FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to____
Commission file number 0-9919
PSC Inc.
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Exact name of registrant as specified in its charter
New York 16-0969362
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State or other jurisdiction of IRS Employer ID No.
incorporation or organization
675 Basket Road, Webster, New York 14580
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Address of principal executive offices zip code
Registrant's telephone number, including area code: 716-265-1600
Securities registered pursuant to Section 12(b) of the Act:
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None
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Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
As of March 23, 1998 the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $105,126,966 (Assumes
officers, directors and any shareholder holding 5% of the outstanding shares are
affiliates.)
As of March 23, 1998, there were outstanding 11,575,894 shares of Common Stock.
Documents incorporated by reference:
Portions of PSC Inc.'s Proxy Statement for the Annual Meeting of
Shareholders to be held on May 7, 1998 are incorporated into Part III of this
Form 10-K.
TABLE OF CONTENTS
PART I
PAGE
Item 1: Business................................................ 4
Item 2: Properties.............................................. 17
Item 3: Legal Proceedings....................................... 17
Item 4: Submission of Matters to a Vote of Security Holders..... 17
Executive Officers of Registrant.................... 18
PART II
Item 5: Market for Registrant's Common Equity and Related
Security Holder Matters................................. 21
Item 6: Selected Financial Data................................. 22
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operation...................... 23
Item 8: Financial Statements and Supplementary Data............. 27
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................. 27
PART III
Item 10: Directors and Executive Officers of the Registrant...... 27
Item 11: Executive Compensation.................................. 27
Item 12: Security Ownership of Certain Beneficial Owners and
Management.............................................. 27
Item 13: Certain Relationships and Related Transactions.......... 28
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................. 29
PART I
ITEM 1: BUSINESS
COMPANY OVERVIEW
PSC Inc., together with its subsidiaries, (the Company) was incorporated in
the State of New York in 1969. The Company manufactures the world's broadest
line of laser based handheld and fixed position bar code readers, verifiers,
integrated sortation and point-of-sale (POS) scanning systems for the worldwide
Automatic Identification and Data Capture (AIDC) market. The Company's products
serve as the "front end" of terminals or host computers and are used to
identify, capture, process and transmit data. The Company has developed products
for AIDC at every stage of the product supply chain from raw material,
manufacturing and warehousing, to logistics, transportation, inventory
management and POS. The Company's products are used throughout the world in
food, general retail, health care and other industries, and in government.
The Company has positioned itself within the AIDC industry by selling both
domestically and internationally. International sales accounted for
approximately 46% of the Company's 1997 total sales. The Company has a
diversified customer base composed of original equipment manufacturers (OEMs),
value-added resellers (VAR's), distributors, system integrators and end users.
The Company's distribution relationships have enabled it to introduce its
products (generally under non-PSC labels) to new vertical markets, and have
fostered the development of strategic relationships with leading AIDC
participants and end users. The Company operates within one industry segment:
automatic identification and data capture.
In September 1997, the Company completed a private placement of Convertible
Preferred Shares with Hydra Investissements S.A., a Luxembourg corporation. The
net proceeds to the Company from the offering were $10.2 million. The Company
used the proceeds for working capital purposes and to repay a portion of its
senior revolving credit facility.
In 1996, the Company acquired Spectra-Physics Scanning Systems Inc., TxCOM
S.A. and related businesses (Spectra). Spectra is one of the world's leading
manufacturers of countertop and in-counter fixed position bar code scanners for
retail POS applications. The purchase price was approximately $140 million and
was accounted for as a purchase and is included in the 1996 Consolidated
Financial Statements since the date of acquisition.
The Company's corporate headquarters are located in the Rochester, New York
suburb of Webster. The Company designs, manufactures, sells, distributes and
services its products from world-class manufacturing facilities in Webster, New
York and Eugene, Oregon. The Company has sales and service operations in the
Americas, Europe, Asia and Australia.
MARKETS
The Company currently focuses on retail, and commercial and industrial
applications for the AIDC market.
Retail
The retail segment consists of many applications of bar code scanning
devices used to track the flow of goods, equipment, employees and customers
throughout the retail environment. The most traditional and identifiable
application of bar code scanners and scanning systems is in front end checkout
applications, such as in grocery stores, in which an employee uses a stationary
or handheld scanner to read product identifiers encoded in a bar code. The
retail segment has, however, expanded beyond this base with regard to both the
types of retail stores employing scanners and scanning systems, and the uses to
which these stores put the scanners and scanning systems. Discount, drug,
do-it-yourself, convenience, department and specialty retail stores now use
scanners in such diverse ways as price verification, shelf stocking, inventory
tracking and replenishment, receiving, coupon redemption,
promotion/merchandising and frequent shopper programs.
The Company is currently active in most retail applications and sells its
countertop and in-counter bar code scanners to customers in most retail
segments. In addition, the Company has begun to target systems-oriented and
segment-specific products. One such product currently being marketed by the
Company is U-Scan Express(TM), an automated grocery store self-checkout system
developed and licensed to the Company by Optimal Robotics Corporation. U-Scan
Express(TM), which has been installed in several major supermarket chains and is
currently being tested by several major national mass merchandise chains, is
designed to permit supermarket customers to scan, bag and pay for purchases with
little or no assistance from store personnel.
Commercial and Industrial
The commercial and industrial segment is comprised of commercial,
manufacturing, warehousing and distribution applications of bar code systems
within retail, service, manufacturing, logistics, healthcare and transportation
businesses and organizations. These industries have adopted bar code standards
and installed bar code systems in order to increase productivity and increase
the reliability of data transactions. Automated data collection and
communication is now used, for example, to track insurance forms and financial
documents, record quality levels of manufactured items, sort parcels, mail and
airline baggage, prepare shipping manifests and catalog blood and plasma
inventories. Automatic dimensioning of cartons allows shippers to maximize loads
and more accurately invoice shipping costs. The Company is currently active in
several of these applications across a variety of market segments.
