common shareholders and assumed conversions ($3,149) 12,028 ($0.26) $5,579 13,774 $0.41 ======== ====== ======= ====== ====== ===== PSC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999 (All amounts in thousands, except per share data) (Unaudited) (8) DERIVATIVES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. As amended by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 and cannot be applied retroactively. The Company has not yet quantified the impacts of adopting SFAS No. 133 on the financial statements and will adopt SFAS No. 133 on January 1, 2001. The Company monitors its exposure to interest rate and foreign currency exchange risk. The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. The Company uses derivative instruments solely to reduce the financial impact of these risks. Cash flows from interest rate swap agreements and foreign currency forward exchange contracts are classified in the same category as the item being hedged. Interest Rate Risk: The Company's exposure to interest rate changes relates to its long-term debt. The Company has entered into interest rate swap agreements with its senior lending banks in accordance with the terms of the senior credit agreement. The Company uses these interest rate swap agreements to reduce its exposure to interest rate changes. The differentials to be received or paid under these interest rate swap agreements are recognized as a component of interest expense in the consolidated statements of operations. Foreign Currency Exchange Rate Risk: The Company's exposure to foreign currency relates primarily to its international subsidiaries. Sales to certain countries are denominated in their local currency. The Company enters into foreign currency forward exchange contracts to minimize the effect of foreign currency fluctuations relating to these transactions and commitments denominated in foreign currencies. The foreign exchange contracts generally have maturities of approximately 30 days and require the Company to exchange foreign currencies for U.S. dollars at maturity, at rates agreed to at the inception of the contracts. Gains and losses on forward contracts are offset against the foreign exchange gains and losses on the underlying hedged items and are recorded in the consolidated statements of operations. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations General The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements of the Company's December 31, 1999 annual report on Form 10-K. Overview On December 21, 1999, the Company acquired substantially all of the assets of GAP Technologies, Inc. and GEO Labs, Inc. (GAP) for approximately $4.8 million. GAP is a technology and research group that designs and manufactures miniature laser scan engines and pen-based scanners. The Company recently introduced an innovative consumer home shopping appliance, incorporating the miniature scan engine technology developed by GAP. The home shopping system enables consumers to create a shopping list by scanning product bar codes and then transmitting the list online to the retailer. On January 19, 2000, the Company acquired all of the outstanding shares of Percon Incorporated (Percon), a manufacturer of wireless and batch portable data terminals (PDTs), decoders, input devices and data management software, for approximately $57.0 million. The acquisition of Percon significantly increased the scope of the Company's product line, enhancing the Company's ability to provide systems type solutions and to expand the Company into the PDT and software/services categories of the AIDC market, which are growing rapidly. On June 5, 2000, the Company, Mohawk Corp. (Parent) and Mohawk Acquisition Corp., a wholly owned subsidiary of Parent (Purchaser), entered into an Agreement and Plan of Merger. Pursuant to the agreement, Purchaser commenced a cash tender offer to purchase all outstanding shares of common stock, all outstanding shares of Series A Convertible Preferred Stock and all outstanding warrants, in each case net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase dated June 19, 2000 and in the related Letters of Transmittal. On July 24, 2000, Parent, Purchaser and the Company executed a Termination Agreement whereby the parties agreed to terminate the offer effective on such date. The Company recorded a pre-tax charge of approximately $1.0 million during the second quarter of 2000 for expenses related to the merger activities. Results of Operations: Three Months ended June 30, 2000 and July 2, 1999 Net Sales. Net sales during the three months ended June 30, 2000 increased $9.4 million or 16% compared with the same period in 1999. The increase in net sales is attributed primarily to increased sales in U-Scan(R) Express Self-Checkout Systems and inclusion of Percon product sales offset by a decline in sales of retail fixed position products and a significant impact of unfavorable foreign currency exchange rates. Gross Profit. Gross profit during the three months ended June 30, 2000 increased $1.7 million or 7% compared with the same period in 1999. As a percentage of sales, gross profit decreased from 41.4% to 38.2%. The