===============================================================================
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 September 29, 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 November 16, 2000, there were 12,305,129 shares of common stock
outstanding.
===============================================================================
PSC INC. AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION Page
Number
Item 1 Financial Statements -------
Consolidated Balance Sheets as of
September 29, 2000 (Unaudited) and December 31, 1999...............3-4
Consolidated Statements of Operations and
Retained Earnings for the three and nine months ended:
September 29, 2000 (Unaudited) and October 1, 1999 (Unaudited) ....5-6
Consolidated Statements of Cash Flows
for the nine months ended:
September 29, 2000 (Unaudited) and October 1, 1999 (Unaudited) ......7
Notes to Consolidated Financial Statements (Unaudited) ...........8-14
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations ...................15-18
PART II: OTHER INFORMATION
Item 1 Legal Proceedings ..................................................19
Item 2 Changes in Securities .............................................19
Item 3 Defaults upon Senior Securities ....................................19
Item 4 Submission of Matters to a Vote of Security Holders ...............20
Item 5 Other Information ................................................20
Item 6 Exhibits and Reports on Form 8-K ..................................20
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
PSC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except per share data)
September 29, 2000 December 31, 1999
----------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 7,319 $ 1,402
Accounts receivable, net of allowance for doubtful
accounts of $710 and $685, respectively ................ 46,033 38,396
Inventories ............................................ 27,930 23,343
Prepaid expenses and other ............................. 2,441 3,514
---------------- ---------------
TOTAL CURRENT ASSETS ................................... 83,723 66,655
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $28,241 and $23,614,
respectively ........................................... 20,719 25,994
DEFERRED TAX ASSETS ....................................... 22,541 20,762
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $36,757 and $27,476, respectively ...... 95,657 53,330
---------------- ---------------
TOTAL ASSETS .............................................. $222,640 $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)
September 29, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .................................... $135,406 $16,281
Accounts payable ..................................................... 24,317 20,685
Accrued expenses ..................................................... 8,172 7,086
Accrued payroll and related employee benefits ........................ 3,953 5,758
----------------- ---------------
TOTAL CURRENT LIABILITIES ............................................ 171,848 49,810
LONG-TERM DEBT, less current maturities ................................. -- 57,585
ACCRUED PROVISION FOR DISPUTED ROYALTIES ................................ 8,519 6,400
OTHER LONG-TERM LIABILITIES ............................................. 1,980 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
12,311 and 12,080 shares issued and outstanding ..................... 123 121
Additional paid-in capital ........................................... 73,907 71,843
Retained earnings/(Accumulated deficit) .............................. (29,214) (18,065)
Accumulated other comprehensive income/(loss) ........................ (3,167) (1,210)
Less treasury stock repurchased at cost, 180 shares .................. (1,357) (1,357)
----------------- ---------------
TOTAL SHAREHOLDERS' EQUITY .............................................. 40,293 51,333
----------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $222,640 $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)
Three Months Ended
---------------------------------------------------
September 29, 2000 October 1, 1999
------------------ ---------------
(Unaudited) (Unaudited)
NET SALES ............................................................... $59,543 $59,031
COST OF SALES ........................................................... 36,798 34,130
------------------ ---------------
Gross profit ......................................................... 22,745 24,901
OPERATING EXPENSES:
Engineering, research and development ................................ 5,268 4,622
Selling, general and administrative .................................. 13,514 11,435
Severance and other costs ............................................ 426 --
Write-down of facility ............................................... 6,009 --
Amortization of intangibles resulting from
business acquisitions ............................................. 2,870 1,603
------------------ ---------------
Income/(loss) from operations ........................................ (5,342) 7,241
INTEREST AND OTHER INCOME/(EXPENSE):
Interest expense ..................................................... (3,280) (1,826)
Interest income ...................................................... 100 70
Other income/(expense) ............................................... 54 425
------------------ ---------------
(3,126) (1,331)
------------------ ---------------
Income/(loss) before income tax provision/(benefit) .................. (8,468) 5,910
Income tax provision/(benefit) ....................................... (468) 2,068
---------------
------------------
Net income/(loss) .................................................... ($ 8,000) $3,842
================== ===============
NET INCOME/(LOSS) PER COMMON AND COMMON
Basic ............................................................. ($0.66) $0.32
Diluted ........................................................... ($0.66) $0.27
WEIGHTED AVERAGE NUMBER OF COMMON AND
Basic ............................................................. 12,120 12,019
Diluted ........................................................... 12,120 14,021
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit), beginning of period ......... ($21,214) ($20,448)
Net income/(loss) .................................................... (8,000) 3,842
------------------ ---------------
Retained earnings/(Accumulated deficit), end of period ............... ($29,214) ($16,606)
================== ===============
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)
Nine Months Ended
--------------------------------------------------------
September 29, 2000 October 1, 1999
------------------ ---------------
(Unaudited) (Unaudited)
NET SALES ........................................................... $188,400 $176,177
COST OF SALES ....................................................... 116,342 101,649
--------------- ----------------
Gross profit ..................................................... 72,058 74,528
OPERATING EXPENSES:
Engineering, research and development ............................ 16,505 13,169
Selling, general and administrative .............................. 41,031 34,593
Severance and other costs ........................................ 2,100 2,103
Merger related costs ............................................. 959 --
Write-down of facility ........................................... 6,009 --
Amortization of intangibles resulting from
business acquisitions ......................................... 8,338 4,815
--------------- ----------------
Income/(loss) from operations .................................... (2,884) 19,848
INTEREST AND OTHER INCOME/(EXPENSE):
Interest expense ................................................. (9,823) (5,908)
Interest income .................................................. 322 209
Other income/(expense) ........................................... 77 337
--------------- ----------------
(9,424) (5,362)
--------------- ----------------
Income/(loss) before income tax provision/(benefit) .............. (12,308) 14,486
Income tax provision/(benefit) ................................... (1,159) 5,065
----------------
---------------
Net income/(loss) ................................................ ($11,149) $ 9,421
=============== ================
NET INCOME/(LOSS) PER COMMON AND COMMON
Basic ......................................................... ($0.92) $0.79
Diluted ....................................................... ($0.92) $0.68
WEIGHTED AVERAGE NUMBER OF COMMON AND
Basic ......................................................... 12,059 11,948
Diluted ....................................................... 12,059 13,873
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit), beginning of period ..... ($18,065) ($26,027)
Net income/(loss) ................................................ (11,149) 9,421
--------------- ----------------
Retained earnings/(Accumulated deficit), end of period ........... ($29,214) ($16,606)
=============== ================
See accompanying notes to the Consolidated Financial Statements.
