1 of 21 =================================================================== 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, 1996 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 9 , 1996 there were 11,060,265 shares of common stock outstanding. =============================================================================== 2 PSC Inc. AND SUBSIDIARIES INDEX PAGE NUMBER PART I FINANCIAL INFORMATION Item 1 -Financial Statements Consolidated Balance Sheets as of June 30, 1996 (Unaudited) and December 31, 1995..................................3 - 4 Consolidated Statements of Operations and Retained Earnings for the three and six months ended: June 30, 1996 (Unaudited) and June 30, 1995 (Unaudited) .........................5 - 6 Consolidated Statements of Cash Flows for the six months ended: June 30, 1996 (Unaudited) and June 30, 1995 (Unaudited) .............................7 Notes to Consolidated Financial Statements (Unaudited) ............................8 - 9 Item 2 -Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................10 - 11 PART II OTHER INFORMATION Item 1 -Legal Proceedings.....................................12 Item 2 -Changes in Securities.................................12 Item 3 -Defaults upon Senior Securities.......................12 Item 4 - Submission of Matters to a Vote of Security Holders ...............................12 - 13 Item 5 -Other Information.....................................13 Item 6 - Exhibits and Reports on Form 8-K.....................13 3 PART I - FINANCIAL INFORMATION Item 1: Financial Statements PSC Inc. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (All amounts in thousands) June 30 Dec. 31 1996 1995 (Unaudited) ----------- ------- ASSETS CURRENT ASSETS Cash and short-term investments ................. 8,782 $ 5,538 Marketable securities ............................. -- 4,204 Accounts receivable, net of allowance for doubtful accounts of $280 and $387, respectively .......................... 15,213 15,897 Inventories ....................................... 12,320 10,440 Prepaid expenses and other ........................ 2,633 623 ----- --- TOTAL CURRENT ASSETS ................................... 38,948 36,702 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $5,499 and $4,112, respectively .......................... 21,772 22,157 DEFERRED TAX ASSETS .................................... 1,410 1,506 INTANGIBLE AND OTHER ASSETS, net of accumulated amortization of $3,159 and $2,376 respectively ....... 10,888 10,872 ------ ------ TOTAL ASSETS ........................................... $73,018 $71,237 ======= ======= SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 4 PSC Inc. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (All amounts in thousands) (Continued) June 30 Dec. 31 1996 1995 (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt ............... $141 $131 Accounts payable ................................ 10,478 8,397 Accrued expenses ................................ 5,843 6,202 Accrued payroll and commissions ................. 589 1,237 Accrued acquisition related restructuring costs . 257 338 --- --- TOTAL CURRENT LIABILITIES ........................ 17,308 16,305 LONG-TERM DEBT, less current maturities ............... 454 492 OTHER LONG-TERM LIABILITIES ............................ 609 1,113 SHAREHOLDERS' EQUITY Preferred Shares, par value $.01; 10,000 authorized, none issued ................. -- -- Common shares, par value $.01; 40,000 authorized, 10,028 and 9,985 shares issued and outstanding ................ 100 100 Additional paid-in capital ...................... 46,578 45,881 Retained earnings ............................... 8,194 7,548 Cumulative translation adjustment ............... 12 35 Less treasury stock, 39 shares repurchased, at cost ........................... (237) (237) ---- ---- TOTAL SHAREHOLDERS' EQUITY ....................... 54,647 53,327 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................................. $ 73,018 $ 71,237 ======== ======== SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 5 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 1996 1995 ---- ---- NET SALES .............................................. $22,052 $21,315 COST OF SALES .......................................... 13,488 12,007 ------- ------- Gross profit ..................................... 8,564 9,308 OPERATING EXPENSES Engineering, research and development ............ 1,611 1,131 Selling, general and administrative .............. 6,726 5,689 Income from operations ...................... 227 2,488 INTEREST AND OTHER INCOME .............................. 108 286 ------- ------- Income before provision for income taxes .... 335 2,774 INCOME TAX PROVISION ................................... 