COMPANY PRODUCTS AND SERVICES
The Company offers a wide range of laser based bar code scanning products
such as handheld, countertop, in-counter, fixed position and unattended scanners
and scan engines for use by business, industry and government in multiple
application areas. To ensure the quality of bar codes themselves, the Company
offers a full line of bar code verifiers. In addition, the Company markets a
full line of accessories, software and supplies to support its products. This
line includes such items as cables, stands, printers, mounts, electronic article
surveillance antennas, AC power supplies, product documentation and software
configurations, carrying cases, batteries and battery chargers. An early entrant
in the AIDC industry, the Company is committed to ongoing innovation in product
design, manufacturing, product performance and customer satisfaction.
The Company's products include:
Fixed Position Scanners: Retail
360 Degree Scanner and Scanner/Scale (Magellan(R)). The Company sells the
Magellan(R), the industry's first 360 degree scanner and scanner/scale and the
Company's highest performing in-counter scanner. Magellan(R) is capable of
simultaneously reading the bottom and all four sides of grocery store items, a
full 360 degrees, thereby increasing productivity and improving ergonomics by
reducing the need for checkers to twist, turn or lift items for scanning.
Magellan(R) is available with an integrated, 30 pound capacity scale which
allows retailers to combine the scanner and scale functions into a single unit.
Both the scanner and scanner/scale are designed for easy installation into new
and existing checkstands. An integrated electronic article surveillance
deactivation antenna is also available for use in deactivating RF-based security
tags. Magellan(R) autodiscriminates UPC/EAN and up to three industrial bar
codes, and is available with advanced Edge(TM) decoding software that enables
the scanner to read torn and disfigured labels. Magellan(R) also reads UPC/EAN
and Code 128 supplemental codes, such as those found on books, periodicals and
coupons.
Magellan SL(TM) Slim Line Scanner. In 1997, the Company introduced the Magellan
SL(TM) SlimLine Series of 360 degree scanners and scanner/scales. The Magellan
SL(TM) is a variant of Magellan(R), and offers the same capabilities and
benefits as Magellan(R). One benefit unique to Magellan SL(TM) is its smaller
size which accommodates installation in the narrower checkstands common in
Europe, Asia and large cities throughout the world. A key feature of Magellan
SL(TM) is the L-shaped All-Weighs(TM) Platter. With the All-Weighs(TM) Platter
the scanner/scale's vertical window and frame are an integral part of the scale
weighing platter, allowing checkers to lean oversized items against the vertical
window, intentionally or unintentionally, and get an accurate weight.
High Performance Horizontal Scanner (HS1250). The Company sells the HS1250, a
compact, high performance horizontal scanner for grocery, drug, discount and
home improvement store applications. The HS1250 reads UPC/EAN and industrial bar
codes and features advanced Edge(TM) decoding software. It is also available
with an integrated electronic article surveillance antenna for use in
deactivating RF based security tags. The scanner includes an integrated mount to
simplify installation. A sleep mode, which turns off the motor and laser after
periods of inactivity, reduces power consumption and prolongs the life of the
scanner.
High Performance Vertical Scanners (VS1000 and VS1200). The Company sells the
VS1000 and VS1200 compact vertical scanners which include scan geometry
optimized for vertical scanning applications in limited space areas such as
pharmacies, variety and convenience stores. These products permit bar codes to
be read whether the handler is presenting the bar code to the scanner or
sweeping the bar code across the scanner in a continuous movement. The VS1000
autodiscriminates up to four bar code types and reads UPC/EAN and industrial bar
codes. The VS1200, in addition to the above features, also incorporates the
Company's advanced Edge(TM) decoding software. The VS1200 is well suited for
performance demanding applications in supermarkets and hypermarkets. Both the
VS1000 and VS1200 are available with an optional integrated electronic article
surveillance antenna for use in deactivating RF-based security tags.
Compact Scanners (Duet(TM) and SP*ACE(TM)). The Duet(TM) Scanner, announced in
1997, is a compact "dual action" scanner that combines features of both
countertop and handheld scanners. Standard bar coded items are presented or
swept by the scanner's 19 line omni-directional scan window. Pick lists and
large, bulky goods are easily processed using Duet's Targeted Handheld Mode by
simply picking up the scanner and pointing it at a bar code. With an innovative
scan pattern and a 9" depth of field, Duet(TM) provides superior performance,
fast throughput. The ergonomic design of the Duet(TM) scanner makes it
exceptionally easy to use and easy on the user.
SP*ACE(TM) is the Company's smallest fixed position scanner. Because of its
compact size and multi-position scan head, the SP*ACE(TM) scanner adapts easily
to a variety of retail and industrial countertop or wall-mounted applications
where space and/or routing opportunities are limited. SP*ACE(TM) reads bar codes
up to eight inches away and autodiscriminates between up to four different bar
code types.
Retail Automation Systems
The Company is currently manufacturing and selling the U-Scan Express(TM)
system, a stand-alone self-checkout system, to major supermarkets and mass
merchandisers in the U.S. Designed and licensed to the Company by Optimal
Robotics Corporation, a Montreal based company, the system is targeted for
retail store express lanes and incorporates scanning, interactive video,
security system and money tendering (cash, credit or debit) into a complete
stand-alone unit. The U-Scan Express(TM) is designed to permit customers to
scan, bag and pay for their own purchases with little or no assistance from
store personnel, thereby speeding checkout and improving store productivity. To
date, the U-Scan Express(TM) system has been installed in a number of major
supermarket chains nationwide and discussions are underway for future
installations with several large food and non-food retailers.
Handheld Scanners
Light Industrial/Commercial Scanners (5300 HP). The Company's high performance
5300 HP handheld scanners are based on its 5301 scan engine platform. The 5300
HP series was designed for the light industrial, commercial and special retail
environments where performance is critical. These high performance scanners
provide snappy scanning of "real world" bar code labels. Depending on the size
and quality of bar codes, one model in the Series can read bar codes having bars
or spaces with a dimension as narrow as two millimeters (.002 inches). A two
millimeter dimension bar code is common on small jewelry items or on the side of
a printed circuit board which can then be tracked through a manufacturing
process. A higher powered laser in the 5300 HP series permits bar code reading
in bright sunlight, thereby allowing the operator to read through a windshield
for vehicle identification or through a glass showcase to read price tags.