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Nine Months Ended
--------------------------------------------------
September 29, 2000 October 1, 1999
------------------ ---------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) ..................................................... ($11,149) $9,421
Adjustments to reconcile net income/(loss) to net cash
Depreciation and amortization ......................................... 13,887 10,056
Loss on write-down of assets .......................................... 6,009 --
Deferred tax assets ................................................... (1,757) 2,506
(Increase) decrease in assets:
Accounts receivable ................................................ (1,203) 255
Inventories ........................................................ (567) (6,720)
Prepaid expenses and other ......................................... 1,127 70
Increase (decrease) in liabilities:
Accounts payable ................................................... 1,078 693
Accrued expenses ................................................... (1,996) (1,573)
Accrued provision for disputed royalties ........................... 2,119 --
Accrued payroll and related employee benefits ...................... (1,878) (46)
------------------ ---------------
Net cash provided by operating activities .......................... 5,670 14,662
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ............................................. (2,809) (3,682)
Net cash paid for business ............................................ (53,486) --
Additions to intangible and other assets .............................. (4,292) (4,842)
Proceeds from sale and leaseback transaction .......................... -- 8,620
------------------ ---------------
Net cash (used in) provided by investing activities ................ (60,587) 96
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt ........................................... 119,000 7,000
Payments of long-term debt ............................................ (58,058) (22,772)
Additions to other long-term liabilities, net ......................... 362 81
Purchase of treasury stock ............................................ -- (72)
Exercise of options and issuance of common shares ..................... 1,459 1,515
Tax benefit from exercise or disposition of stock options ............. 28 43
------------------ ---------------
Net cash provided by (used in) financing activities ................ 62,791 (14,205)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS .................................................. (1,957) (809)
------------------ ---------------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS ...................................................... 5,917 (256)
CASH AND CASH EQUIVALENTS:
Beginning of period ................................................ 1,402 6,180
------------------ ---------------
End of period ...................................................... $7,319 $5,924
================== ===============
See accompanying notes to the Consolidated Financial Statements.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2000 AND OCTOBER 1, 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 September 29, 2000, the results of
operations for the three and nine months ended September 29, 2000 and
October 1, 1999 and its cash flows for the nine months ended September 29,
2000 and October 1, 1999. The results of operations for the three and nine
months ended September 29, 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.
(2) 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:
September 29, 2000 December 31, 1999
------------------------ ----------------------
Raw materials $15,296 $14,358
Work-in-process 6,174 5,238
Finished goods 6,460 3,747
------------ ------------
$27,930 $23,343
============ ============
(3) PROPERTY, PLANT & EQUIPMENT
The Company is consolidating its Webster, New York headquarters with its
operations in Eugene, Oregon. As a result, the Company recorded a $6.0
million write-down in connection with the anticipated sale of the Webster,
New York facility in accordance with Statement of Financial Accounting No.
121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of". SFAS No. 121 requires an
impairment loss to be recognized if the carrying amount of an asset
exceeds the fair value of the asset. The facility now approximates fair
market value less any commissions or fees to be paid upon disposal, or
$6.5 million. The loss was recognized in September 2000 on the facility
and related leasehold improvements and is included in the consolidated
statements of operations. The Company anticipates disposing of the
facility within the next twelve months, at which time, the proceeds will
be utilized to reduce the Company's indebtedness under the senior credit
facility.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2000 AND OCTOBER 1, 1999
(All amounts in thousands, except per share data)
(Unaudited)
(4) DEBT
Debt consists of the following:
September 29, 2000 December 31, 1999
------------------ -------------------
Senior term loan .............. $70,000 $42,000
Revolving line of credit ...... 34,000 --
Subordinated term loan ........ 29,652 29,607
Subordinated promissory note .. 1,251 2,188
Other ......................... 503 71
------------ ------------
135,406 73,866
Less: current maturities ..... 135,406 16,281
------------ ------------
$-- $57,585
============ ============
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 5 "Acquisition". The amended revolving credit
facilities provide for borrowings up to $45.0 million, of which, $27.0 million
was utilized toward the acquisition.
The Company has embarked upon a process of selling certain assets, including the
Webster, New York facility, with the objective of generating proceeds to reduce
the outstanding indebtedness under the senior credit facility. As of September
29, 2000, the Company has no availability to borrow from the revolving credit
facilities.