124 1,040 ------- ------- NET INCOME ............................................. $ 211 $ 1,734 ======= ======= NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ .02 $ .16 ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Common shares .................................... 9,981 9,786 Common equivalent shares ......................... 441 895 --- --- 10,422 10,681 ====== ====== RETAINED EARNINGS: Retained earnings, beginning of period ........... $ 7,983 $ 3,980 Net income ....................................... 211 1,734 --- ----- Retained earnings, end of period ................. $ 8,194 $ 5,714 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 6 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 1996 1995 ---- ---- NET SALES .................................................. $43,551 $43,577 COST OF SALES .............................................. 25,831 23,767 ------- ------- Gross profit ......................................... 17,720 19,810 OPERATING EXPENSES Engineering, research and development ................ 3,391 2,217 Selling, general and administrative .................. 13,472 11,912 ------ ------ Income from operations .......................... 857 5,681 INTEREST AND OTHER INCOME .................................. 169 127 ------- ------- Income before provision for income taxes ........ 1,026 5,808 INCOME TAX PROVISION ....................................... 380 2,193 ------- ------- NET INCOME ................................................. $ 646 $ 3,615 ======= ======= NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE ................................... $ .06 $ .38 ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Common shares ........................................ 9,971 8,720 Common equivalent shares ............................. 441 895 ------- ------- 10,412 9,615 ====== ===== RETAINED EARNINGS: Retained earnings, beginning of period ............... $ 7,548 $2,099 Net income ........................................... 646 3,615 --- ----- Retained earnings, end of period ..................... $ 8,194 $5,714 ======= ====== SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 7 PSC INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (All amounts in thousands) (Unaudited) Six Months Ended June 30 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income .......................................... $ 646 $ 3,615 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ................... 2,170 1,261 Loss/(Gain) on disposition of assets 37 (161) Deferred tax assets ............................. 128 144 Decrease (increase) in assets: Accounts receivable ........................... 665 (1,764) Inventories ................................... (1,880) (3,766) Prepaid expenses and other .................... (2,132) 258 Increase (decrease) in liabilities: Accounts payable .............................. 2,081 2,369 Accrued expenses .............................. (523) 96 Accrued payroll and commissions ............... (648) (400) Accrued acquisition related restructuring costs (331) (536) ---- ---- Net cash provided by operating activities ...................... 213 1,116 -------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net ......... ................. (967) (4,641) Additions to intangible assets .... ................. (780) (507) Proceeds from sale of investments . ................. 4,167 -- ----- ----- Net cash provided by (used in) investing activities 2,420 (5,148) ===== ====== CASH FLOWS FROM FINANCING ACTIVITIES: Additions to long-term debt ......................... -- 1,199 Principal repayments of long-term debt .............. ( 63) (14,307) Exercise of stock options and sale of common stock .. 627 24,534 Tax benefit from exercise or early disposition of certain stock options ........................ 70 196 -- --- Net cash provided by financing activities .... 634 11,622 --- ------ FOREIGN CURRENCY TRANSLATION ......................... (23) (8) NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS ..................... 3,244 7,582 CASH AND SHORT-TERM INVESTMENTS: Beginning of period ........................... 5,538 2,720 ------- ------- End of period ................................. $ 8,782 $10,302 ======= ======= SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 8 PSC Inc. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED June 30, 1996 and 1995 (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, 1996, and the results of operations and its cash flows for the six months ended June 30, 1996 and 1995. The results of operations for the three months and six months ended June 30, 1996 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, 1995 annual report on Form 10-K. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is based on the weighted average number of common and common equivalent shares (stock options determined under the treasury stock method) outstanding during the period. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. Elements of cost include materials, labor, and overhead and consist of the following: June 30, Dec. 31, 1996 1995 Raw materials ................. $ 8,247 $ 6,914 Work-in-process ............... 2,592 2,090 Finished goods ................ 1,481 1,436 ------- ------- $12,320 $10,440 ======= ======= (2) LONG-TERM DEBT Long-term debt consists of the following: June 30, Dec. 31, 1996 1995 Capital lease obligations ..... $ 529 $ 553 Other ......................... 66 70 ---- ---- 595 623 Less: current maturities ..... 141 131 ---- ---- $454 $492 ==== ==== 9 PSC Inc. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED June 30, 1996 and 1995 (All amounts in thousands, except per share data) (Unaudited) (3) SHAREHOLDERS' EQUITY During the six month period ended June 30, 1996, employees purchased approximately 13 common shares at $7.86 per share under the provisions of the Company's Employee Stock Purchase Plan. Changes in the status of options under the Company's stock option plans are summarized as follows: January 1, 1996 January 1, 1995 to to June 30, 1996 December 31, 1995 ------------- ----------------- Options outstanding at beginning of period .............. 2,138 2,299 Options granted ................... 282 105 Options exercised ................. (69) (200) Options forfeited/canceled ........ (16) (66) ------ ------ Options outstanding at end of period ................... 2,335 2,138 ====== ====== Number of options at end of period: Exercisable .................... 1,649 1,575 Available for grant ............ 1,371 1,637 Average price of options: Outstanding at end of period ..... $8.36 $ 8.41 Exercised ........................ $ 7.68 $ 6.52 (4) SUBSEQUENT EVENT On July 12, 1996, the Company completed its purchase agreement with Spectra-Physics AB of Sweden to acquire its Data Capture Group which includes Spectra-Physics Scanning Systems, Inc., TXCOM S.A. and related businesses ("Spectra"). Spectra, which is headquartered in Eugene, Oregon, is the world's leading manufacturer of countertop and in-counter fixed position bar code scanners for retail point-of-sale applications. The purchase price was approximately $140 million. The purchase was funded by $125 million in cash, $10 million in PSC Common Shares, and $5 million subordinated Installment Promissory Note. The $125 million cash portion was funded by a combination of the Company's cash and Senior Debt ($92.5 million) and Subordinated Debt ($30 million). The acquisition will be accounted for as a purchase. The Company currently estimates that it will allocate approximately $60 million of the purchase price to acquired in-process research and development as required by generally accepted accounting principles, resulting in a one-time charge to the Company's earnings in the third quarter. 10 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, 1995 annual report on Form 10-K. Results of Operation: Three Months Ended June 30, 1996 and 1995 - - ---------------------------------------------------------------- Net Sales. Consolidated net sales during the three months ended June 30, 1996 increased $0.7 million or 3% compared with the same period in 1995. The increase is primarily due to increased sales volume of cased handheld scanners, particularly QuickScan products, offset by a decrease in sales volume of the Company's scan engines and decreased sales of the LazerData product line's fixed position scanners. Geographically, domestic net sales increased by 3% and international net sales increased by approximately 5%. International net sales represented approximately 22% of net sales in the second quarter of 1996 and 1995. Gross Profit. Consolidated gross profit during the three months ended June 30, 1996 decreased $0.7 million or 8% compared with the same period in 1995. As a percentage of sales, gross profit decreased from 43.7% to 38.8%. The decrease in gross profit percentage is primarily due to lower average selling prices for certain of its products and production start-up costs associated with its new DI-1000 products. Engineering, Research and Development. Engineering, Research and Development (ER&D) expenses increased $480 or 42%, as compared to the same period in 1995. As a percentage of sales, ER&D was 7.3% in the second quarter of 1996 versus 5.3% in the second quarter of 1995. The dollar increases were primarily related to the Company's new product development for its handheld laser scanner products and its LazerData product line's fixed position scanners. Selling, General and Administrative. Selling, General and Administrative (SG&A) expenses increased $1.0 million or 18%, as compared to the same period in 1995. As a percentage of sales, SG&A was 30.5% in 1996 and 26.7% in 1995. The increased dollar amount is