Ruggedized Industrial Scanners (5300 IP). Like the 5300 HP, the Company's high
performance 5300 IP handheld scanners are based on its 5301 scan engine
platform. The 5300 IP series scanners were designed for extreme durability and
performance for jobs in demanding environments. They are ideal for use in
warehouses, distribution centers, automotive plants, utilities, in cold storage
warehouses and at chemical plants. They can withstand rugged conditions such as
multiple six-foot drops to concrete and temperatures as low as -22oF (-30oC) as
are encountered in walk-in freezers. In 1997, the Company introduced the
AutoRange(TM) scanner which is essentially two scanners in one. This scanner is
ideally suited for warehouse and distribution center applications for reading
bar code labels at long distances as well as up close.
5300 series scanners are designed with an open slot in the scanner handle that
accommodates circuit boards with additional capabilities such as decode,
interface and optional memory, thus enabling the Company to offer
custom-manufactured scanners that OEMs then sell under their private labels. The
Company's lifetime warranty on the scanning mechanism in each model of the 5300
series reflects the Company's confidence in the quality of these products.
Retail, POS Service and Commercial Scanners (Quick Scan(TM) and SP400). The
Quick Scan(TM) is a full feature, full function, full performance scanner
incorporating the Company's smaller scan engine platforms. The Quick Scan GP(TM)
provides general performance scanning in lower volume POS, point-of-service and
commercial applications with consistent bar code placement and location. The
Quick Scan HP(TM) addresses the scanning requirements for higher volume retail
and commercial applications where handling mixed and inconsistently marked items
requires greater depth-of-field and enhanced scanning performance. The Quick
Scan(TM) EP provides extended performance and longer range scanning applications
up to five feet. The Quick Scan(TM) 6000 was designed specifically for the
retail POS and features an unprecedented combination: the superior performance
and rugged design of a high end POS scanner, priced affordably. Its advanced
ergonomic design was developed with operator comfort in mind -- a critical
factor that ensures prolonged operator productivity. The size and shape of Quick
Scan(TM) makes it comfortable to hold independent of handedness and hand size.
The SP400 offers higher performance levels by combining a visible laser diode
light source, patented signal processing technology, long depth-of-field and
wide angle reading. The SP400 family includes a variety of models for retail and
industrial applications. The SP400 EP (Extreme Performance) scanner is the only
handheld scanner on the market to offer a true seal against windblown dust and
rain. This feature, combined with other enhancements to the housing, gives the
SP400 EP the highest rating in the industry for ruggedness and durability, and
makes it ideal for outdoor use.
Specialty Handheld Scanners (538X Series). These specialty scanners offer custom
form factors and optics for unique applications. Included in this line are the
5380 Back-of-the-Hand Scanner, the 5381 Palm Top Scanner and the 5387
Scandle(TM).
The 5380 Back-of-the-Hand Scanner has a small profile and weighs only three
ounces, making it particularly suitable for "picking" applications in
distribution centers and other hands-free operations. This scanner, which allows
for hands-free scanning, attaches to a comfortable glove that can be worn on
either hand and can be actuated manually with a trigger or automatically by
PSC's Autosense(R) feature. Hands-free scanning allows an operator to use both
hands to select items from shelves or racks and transmit data regarding those
items to a data terminal.
The 5381 Palm Top Scanner, compactly designed and weighing 4.8 ounces, is about
the size of a TV remote control. It can be used in either hand and can be
slipped into a shirt pocket or attached to clothing with a Velcro(R) patch when
not in use. The 5381 is the appropriate choice for POS and industrial
applications where size, weight and accessibility are key factors. Top and side
triggers have been provided to allow for ease of scanning either vertical or
horizontal bar codes by left or right handed operators.
The 5387 Scandle(TM) has the approximate size, weight and shape of a telephone
handset. When snapped into place on a small portable computer, such as those
carried by telephone line workers, it functions as the computer's carrying
handle.
Fixed Position Scanners: Commercial and Industrial
Miniature Scanners. The 9000 scanner is a compact, versatile, industrial line
scanner intended primarily for high-speed automated sorting or identification in
the demanding environments of the manufacturing and material handling markets.
Through the use of advanced digital signal processors, this scanner can provide
scan rates of between 200 and 1500 scans per second. Both the scan engine and
the decoder may be contained in a single unit. Because the scanner can be
programmed either locally or from the host computer, it provides the user with
maximum flexibility.
High-End Line Scanners. The series 8000 and 8000LX provide a line of
high-powered, high-speed, adjustable rastering line scanners for demanding
applications, such as airline baggage handling, overnight package delivery
sortation and other high-speed sortation. They can read bar code labels moving
at speeds of up to 500 feet per minute. Features include auto-focusing and Time
Slice Decoding(TM) (TSD) which allows the scanner to read only
a small portion of a code on each of several successive scans and reconstruct
the entire bar code. By multiplexing (interconnecting two or more of these
scanners having varying scanning ranges), a system can be configured to
simultaneously read and track bar codes as they move past the scanners at
different distances.
Omnidirectional Scanners. The model 990 SureScan(R) is a high-speed modular,
omnidirectional scanner for use in large volume distribution centers. It may be
equipped with TSD software to read randomly oriented bar codes as, for example,
labels on packages tumbling down a chute at speeds up to 600 feet per minute at
a distance of 30 inches. The model 990 can also be configured with up to four
multiplexed scanners.
Carton Dimensioning System. The SureCube(TM) is an automated carton dimensioning
system which measures the volume of cartons over conveyors or in-motion scales
for material handling systems. The system can be supplied with a bar code
scanner for identifying and dimensioning or integrated with an in-motion scale
to provide a completely automated system for identifying, sizing, weighing and
sorting of cartons. It captures the carton data regardless of the location,
orientation or angle of the carton. This is especially useful in large
warehouses, package delivery services and other shipping companies.
Scanning Tunnel Systems. By using multiple scanners oriented around a conveyor
belt, PSC offers a unique solution to solve high speed sortation problems where
cartons may have a bar code label on any surface of a carton, even the bottom,
or multiple labels on multiple sides of the carton. With the ScanManager(TM),
this system can track up to 16 cartons at one time at conveyor speeds up to 300
feet per minutes.