The Company is required to meet certain financial covenants in relation to its
senior and subordinated credit facilities. At September 29, 2000, the Company
was in violation of several of its financial covenants including covenants
relating to the senior debt ratio, total debt ratio, interest coverage ratio,
fixed charge coverage ratio and net worth. The Company believes it has reached
an agreement in principle with its senior lenders to waive these events of
default and, in connection therewith, to modify certain provisions of the credit
agreement through March 31, 2001, subject to certain terms and conditions. Among
other provisions, the commitment for its working capital facility will be
reduced from $50 million to $45 million and the interest rate will be increased
to prime plus 1.50% from November 1, 2000 to December 31, 2000 and to prime plus
2.00% from January 1, 2001 to March 31, 2001. A 2.00% default interest rate on
the senior debt will be accrued. The Company has also been negotiating waivers
of the foregoing defaults with its subordinated note holders and although there
can be no assurance, the Company is optimistic about obtaining such waivers. The
Company will also be seeking further amendments to its senior credit facilities
and the financial covenants contained therein. If the Company is unsuccessful in
obtaining such further amendments prior to March 31, 2001, management believes
that the Company will be unable to meet the current financial ratios on that
date and the Company will then be in default. In the event of such default, the
lenders could elect to declare all amounts borrowed under the credit agreements
to be due and payable. Accordingly, the Company has classified all of its
long-term debt as current.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2000 AND OCTOBER 1, 1999
(All amounts in thousands, except per share data)
(Unaudited)
The Company has been advised by its independent public accountants that
should the situation remain unresolved prior to the completion of their
audit of the Company's financial statements for the year ending December
31, 2000, their auditors' report on those financial statements may be
modified for that contingency.
(5) 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 Nine Months Ended
--------------------------------------------------
September 29, 2000 October 1, 1999
------------------------ ---------------------
Net sales ............................................ $189,159 $201,887
Income/(loss) from operations ........................ (4,402) 20,178
Net income/(loss) .................................... (12,715) 6,353
Net income/(loss) per common and
Basic ........................................... ($1.05) $0.53
Diluted ......................................... ($1.05) $0.46
Weighted average number of common and
Basic ........................................... 12,059 11,948
Diluted ......................................... 12,059 13,873
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2000 AND OCTOBER 1, 1999
(All amounts in thousands, except per share data)
(Unaudited)
In connection with the acquisition, liabilities assumed and net cash paid
were as follows:
Fair value of assets acquired ..... $67,611
Liabilities assumed ............... 6,623
-------------
Cash paid for business ............ 60,988
Less: cash acquired .............. 7,502
-------------
Net cash paid for business ........ $53,486
=============
(6) 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 $1.3 million of the
accrual in 2000. As of September 29, 2000, the amount of the severance
accruals was approximately $0.4 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.
(7) 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.
(8) SHAREHOLDERS' EQUITY
Comprehensive income, which includes net income/(loss), foreign currency
translation adjustments and unrealized gain/(loss) on securities, was
($8,966) and $3,960 for the three months ended September 29, 2000 and
October 1, 1999, respectively, and ($13,106) and $8,300 for the nine
months ended September 29, 2000 and October 1, 1999, respectively.
During the nine month period ended September 29, 2000, employees purchased
approximately 135 shares at an average price of $6.38 per share under the
provisions of the Company's Employee Stock Purchase Plan.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2000 AND OCTOBER 1, 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
September 29, 2000 Price December 31, 1999 Price
------------------------- ------------ ----------------------- -------------
Options outstanding at
beginning of period ........ 3,221 $7.84 3,027 $7.98
Options granted ............... 230 5.70 432 7.28
Options exercised ............. (78) 6.38 (82) 7.24
Options forfeited/canceled .... (408) 7.99 (156) 9.24
-------- --------
Options outstanding at
end of period .............. 2,965 $7.70 3,221 $7.84
======== ========
Number of options at end
Exercisable ................ 2,153 $7.98 2,058 $8.13
Available for grant ........ 618 693
During the nine month period ended September 29, 2000, 253 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.
(9) 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 September 29, 2000 and October 1,
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 2,883 and 497 common shares at
an average price of $7.81 and $10.76 per share were outstanding for the
three months ended September 29, 2000 and October 1, 1999, respectively.