primarily due to start-up costs associated with the Company's new South American subsidiary and increased patent related expenses. The increase in patent related expenses is due to an increase in litigation expenses related to its patent infringement lawsuit with Symbol Technologies, Inc. See Legal Proceedings for further discussion of the lawsuit. Acquisition Related Restructuring and Other Costs. During the 1994 fourth quarter, the Company recognized a one-time pre-tax restructuring charge of $3.0 million. The charge related to the integration of the Company's existing fixed position scanner product lines with those of LazerData, which was acquired in December 1994. The restructuring program in part, provided for employee severance and benefit costs for the elimination of approximately 12 manufacturing and engineering support positions. As of June 30, 1996, all positions targeted in the restructuring program have been eliminated. The amount of the restructuring accrual at June 30, 1996 was approximately $0.5 million. Restructuring actions are substantially complete as of June 30, 1996. There have been no re-allocations and/or re-estimates to date. Provision for Income Taxes. Provision for income tax dollar amounts was down $0.9 million due to the reduction in pre-tax net income. The Company's effective tax rate was 37.0% in 1996, compared with 37.5% in 1995. The Company expects to record income tax expense at or about the combined federal and state statutory tax rate in 1996. Results of Operation: Six Months Ended June 30, 1996 and 1995 - - -------------------------------------------------------------- Net Sales. Consolidated net sales during the six months ended June 30, 1996 were flat compared with the same period in 1995. Geographically, domestic net sales decreased by 2% and international net sales increased by approximately 6%. International net sales represented approximately 22% of net sales in the first six months of 1996 versus 21% of net sales in the first six months of 1995. 11 Gross Profit. Consolidated gross profit during the six months ended June 30, 1996 decreased $2.1 million or 11% compared with the same period in 1995. As a percentage of sales, gross profit decreased from 45.5% to 40.7%. The decrease in gross profit percentage is primarily due to lower average selling prices for certain of its products and production start-up costs associated with its new DI-1000 products. Engineering, Research and Development. Engineering, Research and Development (ER&D) expenses increased $1.2 million or 53%, as compared to the same period in 1995. As a percentage of sales, ER&D was 7.8% in the first six months of 1996 versus 5.1% in the first six months of 1995. The dollar increases were primarily related to the Company's new product development for its handheld laser scanner products and its LazerData product line's fixed position scanners. Selling, General and Administrative. Selling, General and Administrative (SG&A) expenses increased $1.6 million or 13%, as compared to the same period in 1995. As a percentage of sales, SG&A was 30.9% in 1996 and 27.3% in 1995. The increased dollar amount is primarily due to start-up costs associated with the Company's new South American subsidiary and increased patent related expenses. The increase in patent related expenses is due to an increase in litigation expenses related to its patent infringement lawsuit with Symbol Technologies, Inc. See Legal Proceedings for further discussion of the lawsuit. Provision for Income Taxes. Provision for income tax dollar amounts was down $1.8 million due to the reduction in pre-tax net income. The Company's effective tax rate was 37.0% in 1996, compared with 37.8% in 1995. The Company expects to record income tax expense at or about the combined federal and state statutory tax rate in 1996. Liquidity and Capital Resources: The Company utilizes a number of measures of liquidity, including the following: June 30, December 31, 1996 1995 ---- ---- Cash provided by operations ................... $ 213 $ 2,897 Working capital ............................... $21,640 $ 20,397 Long-term debt to capital (Long-term debt to long-term debt plus equity) 0.8% 0.9% Cash provided by operations decreased $2.7 million versus the second quarter of 1995 primarily due to the decreased net income. Working capital increased $1.2 million from December 31, 1995 primarily due to an increase in inventories, prepaids and other current assets offset by a smaller increase in current liabilities. Property, plant and equipment expenditures totaled $1.0 million for the six months ended June 30, 1996 compared with $4.6 million for the six months ended June 30, 1995. The 1995 expenditures primarily related to the construction costs of the Company's headquarters, manufacturing and engineering facility. The long-term