Scan Engines
The Company's scan engines are self-contained bar code reading components
which OEMs build into a variety of products. The Company's scan engines
incorporate all of the electronic, optical and mechanical components required
for laser scanning in a single package which can be easily integrated. The
various models manufactured by the Company are based on either its 5301 "large"
platform, the smaller 5303 version or the miniaturized Minuet(TM) DI(TM) or
LM-500. The 5301 platform is about the size of a deck of playing cards and
occupies a volume of 10 cubic inches. In response to industry demands for a
smaller scanning platform, the Company introduced the 5303 scan engine which is
about half the footprint of the 5301 and occupies 3.5 cubic inches. The Company
introduced an even smaller scan engine, the Minuet(TM) Direct Illumination(TM)
bar code engine. This miniature engine has a volume of only 1.2 cubic inches. In
a Direct Illumination(TM) bar code engine system, there are no reflective
optics; the laser is mechanically swept to directly illuminate the bar code. The
Minuet(TM) DI(TM) can significantly enhance bar code reading performance in a
variety of OEM products such as portable data collection devices; laptop,
handheld and palmtop computers; diagnostic and test equipment; and ticket
issuing machines. The newest addition to the Minuet(TM) scanner family is the
LM-500. The LM-500 continues the progress toward miniaturization of scanning
engines.
Quick Check (R) Verifiers
The Company's line of Quick Check(R) verifiers is designed to ensure that
the customer is producing, using and receiving quality bar code symbols. Quick
Check(R) verifiers can display a simple pass/fail report or provide a detailed
quality analysis. These verifiers are sold as handheld, desktop, PC based or
printer/labeler mounted on-line models. They analyze bar codes for traditional
print quality such as wide to narrow ratio, print contrast, bar growth or loss,
dimensions and formats, or analyze based upon quality parameters found in the
American National Standards Institute (ANSI) and European Committee for
Standardisation (CEN) guidelines such as edge determination, reflectance
minimum, symbol contrast, modulation, decodability and edge contrast minimum.
When mounted on-line, the Quick Check(R) verifier results can automatically
control the user's system and cause it to pause, reprint, shutdown or activate
an alarm. All Quick Check(R) verifiers are designed and manufactured to meet
national, international and industry specified standards (such as those created
by the Uniform Code Council and the Automatic Identification Manufacturers,
Inc.) and provide traceability to the National Institute of Standards and
Technology (NIST) for compliance to ISO 9000 and QS 9000 requirements.
SALES AND MARKETING
The Company sells its products domestically and internationally through a
diversified customer base composed of OEMs, third party resellers and end users.
International sales increased from approximately $19.3 million, or 22% of net
sales, in 1995 to approximately $95.2 million, or 46% of net sales, in 1997.
Management believes that the international markets for bar code products are
less developed and intends to broaden its international sales and provide
additional sales and marketing support to its international operations.
The Company's OEM customers and third party resellers serve various
vertical markets and submarkets and a wide variety of end users. They introduce
the Company's products to their end users through their established sales and
distribution networks, thus sparing the Company the expense of supporting a
large in-house sales force. By forming strategic relationships with major OEM
customers, the Company has been able to conduct joint development and design
customer-specific products and applications and thereby further expand its
market presence and broaden its distribution network.
In addition to its sales and marketing staff in Webster, New York and
Eugene, Oregon, the Company has regional sales representatives in the United
States and sales offices throughout Europe and the Asia Pacific area that
provide sales, service and support to the Company's domestic and international
customers.
Foreign sales of the Company's products are subject to the normal risks of
foreign operations, such as currency fluctuations, protective tariffs,
export/import controls and transportation delays and interruptions. Because the
Company's products are manufactured in the United States, the Company's sales
and results of operations could be affected by fluctuations in the value of the
U.S. dollar.
The Company's marketing operations include product management, market
management, new business development and marketing communications. Marketing
personnel identify new business opportunities, develop business plans, identify
new product and market requirements, manage product positioning/introduction and
provide tactical sales support activities. They interact regularly with external
parties such as OEMs, VARs, distributors, systems integrators and end users,
technical partners and standards committees. The marketing personnel also, in
conjunction with outside vendors, conduct customer surveys and coordinate
advertising and public relations. This group creates advertising, brochures and
documentation, manages trade show exhibits and places articles highlighting
applications of the Company's products in trade and industry publications.
CUSTOMER SUPPORT AND SERVICE
The Company is dedicated to providing consistently high customer service on
a national and international basis. The Company maintains a highly responsive
customer support and service organization that bridges the Company's marketing,
engineering and manufacturing functions. The customer support and service
personnel receive extensive training in all of the Company's products and assist
customers with ordering, product scheduling, coordinating service repairs,
procuring replacement parts and managing warranties and service contracts. The
Company's Eugene, Oregon customer service and support organization has met ISO
9000 quality registration levels.
CUSTOMERS
The Company sells its products to OEMs, VARs, distributors, systems
integrators and end users. During 1997 and 1996, no individual customer
accounted for greater than 10% of net sales. During 1995, Telxon Corporation
accounted for 17% of sales. No other customers were responsible for greater than
10% of net sales in 1995. The Company's arrangements with major customers are
generally nonexclusive.
ENGINEERING, RESEARCH AND PRODUCT DEVELOPMENT
The Company's engineering research and product development (ER&D) programs
are aimed at applying its technology to develop new products, improve its
existing products' reliability, ergonomics and performance and reduce
manufacturing and related support costs. Current programs focus on new advances
in bar code scanning, retail applications such as retail self-checkout systems
and new generations of portable data terminals. The Company also carries on
significant development programs in electronics design, bar code acquisition and
decoding, RF communications, optical signal detection, software, network
architectures, advanced mechanical structures and automated manufacturing
methods. Computer-aided design and computer-aided manufacturing tools assist the
Company's research and development efforts by permitting computer simulation of
proposed products. These tools include electronics circuit modeling, optics
analysis and three-dimensional mechanical product modeling.
Substantially all of the Company's research and development is performed by
its own staff. The Company believes its technical strengths are in the specialty
disciplines of lasers, electro-optics, video imaging, signal processing,
decoding, portable/fixed computers and software development.