Options to purchase 2,883 and 512 common shares at an average price of
$7.78 and $10.25 per share were outstanding for the nine months ended
September 29, 2000 and October 1, 1999, respectively. Warrants to purchase
1,155 and 180 common shares at an average price of $5.68 and $8.00 per
share were outstanding for the three and nine months ended September 29,
2000, respectively. Warrants to purchase 180 common shares at $8.00 per
share were outstanding for the nine months ended September 29, 2000.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2000 AND OCTOBER 1, 1999
(All amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
-------------------------------------------------------------------------------------------------
September 29, 2000 October 1, 1999
----------------------------------------------- ----------------------------------------------
Per Per
Income/(loss) Shares Share Income/(loss) Shares Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS:
Income/(loss) available to
common shareholders ............. ($8,000) 12,120 ($0.66) $3,842 12,019 $0.32
Effect of dilutive securities:
Options ...................... -- -- -- 448
Warrants ..................... -- -- -- 179
Preferred Shares -- -- -- 1,375
---------------- ------------------ ---------------- ------------------
Diluted EPS:
Income/(loss) available to
common shareholders and
assumed conversions ............. ($8,000) 12,120 ($0.66) $3,842 14,021 $0.27
======== ====== ======= ====== ====== =====
Nine Months Ended
----------------------------------------------------------------------------------------------------
September 29, 2000 October 1, 1999
------------------------------------------------ ------------------------------------------------
Per Per
Income/(loss) Shares Share Income/(loss) Shares Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS:
Income/(loss) available to
common shareholders ($11,149) 12,059 ($0.92) $9,421 11,948 $0.79
======= =====
Effect of dilutive securities:
Options ...................... -- -- -- 406
Warrants ..................... -- -- -- 144
Preferred Shares ............. -- -- -- 1,375
----------------- ------------------ ----------------- ------------------
Diluted EPS:
Income/(loss) available to
common shareholders and
assumed conversions ............. ($11,149) 12,059 ($0.92) $9,421 13,873 $0.68
========= ====== ======= ====== ====== =====
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2000 AND OCTOBER 1, 1999
(All amounts in thousands, except per share data)
(Unaudited)
(10) 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 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 foreign currency forward exchange contracts are classified in
the same category as the item being hedged.
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 60 to 90 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.
(11) SUBSEQUENT EVENT
Severance and Other Costs
On November 10, 2000, the Company announced a plan to consolidate its Webster,
New York headquarters with its operations in Eugene, Oregon. The consolidation
will result in the elimination of approximately 140 employees, of which, 110
employees are located in Webster, New York. Management is still in the process
of finalizing the consolidation plan, however, management estimates the charge
for severance and other costs, which will be recorded in the fourth quarter of
2000, will range between $2.0 million and $3.0 million.
Litigation
On November 20, 2000, all pending litigation with Symbol Technologies, Inc.
("Symbol") was settled. The agreements resolve all litigation between the
parties, settle all disputed royalty payments and uphold the patents asserted by
Symbol. In addition, the parties have also amended and clarified the Company's
existing license agreement and included certain new patents.
The parties also entered into product supply agreements for products that will
begin shipping in approximately one year. Under the terms of the supply
agreements, the Company has agreed to purchase hand-held laser scanners and scan
engines from Symbol. Symbol has agreed to purchase fixed-position retail
point-of-sale scanners from the Company.
The parties have exchanged general releases. Stipulations of Dismissal and
Consent Judgments are being submitted to the Courts. Management has not yet
quantified the impact of the settlement on the Company's financial statements,
however, management estimates that the full amount of the settlement has been
accrued at September 29, 2000.
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. In early 2000, the Company 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.
On November 10, 2000, the Company announced a plan to consolidate its Webster,
New York headquarters with its operations in Eugene, Oregon. The consolidation
will result in the elimination of approximately 140 employees, of which, 110
employees are located in Webster, New York. Management is still in the process
of finalizing the consolidation plan, however, management estimates the charge
for severance and other costs, which will be recorded in the fourth quarter of
2000, will range between $2.0 million and $3.0 million.