decrease in gross profit percentage is primarily due to a change in the Company's product mix and the impact of unfavorable foreign currency exchange rates. Engineering, Research and Development. Engineering, Research and Development (ER&D) expenses increased $1.0 million or 23%, as compared to the same period in 1999. As a percentage of sales, ER&D was 8.0% in the second quarter of 2000 versus 7.6% of net sales in the second quarter of 1999. The increase in ER&D is primarily attributable to additional investments in developing new products and enhancing existing products, and the inclusion of GAP Technologies and Percon, which were acquired in December 1999 and January 2000, respectively. Selling, General and Administrative. Selling, General and Administrative (SG&A) expenses increased $2.3 million or 21%, as compared to the second quarter of 1999. As a percentage of sales, SG&A was 19.4% in 2000 versus 18.6% in 1999. The dollar and percentage increases are primarily due to the inclusion of Percon and higher royalty expense recorded in connection with the February 8, 2000 decision related to the Company's licensing agreements with Symbol Technologies, Inc. See "Legal Proceedings." Interest Expense. Interest expense increased $1.2 million versus the comparable period in 1999. The increase is primarily due to additional borrowings of $58.0 million in January 2000 to finance the acquisition of Percon. Income Tax Provision. Excluding nondeductible goodwill amortization recorded in connection with the Percon acquisition, the Company's effective tax rate was 36% in 2000 versus 35% in 1999. Results of Operations: Six Months ended June 30, 2000 and July 2, 1999 Net Sales. Net sales during the six months ended June 30, 2000 increased $11.7 million or 10% compared with the same period in 1999. The increase in net sales is attributed primarily to increased sales in U-Scan(R) Express Self-Checkout Systems and inclusion of Percon product sales offset by a decline in sales of retail fixed position products and a significant impact of unfavorable foreign currency exchange rates. Gross Profit. Gross profit during the six months ended June 30, 2000 decreased $0.3 million or 1% compared with the same period in 1999. As a percentage of sales, gross profit decreased from 42.4% to 38.3%. The decrease in gross profit percentage is primarily due to a change in the Company's product mix and the impact of unfavorable foreign currency exchange rates. Engineering, Research and Development. Engineering, Research and Development (ER&D) expenses increased $2.7 million or 32%, as compared to the same period in 1999. As a percentage of sales, ER&D was 8.7% in the second quarter of 2000 versus 7.3% of net sales in the second quarter of 1999. The increase in ER&D is primarily attributable to additional investments in developing new products and enhancing existing products, and the inclusion of GAP Technologies and Percon, which were acquired in December 1999 and January 2000, respectively. Selling, General and Administrative. Selling, General and Administrative (SG&A) expenses increased $4.4 million or 19%, as compared to the second quarter of 1999. As a percentage of sales, SG&A was 21.4% in 2000 versus 19.8% in 1999. The dollar and percentage increases are primarily due to the inclusion of Percon and higher royalty expense recorded in connection with the February 8, 2000 decision related to the Company's licensing agreements with Symbol Technologies, Inc. See "Legal Proceedings." Severance and Other Costs. During the first quarter of 2000, the Company recorded a pretax charge of $2.0 million for employee severance and benefit costs for the elimination of approximately 35 positions resulting from integration activities associated with the acquisition of Percon and reorganization actions in connection with the Company's sales force. Excluding $0.3 million reversed in the second quarter of 2000, the Company utilized $1.0 million of the accrual in 2000. As of June 30, 2000, the amount of the severance accruals was approximately $0.7 million, which relates to current contractual obligations. Including $0.3 million reversed in the second quarter, these costs reduced 2000 income/(loss) before income tax provision/(benefit), net income/(loss), basic EPS and diluted EPS by $1.7 million, $1.1 million, $0.09 and $0.09, respectively. Interest Expense. Interest expense increased $2.5 million versus the comparable period in 1999. The increase is primarily due to additional borrowings of $58.0 million in January 2000 to finance the acquisition of Percon, and bank fees incurred in connection with amendments and waivers obtained for the senior and subordinated credit agreements. Income Tax Provision/(Benefit). Excluding nondeductible goodwill amortization recorded in connection with the Percon acquisition, the Company's effective tax rate was 36% in 2000 versus 35% in 1999. Liquidity and Capital Resources Current assets increased $13.1 million from December 31, 1999 primarily due to the inclusion of Percon and to the increase in accounts receivable. Current liabilities increased $3.0 million from December 31, 1999 primarily due