The Company's ER&D expenses were approximately $13.0 million, $11.1
million, and $5.0 million in 1997, 1996, and 1995, respectively. Such amounts do
not include expenditures by the Company for manufacturing engineering
activities.
MANUFACTURING AND SUPPLIERS
The Company designs, engineers and manufactures substantially all of its
scanning products at its Webster, New York headquarters or its Eugene, Oregon
facility. The Company's design and process approach allows end-of-line
configuration of generic modules to meet a multitude of specific customer needs.
Statistical methods are used throughout the factory and with critical suppliers
in order to control important processes. The Company makes extensive use of
computer integrated systems and software for purposes of resource planning, such
as material requirements, assembly planning and scheduling and order management.
The Company seeks to design and manufacture products that optimize
performance, quality, reliability, durability and versatility. These designs
facilitate cost-efficient materials sourcing and assembly methods with high
standards of workmanship. The Company has invested and will continue to invest
in capital equipment such as printed circuit board surface mount machines that
automate production, increase capacity and reduce direct labor costs. Computer
operated equipment is used for testing at all levels of production to assure
repeatable, reliable performance and accurate data collection. The Company has
designed many of its own tools, fixtures and test equipment. The Quick Check(R)
product is manufactured by an independent third party. The Company believes its
relationship with this manufacturer to be good, and the loss of this
manufacturer would not have a material effect on the Company.
The Company does not have long-term supply contracts with its vendors. The
Company currently relies on single suppliers, some of whom manufacture at a
number of locations, for some key components of its products. The Company
believes that maintaining ongoing relationships with single suppliers who have
proven that they are capable of meeting the Company's standards of quality,
on-time delivery and cost containment has enabled it to increase the value of
its product to its customers. Although the Company maintains 30 to 60 day
inventories of key components and alternative sources of key materials are
available, the Company could incur set-up costs and delays in manufacturing
should it become necessary to replace key vendors due to work stoppages,
shipping delays, financial difficulty or other factors, and under certain
circumstances, these costs and delays could have a material adverse effect on
the Company's operations.
COMPETITION
The AIDC industry is highly competitive with rapid technological change and
intellectual property developments being key competitive factors. The Company
also competes on the basis of innovative design, high quality manufacturing,
technical expertise in scanning and wireless RF systems, level of sales and
support services, price and overall product functionality and fitness for use.
Failure to keep pace with product and technological advances could negatively
affect the Company's competitive position and prospects for growth. Many firms
manufacture and market bar code reading equipment utilizing laser technology. In
addition, the Company's bar code reading equipment also competes with devices
which utilize technologies other than laser scanners such as CCDs and optical
wands. The Company faces competitive pressures from various companies in each of
its product categories. Many of the Company's competitors have substantially
greater financial, manufacturing, research and development and marketing
resources than the Company. The Company believes its principal competitors for
its handheld bar code scanner products are Symbol Technologies, Inc. (Symbol),
and Metrologic Instruments Inc. (Metrologic). The Company's principal
competitors in the fixed position scanner market are Accu-Sort Systems, Inc.
(Accu-Sort) and CI/Matrix. The Company believes its principal competitors for
its line of in-counter and on-counter scanner products are NCR Corporation,
Fujitsu Ltd., Symbol, Scantech B.V. and Metrologic. The principal competitors
for its line of verifiers are Stratix (formerly Bar Code Systems) and RJS Inc.
The Company's principal competitor for POS self-checkout systems is Productivity
Solutions, Inc.
No assurance can be given that the Company will be able to compete
successfully against current and future competitors or that the competitive
factors faced by the Company will not have a material adverse effect on the
Company's operations.
INTELLECTUAL PROPERTY
The Company believes that certain of its products are proprietary and
consequently relies on a combination of United States and foreign patent, trade
secret, copyright and trademark law to establish and protect its proprietary
rights. The Company currently holds more than 160 United States patents and also
has certain foreign patents pertaining to various technologies associated with
its products. These patents expire on various dates between 2003 and 2016. The
Company currently has a number of patent applications pending in the United
States and in a number of foreign countries. In addition, the Company expects
that its continuing research and development efforts will result in the creation
of new proprietary rights for which it will seek patent protection.
The Company maintains an active program to obtain patents and otherwise
protect its intellectual property. Nevertheless, its competitors could develop
technology or know-how or obtain patents that could limit the Company's ability
to compete in the future. Similarly, others could challenge the validity of the
Company's patents or assert that the Company is infringing on their proprietary
rights. The Company believes that its patents are valid and enforceable and does
not believe that it is infringing on the proprietary rights of others. While the
Company believes that its patents provide it with competitive advantages with
respect to the products they cover, the Company relies primarily upon the
technical know-how, competence, innovative skills and marketing abilities of its
engineers and other employees.
The Company currently holds certain trademarks that are registered with the
United States Patent and Trademark Office and a number of common law trademarks
and valuable trade secrets. It also has certain foreign trademarks and has
numerous domestic and foreign trademark registrations pending.
EMPLOYEES
As of March 1, 1998, the Company had approximately 1,150 full-time
employees. In addition, the Company at various times makes use of temporary
labor in its manufacturing operations. Approximately 8% of the work force is
located outside the United States, based in offices throughout Europe and the
Asia Pacific regions. The Company believes that its future success will depend
in part on its ability to recruit and maintain highly qualified management,
marketing, technical and administrative personnel. None of the Company's
employees is represented by a labor union. Management believes that its
relationship with employees is good.
GOVERNMENT REGULATION
Certain products of the Company must comply with regulations promulgated by
the United States Food and Drug Administration's Center for Devices and
Radiological Health (CDRH), the Federal Communications Commission (FCC), as well
as the Canadian Standard Association, the European Community Standards (CE) and
TUV Rheinland (Europe), which are corresponding agencies for certain foreign
countries. The regulations are in
the areas of laser light emissions, intentional or non-intentional RF energy
emissions, standards for weighing instruments and European electromagnetic
compatibility (EMC) directives. The regulations mandate, among other items,
warning labels, safety features, and establish certain levels for laser power,
weight measuring, voltage and electromagnetic fields. The Company's operations
are also subject to certain federal, state and local requirements relating to
environmental, waste management, health and safety regulations. Management
believes that the Company's business is operated in compliance with applicable
government, environmental, waste management, health and safety regulations.