debt to capital percentage was 0.8% at June 30, 1996 versus 0.9% at December 31, 1995. At June 30, 1996, liquidity immediately available to the Company consisted of cash and short-term investments of approximately $8.8 million. In addition, the Company had a revolving loan agreement with Manufacturers and Traders Trust Company pursuant to which the bank had agreed to provide a line of credit totaling $20.0 million. As of June 30, 1996, the Company had no outstanding borrowings under this agreement. On July 12, 1996, in connection with the acquisition of Spectra, the Company terminated its existing revolving credit facility and simultaneously replaced it with new credit facilities. The new facilities provide credit totaling $130 million. They consist of senior term loans of $80 million, a senior revolving credit facility of $20 million and a subordinated term loan of $30 million. The Company borrowed and has outstanding $122.5 million on these facilities. 12 Part II: OTHER INFORMATION Item 1: Legal Proceedings: Legal proceedings incorporated by reference to Item 1 of Part II of the registrant's quarterly report on Form 10-Q for the quarter ended March 31, 1996. On May 31, 1996, PSC filed an amended complaint adding claims under the federal antitrust laws and seeking declaratory relief under additional Symbol patents. The amended complaint alleges five federal antitrust law claims and several claims for unfair trade practices under federal and state law. In addition, the amended pleading seeks declarations of non-infringement and/or invalidity with respect to 37 Symbol patents. Symbol has answered certain claims in the amended complaint, generally denying liability, and has moved to dismiss from the amended complaint claims for declaratory relief that relate to certain Symbol patents. Symbol also has moved to sever and stay proceedings with respect to all of PSC's antitrust and unfair competition claims. A hearing date for both the motion to dismiss claims relating to certain Symbol patents and to sever and stay is scheduled for September 4, 1996. On June 19, 1996, the United States District Court for the Southern District of New York granted PSC's motion and transferred Symbol's suit in that district to the Western District. Symbol's action, which alleges infringement of 19 Symbol patents by PSC and PSC's customer Data General Corporation, and alleges breach of contract against PSC, has since been consolidated with PSC's pending action against Symbol, with the effect that the cases will be conducted together through discovery and trial. PSC has moved to dismiss Symbol's claims for breach of contract. A hearing on PSC's motion is scheduled for September 4, 1996. Other legal proceedings incorporated by reference to Item 3 of the Annual Report on Form 10K for the fiscal period ended December 31, 1995. Item 2: Changes in Securities: None Item 3: Defaults upon Senior Securities: None Item 4: Submission of Matters to a Vote of Security Holders: (a) The Annual Meeting of Shareholders was held on April 30, 1996. (b) The names of the directors elected at the Annual Meeting for a three year term are as follows: Jay M. Eastman James W. Henry Thomas J. Morgan 13 The name of each other director whose term of office as a director continued after the Annual Meeting is as follows: Robert S. Ehrlich Donald K. Hess L. Michael Hone James O'Shea Jack E. Rosenfeld Justin L. Vigdor (c) (i) At the Annual Meeting, the tabulation of votes with respect to each nominee for director was as follows: Nominee Votes FOR Authority Withheld ------- ---------- ------------------ Jay M. Eastman 9,017,590 395,111 James W. Henry 9,016,316 396,385 Thomas J. Morgan 9,004,184 408,517 (ii) At the Annual Meeting, the shareholders voted upon two other matters. The description of each other matter voted upon and the tabulation of votes with respect to each such matter are as follows: Votes Votes Votes FOR AGAINST ABSTAINING ------ --------- ----------- (a) Proposal to amend the Certificate of Incorporation to increase the number of authorized Common Shares .......... 8,673,178 698,120 41,403 (b) Proposal to amend the Certificate of Incorporation to authorize a new class of Series B Preferred Shares ......... 5,026,191 1,199,104 60,725 Item 5: Other Information: None Item 6: Exhibits and Reports on Form 8-K (a) Exhibits: Certificate of Amendment..................15-21 (b) Reports on Form 8-K: Report on Form 8-K, dated May 20, 1996. 14 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 9, 1996 By: /s/ L. Michael Hone L. Michael Hone, Chairman, Chief Executive Officer, and President DATE: August 9, 1996 By: /s/ William J. Woodard William J. Woodard Vice President, Finance and Treasurer (Principal Financial Officer) DATE: August 9, 1996 By: /s/ Scott D. Deverell Scott D. Deverell (Principal Accounting Officer)