On November 20, 2000, all pending litigation with Symbol Technologies, Inc.
("Symbol") was settled. The agreements resolve all litigation between the
parties, settle all disputed royalty payments and uphold the patents asserted by
Symbol. In addition, the parties have also amended and clarified the Company's
existing license agreement and included certain new patents.
The parties also entered into product supply agreements for products that will
begin shipping in approximately one year. Under the terms of the supply
agreements, the Company has agreed to purchase hand-held laser scanners and scan
engines from Symbol. Symbol has agreed to purchase fixed-position retail
point-of-sale scanners from the Company.
The parties have exchanged general releases. Stipulations of Dismissal and
Consent Judgments are being submitted to the Courts. Management has not yet
quantified the impact of the settlement on the Company's financial statements,
however, management estimates that the full amount of the settlement has been
accrued at September 29, 2000.
Results of Operations: Three Months ended September 29, 2000 and October 1, 1999
- --------------------------------------------------------------------------------
Net Sales. Net sales during the three months ended September 29, 2000 increased
$0.5 million or 1% compared with the same period in 1999. The increase in net
sales is attributed primarily to the inclusion of Percon product sales and
increased sales in U-Scan(R) Express Self-Checkout Systems offset by a decline
in retail fixed position and handheld product sales combined with a $2.0 million
impact of unfavorable foreign currency exchange rates.
Gross Profit. Gross profit during the three months ended September 29, 2000
decreased $2.2 million or 9% compared with the same period in 1999. As a
percentage of sales, gross profit decreased from 42.2% to 38.2%. The decrease in
gross profit 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 $0.6 million or 14%, as compared to the same period in
1999. As a percentage of sales, ER&D was 8.8% in the third quarter of 2000
versus 7.8% in the third 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 $2.1 million or 18%, as compared to the third quarter of
1999. As a percentage of sales, SG&A was 22.7% in 2000 versus 19.4% 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."
Write-down of Facility. In September 2000, the Company recorded a $6.0 million
write-down in connection with the anticipated sale of the Webster, New York
facility.
Interest Expense. Interest expense increased $1.5 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.
Income Tax Provision/(Benefit). Excluding nondeductible goodwill amortization
recorded in connection with the Percon acquisition and the write-down on the
Webster facility, the Company's effective tax rate was 36% in 2000 versus 35% in
1999.
Results of Operations: Nine Months ended September 29, 2000 and October 1, 1999
- --------------------------------------------------------------------------------
Net Sales. Net sales during the nine months ended September 29, 2000 increased
$12.2 million or 7% compared with the same period in 1999. The increase in net
sales is attributed primarily to the inclusion of Percon product sales and
increased sales in U-Scan(R) Express Self-Checkout Systems offset by a decline
in retail fixed position and handheld product sales combined with a $4.9 million
impact of unfavorable foreign currency exchange rates.
Gross Profit. Gross profit during the nine months ended September 29, 2000
decreased $2.5 million or 3% compared with the same period in 1999. As a
percentage of sales, gross profit decreased from 42.3% to 38.2%. The decrease in
gross profit 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 $3.3 million or 25%, as compared to the same period in
1999. As a percentage of sales, ER&D was 8.8% in 2000 versus 7.5% in 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 $6.4 million or 19%, as compared to the same period in 1999.
As a percentage of sales, SG&A was 21.8% in 2000 versus 19.6% 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."
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 $1.3
million of the accrual in 2000. As of September 29, 2000, the amount of the
severance accruals was approximately $0.4 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.
Merger Related Costs. The Company recorded a pre-tax charge of approximately
$1.0 million during the second quarter of 2000 for expenses related to the
termination of merger activities.
Write-down of Facility. In September 2000, the Company recorded a $6.0 million
write-down in connection with the anticipated sale of the Webster, New York
facility.
Interest Expense. Interest expense increased $3.9 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 and the write-down on the
Webster facility, the Company's effective tax rate was 36% in 2000 versus 35% in
1999.