There can be no assurance that future regulations will not require the Company
to modify its products to meet revised energy output or other requirements.
Failure to comply with future regulations could result in a material adverse
effect on the Company's results of operations.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION REFORM
ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange Commission.
The words or phases "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the Reform Act). The Company wishes to
ensure that such statements are accompanied by meaningful cautionary statements,
so as to maximize to the fullest extent possible the protections of the safe
harbor established in the Reform Act.
Accordingly, such statements are qualified in their entirety by reference
to and are accompanied by the following discussion of certain important factors
that could cause actual results to differ materially from such forward-looking
statements.The risks included here are not exhaustive. Furthermore, reference is
also made to other sections of this report which include additional factors
which could adversely impact the Company's business and financial performance.
Moreover, the Company operates in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible
for management to predict all of such risk factors, nor can it assess the impact
of all of such risk factors on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results.
Shareholders should be aware that while the Company does, from time to
time, communicate with securities analysts, it is against the Company's policy
to disclose to such analysts any material non-public information or other
confidential commercial information. Accordingly, shareholders should not assume
that the Company agrees with any statement or report issued by any analyst
irrespective of the content of such statement or report. Accordingly, to the
extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not the responsibility of the Company.
Spectra Acquisition/Debt Service. The Company incurred substantial indebtedness
($127.5 million) in connection with the acquisition of Spectra. The indebtedness
could have important consequences, including the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions or general corporate purposes may be
impaired; (ii) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of interest on the indebtedness, thereby
reducing the funds available to the Company for other purposes; (iii) the
agreements governing the Company's long-term indebtedness contain certain
restrictive financial and operating covenants; (iv) certain indebtedness under
the senior debt will be at variable rates of interest which would cause the
Company to be vulnerable to increases in interest rates; (v) all of the
indebtedness outstanding under the senior debt is secured by substantially all
the assets of the Company; (vi) the Company is substantially more leveraged than
certain of its competitors which might place the Company at a competitive
disadvantage; (vii) the Company may be hindered in its ability to
adjust rapidly to changing market conditions and (viii) the Company's
substantial degree of leverage could make it more vulnerable in the event of a
downturn in general economic conditions or its business.
As a result of the indebtedness incurred in connection with the acquisition
of Spectra, a substantial portion of the Company's cash flow will be devoted to
debt service. The ability of the Company to continue making payments of
principal and interest will be largely dependent upon its future financial
performance.
Technological Change. The market for the Company's products is characterized by
rapidly changing technology, evolving industry standards, changes in customer
requirements and frequent new product introductions and enhancements. The
Company's future success will depend on its ability to enhance its current
products, to develop new products on a timely and cost-effective basis and to
respond to changing customer requirements and technological developments.
Certain of the Company's competitors spend larger amounts on research and
development efforts than the Company. Any failure by the Company to anticipate
or respond adequately to changes in technology and customer preferences, or any
significant delay in product development or introduction, could have a material
adverse effect on the Company's financial condition and results of operations.
There can be no assurance that the Company will be successful in developing and
marketing, on a timely and cost-effective basis, product enhancements or new
products that respond to technological advances by others, or that such new
products or product enhancements will achieve market acceptance.
Dependence on Intellectual Property Rights. The Company's success is dependent
in part on its ability to obtain patent protection for its products, maintain
trade secret protection and operate without infringing the proprietary rights of
others. The Company currently owns over 160 U.S. patents having expirations from
the year 2003 to the year 2016 and also has certain foreign patents. The Company
has filed, and intends to file, applications for additional patents covering its
products. There can be no assurance that any of these patent applications will
be granted, or that the Company will develop additional products that are
patentable and do not infringe upon the patents of others, or that the patents
issued to or licensed by the Company will provide the Company with a competitive
advantage or adequate protection for its products. In addition, there can be no
assurance that the Company's competitors will not develop technology or
know-how, to obtain patents, that could limit the Company's ability to compete
in the future or that patents issued to or licensed by the Company will not be
challenged, invalidated or circumvented by others.
Pending Litigation. The AIDC industry is characterized by substantial litigation
regarding patent and other intellectual property rights. The Company
aggressively defends its patents and other proprietary rights.
There is litigation pending in the United States District Court for the
Western District of New York between the Company and one of its customers, on
the one hand, and Symbol Technologies, Inc. (Symbol) on the other, involving
certain of Symbol's patents. In that action, the Company has also alleged
violation of the antitrust laws and unfair practices by Symbol and Symbol has
alleged breaches of certain license agreements between the Company and Symbol,
including claims that royalties have been underpaid. The Company has also
assumed the responsibility of defending the action on behalf of its customer and
has provided certain rights of indemnification to its customer. The Company
intends to defend itself and its customer vigorously. Although the Company
maintains that Symbol's patents are invalid, that the Company has not infringed
the patents, or both, and that the Company has not, as was alleged, breached the
Symbol license, nor underpaid royalties, there can be no assurance that this or
any other action will be decided or settled in the Company's favor. There can be
no assurance that others will not assert claims against the Company that result
in litigation. Any such litigation could result in significant expense,
adversely impact the Company's marketing, give rise to certain indemnity rights
on the part of customers and divert the Company's attention from other matters.
If any of the Company's products were found to infringe a third-party patent,
the third party could be entitled to injunctive relief, which would prevent the
Company from selling any such infringing products. In addition, the Company
could be required to pay monetary damages. Although the Company could seek a
license to sell products determined to infringe a third-party patent, there can
be no assurance that a license would be available on terms acceptable to the
Company. The Company could also attempt to redesign any infringing products so
as to avoid infringement,
although any effort to do so could be expensive and time consuming and there can
be no assurance the effort would be successful. See "Business - Intellectual
Property."