to the increase in accrued expenses in connection with merger related activities and higher interest charges offset by a decrease in current portion of long-term debt and accrued payroll and related employee benefits. As a result, working capital increased $10.1 million from December 31, 1999. Property, plant and equipment expenditures totaled $2.2 million for the six months ended June 30, 2000 and July 2, 1999. The 2000 expenditures primarily related to new product tooling, manufacturing equipment, and computer software and hardware. The long-term debt to capital percentage was 70.3% at June 30, 2000 versus 52.9% at December 31, 1999 primarily due to $58.0 million of additional debt borrowed to finance the acquisition of Percon. At June 30, 2000, liquidity immediately available to the Company consisted of cash and cash equivalents of $6.3 million. The Company has revolving credit facilities totaling $50.0 million, of which, $27.0 million was outstanding as of June 30, 2000. The Company believes that its cash resources and available credit facilities, in addition to its operating cash flows, are sufficient to meet its requirements for the next 12 months. Euro Conversion On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing legacy currencies and the euro. The legacy currencies will remain in effect until July 1, 2002, at which time, the legacy currencies will no longer be legal tender for any transactions. The Company believes that the euro conversion will not have a material adverse impact to results of operations, financial position or cash flows. Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 Certain statements contained in this Management's Discussion and Analysis may be forward-looking in nature, or "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Management cautions that these statements are estimates of future performance and are highly dependent upon a variety of important factors, which could cause actual results to differ materially from the estimate. These factors include the market acceptance of products, competitive product offerings, the disposition of legal issues, the ability of the Company to identify and address successfully the Year 2000 issues in a timely manner and at costs that are reasonably in line with projections, and the ability of the Company's vendors to identify and address successfully their own Year 2000 issues in a timely manner. Profits also will be affected by the Company's ability to control manufacturing and operating costs. Reference should be made to filings with the Securities and Exchange Commission for further discussion of factors that could affect the Company's future results. PART II: OTHER INFORMATION Item 1: Legal Proceedings: ----------------- The description of the Company's legal proceedings set forth in Item 3 of the Company's Annual Report on Form 10-K for the fiscal period ended December 31, 1999 is incorporated herein by reference. Symbol Technologies, Inc. The several motions in the litigation with Symbol Technologies, Inc. ("Symbol") pending in the United States District Court for the Western District of New York were deemed submitted on April 19, 2000 and remain under consideration by the Court. With respect to the Eastern District Action commenced by Symbol, a "Markman" hearing to determine the scope of Symbol's patents is scheduled for September 28, 2000. The trial is scheduled to commence on December 4, 2000. Discovery proceedings by both parties are in progress. Lemelson On May 15, 2000, the Company, along with the other Auto ID companies, filed a motion seeking permission to file an interlocutory appeal of the Court's decision to strike the count of the complaint which alleged that the Lemelson Partnership's delays in obtaining its patents rendered them unenforceable for laches. The motion was granted on July 14, 2000, and on August 4, 2000, the petition for leave to appeal was filed with the United States Court of Appeals for the Federal Circuit. On July 24, 2000, the Company, along with the other Auto ID companies, filed a motion for partial summary judgment, asserting that almost all of the claims of the Lemelson Partnership's patents are invalid for lack of written description. This motion is pending. Metrologic Instruments, Inc. The suit involving Metrologic Instruments, Inc. has been restored to the Court's calendar. A discovery deadline has been set for March 2, 2001. Item 2: Changes in Securities: None Item 3: Defaults upon Senior Securities: None Item 4: Submission of Matters of Shareholders to a Vote of Security Holders: None Item 5: Other Information: None Item 6: Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: Report on Form 8-K dated June 7, 2000 Report on Form 8-K dated July 25, 2000 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. PSC Inc. DATE: August 14, 2000 By:/s/ Robert C. Strandberg Robert C. Strandberg President and Chief Executive Officer DATE: August 14, 2000 By: /s/ William J. Woodard William J. Woodard Vice President & Chief Financial Officer DATE: August 14, 2000 By: /s/ Michael J. Stachura Michael J. Stachura Vice President of Finance (Principal Accounting Officer)