Liquidity and Capital Resources
- -------------------------------
Current assets increased $17.1 million from December 31, 1999 primarily due to
the inclusion of Percon and the increase in accounts receivable. Current
liabilities increased $122.0 million from December 31, 1999 primarily due to the
reclassification of long-term debt to current as a result of noncompliance with
the debt covenants (as discussed below). As a result, working capital decreased
$104.9 million from December 31, 1999.
Property, plant and equipment expenditures totaled $2.8 million and $3.7 million
for the nine months ended September 29, 2000 and October 1, 1999. The 2000
expenditures primarily related to new product tooling, computer software and
hardware, and manufacturing equipment.
At September 29, 2000, liquidity immediately available to the Company consisted
of cash and cash equivalents of $7.3 million. The Company has embarked upon a
process of selling certain assets, including the Webster, New York facility,
with the objective of generating proceeds to reduce the outstanding indebtedness
under the senior credit facility. As of September 29, 2000, the Company has no
availability to borrow from the revolving credit facilities.
The Company is required to meet certain financial covenants in relation to its
senior and subordinated credit facilities. At September 29, 2000, the Company
was in violation of several of its financial covenants including covenants
relating to the senior debt ratio, total debt ratio, interest coverage ratio,
fixed charge coverage ratio and net worth. The Company believes it has reached
an agreement in principle with its senior lenders to waive these events of
default and, in connection therewith, to modify certain provisions of the credit
agreement through March 31, 2001, subject to certain terms and conditions. Among
other provisions, the commitment for its working capital facility will be
reduced from $50 million to $45 million and the interest rate will be increased
to prime plus 1.50% from November 1, 2000 to December 31, 2000 and to prime plus
2.00% from January 1, 2001 to March 31, 2001. A 2.00% default interest rate on
the senior debt will be accrued. The Company has also been negotiating waivers
of the foregoing defaults with its subordinated note holders and although there
can be no assurance, the Company is optimistic about obtaining such waivers. The
Company will also be seeking further amendments to its senior credit facilities
and the financial covenants contained therein. If the Company is unsuccessful in
obtaining such further amendments prior to March 31, 2001, management believes
that the Company will be unable to meet the current financial ratios on that
date and the Company will then be in default. In the event of such default, the
lenders could elect to declare all amounts borrowed under the credit agreements
to be due and payable. Accordingly, the Company has classified all of its
long-term debt as current.
The Company has been advised by its independent public accountants that should
the situation remain unresolved prior to the completion of their audit of the
Company's financial statements for the year ending December 31, 2000, their
auditors' report on those financial statements may be modified for that
contingency.
The Company's liquidity is dependent upon its ability to successfully generate
positive cash flow from operations and completion of asset sales.
Notwithstanding the foregoing, there can be no assurance that the Company will
have sufficient cash flows to meet its working capital and capital expenditure
requirements.
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.
On November 20, 2000, all pending litigation with Symbol Technologies,
Inc. ("Symbol") was settled. The agreements resolve all litigation between the
parties, settle all disputed royalty payments and uphold the patents asserted by
Symbol. In addition, the parties have also amended and clarified the Company's
existing license agreement and included certain new patents.
The parties also entered into product supply agreements for products
that will begin shipping in approximately one year. Under the terms of the
supply agreements, the Company has agreed to purchase hand-held laser scanners
and scan engines from Symbol. Symbol has agreed to purchase fixed-position
retail point-of-sale scanners from the Company.
The parties have exchanged general releases. Stipulations of Dismissal
and Consent Judgments are being submitted to the Courts.
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 September 1, 2000, the United States Court of
Appeals for the Federal Circuit granted the petition of the Company and the
other Auto ID companies for permission to pursue this interlocutory appeal.
Metrologic Instruments, Inc.