Competition. The AIDC industry is highly competitive with rapid technological
change, product improvements, new product introduction and intellectual property
developments representing key competitive factors. The Company also competes on
the basis of innovative design, high quality manufacturing, technical expertise
in scanning, level of sales and support services, price and overall product
functionality and fitness for use. Failure to keep pace with product and
technological advances could negatively affect the Company's competitive
position and prospects for growth. Several of the Company's competitors have
substantially greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and to changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products, than
can the Company. In addition, other larger corporations could enter the AIDC
industry. Increased competition is likely to result in average selling price
reductions, reduced operating margins or loss of market share. No assurance can
be given that the Company will be able to compete successfully against current
and future competitors or that the competitive factors faced by the Company will
not adversely affect its business, financial condition or results of operations.
See "Business--Competition."
Product Transitions. The Company is dependent upon the introduction of new and
improved products. The Company's financial performance is dependent upon the
successful introduction of these products. The success will be dependent, among
other things, upon the ability of the Company to complete development of certain
products, customer acceptance of and demand for these products and the ability
of the Company to efficiently manufacture these products and to meet delivery
schedules. The introduction of new and enhanced products requires the Company to
manage the transition from older products in order to minimize disruption in
customer ordering patterns, avoid excess levels of older material inventories
and ensure that adequate supplies of new product can be delivered to meet
customer demand. There can be no assurance that the Company will successfully
manage the transition to selling new products. The failure to do so could have a
material adverse effect on the Company's business and results of operations.
Dependence on Sales by Third Parties: Significant Customers. A significant
portion of the Company's net sales are dependent upon the ability of its OEM,
value-added reseller (VAR), distributor and systems integrator customers to
develop and sell products that incorporate the Company's scanning products.
Factors, including economic conditions, patent positions, inventory positions,
the ability to sell the Company's products to end users, regulatory requirements
and other marketing restrictions that adversely affect the operations of the
Company's OEM, VAR, distributor and systems integrator customers can have a
substantial impact upon the Company's financial results. No assurances can be
given that the Company's OEM, VAR, distributor and systems integrator customers
will not experience financial or other difficulties that could adversely affect
their operations and, in turn, the results of operations of the Company. During
1997 and 1996, no individual customer accounted for more than 10% of net sales.
During 1995, Telxon Corporation accounted for 17% of the Company's net sales.
See "Business--Sales and Marketing" and "--Customer Support and Services."
Risks Associated with International Operations. The Company's sales to
international customers increased from $19.3 million or 22% of total net sales
in 1995 to $95.2 million or 46% of net sales in 1997. The Company intends to
continue to expand its operations outside of the United States and to enter
additional international markets, which will require significant management
attention and financial resources and which will result in a significant portion
of the Company's net sales being subject to the normal risks associated with
international sales. Such risks include unexpected changes in regulatory
requirements, compliance costs associated with quality control standards,
special standards requirements, longer accounts receivable collections in
certain geographic regions, tariffs and other barriers, difficulties in staffing
and managing international subsidiary operations, potentially adverse tax
consequences, country-specific product requirements and political and regulatory
uncertainties. There can be no assurance that these factors will not have an
adverse impact on the Company's ability to increase or maintain its
international sales or results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Sales and Marketing."
Exposure to Currency Fluctuations. Historically, the Company's revenue from
international operations has primarily been denominated in United States
dollars. During 1997, approximately 50% of its revenue from international
operations and 75% of its consolidated revenue were denominated in United States
dollars. The Company expects that a growing percentage of its business will be
conducted in currencies other than the United States dollar. As a result,
fluctuations in the value of certain foreign currencies could materially affect
the Company's business operating results and financial condition. Also, an
increase in the value of the United States dollar relative to foreign currencies
could make the Company's products more expensive and, therefore, less
competitive in certain markets. Due to the constantly changing currency
exposures and the volatility of currency exchange rates, there can be no
assurance that the Company will not experience currency losses in the future,
nor can the Company predict the effect of exchange rate fluctuations upon future
operating results. The Company may occasionally enter into forward foreign
exchange contracts as a hedge against currency fluctuations relating to foreign
sales denominated in foreign currencies. The forward contracts generally have
maturities of approximately 30 days and require the Company to exchange foreign
currencies for United States 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.
Price. Traditionally, the selling price of the Company's products decreases over
the life of the product. The Company endeavors to reduce manufacturing costs of
existing products and to introduce new products, functions and other
price/performance-enhancing features in order to mitigate the effect of such
decreases. To the extent that such cost reductions, product enhancements and new
product introductions do not occur in a timely manner or do not achieve market
acceptance, the Company's operating results could be materially, adversely
affected.
Acquisitions. The Company has in the past and may in the future acquire
businesses or product lines as a way of expanding its product offerings and
acquiring new technology. Failure of the Company to identify future acquisition
opportunities and/or to integrate effectively businesses that it may acquire
could have a material adverse effect on the Company's growth.
Dependence on Key Vendors. The Company's ability to produce and ship its
products on schedule is highly dependent on timely receipt of an adequate supply
of components and materials from its key vendors. The Company currently relies
on single suppliers, some of whom manufacture at a number of locations, for some
of the key components of its products. The Company could incur significant
set-up costs and experience delays in manufacturing should it be necessary to
replace key vendors due to work stoppages, shipping delays, quality problems,
financial difficulties or other factors. There can be no assurance that these
potential costs and delays would not have a material adverse impact on the
Company's business or results of operations. See "Business--Manufacturing and
Suppliers."
Fluctuations in Quarterly Operating Results. Historically, the Company has
experienced variability in its quarterly results and the Company anticipates
that such variability will continue in the future as a result of a number of
factors, many of which are beyond the Company's control. The factors affecting
this variability include demand for the Company's products, the size and timing
of large customer orders, the entry of new competitors and new technological
advances by competitors, changes in pricing policies by the Company or
competitors, customer order deferrals in anticipation of product enhancements or
new product offerings by the Company or its competitors, changes in the mix of
products sold by the Company and general economic factors.