The suit involving Metrologic Instruments, Inc. has been restored to
the Court's calendar. Discovery is on-going. A status conference before the
Court is scheduled for December 11, 2000.
Item 2: Changes in Securities: None
---------------------
Item 3: Defaults upon Senior Securities:
-------------------------------
The Company is required to meet certain financial covenants in relation to
its senior and subordinated credit facilities. At September 29, 2000, the
Company was in violation of several of its financial covenants including
covenants relating to the senior debt ratio, total debt ratio, interest coverage
ratio, fixed charge coverage ratio and net worth. The Company believes it has
reached an agreement in principle with its senior lenders to waive these events
of default and, in connection therewith, to modify certain provisions of the
credit agreement through March 31, 2001, subject to certain terms and
conditions. Among other provisions, the commitment for its working capital
facility will be reduced from $50 million to $45 million and the interest rate
will be increased to prime plus 1.50% from November 1, 2000 to December 31, 2000
and to prime plus 2.00% from January 1, 2001 to March 31, 2001. A 2.00% default
interest rate on the senior debt will be accrued. The Company has also been
negotiating waivers of the foregoing defaults with its subordinated note holders
and although there can be no assurance, the Company is optimistic about
obtaining such waivers. The Company will also be seeking further amendments to
its senior credit facilities and the financial covenants contained therein. If
the Company is unsuccessful in obtaining such further amendments prior to March
31, 2001, management believes that the Company will be unable to meet the
current financial ratios on that date and the Company will then be in default.
In the event of such default, the lenders could elect to declare all amounts
borrowed under the credit agreements to be due and payable. Accordingly, the
Company has classified all of its long-term debt as current.
Item 4: Submission of Matters of Shareholders to a Vote of Security Holders:
-------------------------------------------------------------------
None
Item 5: Other Information:
-----------------
The Company received notification on September 6, 2000 that its common
stock has failed to maintain a minimum bid price of $5.00 per share over the
previous 30 consecutive trading days as required for continued listing on The
Nasdaq National Market. In accordance with Marketplace Rule 4310(c)(8)(B), the
Company was provided 90 calendar days (or until December 5, 2000) to regain
compliance with this Rule. If at any time prior to December 5, 2000 the bid
price of the Company's common stock is at least $5.00 for 10 consecutive trading
days, the Company will have achieved compliance with this Rule. There can be no
assurance that the bid price of the Company's stock will be at or above $5.00
for the requisite period of time. If the Company is unable to regain compliance
with the Rule or has not submitted an application to transfer to The Nasdaq
SmallCap Market, its common stock will be delisted effective on the opening of
business on December 7, 2000. Management intends to submit an application to
transfer its common stock to The Nasdaq SmallCap Market prior to December 5,
2000 if compliance is not attained prior to such date. There can be no assurance
that the Company will satisfy the requirements for listing on that market.
On October 23, 2000, William L. Parnell, Jr., who had previously held
executive positions with the Company, was appointed to the newly created
position of Executive Vice President and Chief Operating Officer.
Effective November 20, 2000, Michael J. Stachura was promoted to the
position of Vice President, Chief Financial Officer & Treasurer. He succeeds
William J. Woodard, who had been the Company's Vice President, Chief Financial
Officer and Treasurer and who remains as a consultant to the Company on an
interim basis.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
---------
3.1 Amended Bylaws of the Company as currently in effect.............. 22
(b) Reports on Form 8-K: None
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: November 20, 2000 By:/s/ Robert S. Ehrlich
Robert S. Ehrlich
Chairman of the Board of Directors &
Interim Co-Chief Executive Officer
DATE: November 20, 2000 By:/s/ Bert W. Wasserman
Bert W. Wasserman
Member of the Board of Directors &
Interim Co-Chief Executive Officer
DATE: November 20, 2000 By:/s/ Michael J. Stachura
Michael J. Stachura
Vice President, Chief Financial
Officer & Treasurer
(Principal Accounting Officer)