Since customers order products for delivery within 30 to 45 days, backlog is not
a reliable predictor of future results beyond the current quarter. The Company's
expense levels are based, in part, on expectations of future revenue. If revenue
levels are below expectations, expense levels would be disproportionately high
as a percentage of total revenue and operating results would be adversely
affected. The Company believes that quarterly period-to-period comparisons of
its financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Government Regulation. The Company's products and operations are subject to
regulation by federal, state and local agencies in the United States and its
products are subject to regulation in certain foreign countries where the
Company's products are sold. While the Company believes that its products and
operations comply with all applicable regulations, there can be no assurance of
continued compliance if these regulations were to change. Noncompliance with
respect to these regulations could have a material adverse impact on the
Company's results of operations. See "Business--Government Regulation."
ITEM 2: PROPERTIES
The Company's principal manufacturing, engineering, and administrative
facility consists of an approximately 132,000 square foot Company-owned building
in Webster, New York, a suburb of Rochester, New York. This facility, completed
in 1995, was custom-designed to serve the Company's operations and to permit a
relatively rapid 45,000 square foot manufacturing addition. An adjacent 20 acre
parcel of land owned by the Company is also available for expansion. The Company
leases approximately 28,000 square feet of offsite storage and shop space
immediately adjacent to its principal facility. This lease expires January 2,
2000.
The Company also owns a 32 acre site in Eugene, Oregon. Engineering,
marketing and administrative functions are contained in a sixteen year old
54,000 square foot facility. Manufacturing and warehousing are contained in a
separate eleven year old 56,000 square foot building. In addition, the Company
leases 9,000 square feet of offsite storage and shop space approximately two
miles from the manufacturing facility. This lease expires June 30, 1998.
Domestically, the Company maintains offices under short-term leases for
individual sales and support personnel in or near Dallas, Texas; Dayton, Ohio;
Raleigh, North Carolina; Denver, Colorado; Miami, Florida and Skaneateles, New
York in order to serve North, Central and South America.
Internationally, the Company maintains offices in or near Tokyo, Beijing,
Sydney, Hong Kong, London, Paris, Milan, Frankfurt, Brussels, Madrid, Malmo, and
Ontario. These offices house from one to 20 people in 300 to 10,000 square foot
facilities under short-term leases.
All of the Company's locations are in good condition and management
believes that the Company has sufficient manufacturing capacity for the
foreseeable future.
ITEM 3: LEGAL PROCEEDINGS
There is litigation pending in the United States District court for the
Western District of New York located in Rochester, New York between the Company
and one of its customers, Data General, on the one hand, and Symbol on the
other, involving certain of Symbol's patents. In that action, the Company has
also alleged violations of the antitrust laws and unfair practices by Symbol.
Symbol has alleged patent infringement and breaches of certain license
agreements between the Company and Symbol, including claims that royalties have
been underpaid. The Company has assumed the responsibility of defending the
action on behalf of Data General.
The litigation is in the early stages of discovery. The Court had set a
hearing in July, 1997 which was to have been solely related to claim
construction of the patent claims alleged by Symbol to be infringed. That
hearing was taken off the Court's calendar. More recently, a status conference
was held on February 19, 1998 at which time the parties and the Court discussed
the status of the suit and, in particular, whether the patent or contract issues
would be heard first. The parties have since proposed a schedule to the Court,
seeking a trial of the contract issues in late fall 1998.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the period ended December 31, 1997.
EXECUTIVE OFFICERS OF REGISTRANT
The Company's executive officers as of December 31, 1997, were as follows.
Name Age Officer/Position
- ---- --- ----------------
Robert C. Strandberg .. 40. ..President and Chief Executive Officer
Edward J. Biernat ..... 43....Vice President, Quality
Charles E. Biss ....... 45....Vice President, Verification
Cecil F. Bowes ........ 55....Vice President, Sales - The Americas, Asia Pacific
Nigel P. Davis ........ 47....Vice President, Sales - Europe, Middle East, Africa
Scott D. Deverell ..... 32....Assistant Treasurer
G. William Hartman .... 52....Vice President, Automation
Dennis T. Hopwood ..... 48....Vice President, Human Resources
William L. Parnell, Jr 41....Vice President, Operations
Brad R. Reddersen ..... 45....Vice President, Chief Technology Officer
Matt D. Schler ........ 42....Vice President, Engineering and Product Development
Michael J. Stachura ... 42....Vice President, Finance
Roger D. Tedford ...... 44....Vice President, Chief Information Officer
William J. Woodard .... 46....Vice President, Chief Financial Officer and Treasurer
Robert C. Strandberg has served as President and Chief Executive Officer of
the Company since April 1997 and was Executive Vice President from November 1996
until April 1997. Prior to joining the Company, Mr. Strandberg was Chairman of
the Board of Directors, President and Chief Executive Officer of Datamax
International Corporation ("Datamax"), Orlando, Florida, from 1991 to 1996.
Datamax designs and manufactures thermal bar code printers. Mr. Strandberg holds
a B.S. in Industrial Engineering Operations Research from Cornell University and
an M.B.A. from Harvard University.
Edward J. Biernat has served as Vice President, Quality, since January
1996. Prior to joining the Company, Mr. Biernat was the manager of Quality
Systems for Thin Film Technology, a division of Bausch and Lomb, Inc. based in
Rochester, New York (1989-1996). Mr. Biernat holds B.S. degrees in Electrical
and Mechanical Engineering from Clarkson University.
Charles E. Biss has served as Vice President, Verification Products since
January 1996, as General Manager, Verification Products (1995-1996) and as
Product and technical Support Manager (1985-1995). Mr. Biss has served the
Company in a variety of technical and production related roles since 1973. Mr.
Biss represents the Company on a number of National and International standards
creating committees relating to bar codes and the automatic identification and
data capture industry. Mr. Biss holds a B.S. degree in Photographic Science and
Engineering from Rochester Institute of Technology.
Cecil F. Bowes has served as Vice President, Sales - The Americas, Asia
Pacific since December 1996. Prior thereto, he was Group Director, North America
for Spectra from November 1990 until December 1996. Mr. Bowes holds a B.S.
degree in Education from the University of Dayton.
Nigel P. Davis has served as Vice President, Sales - Europe, Middle East,
Africa (EMEA) since July 1996. Prior thereto, he was Group Director for Spectra
- - EMEA from March 1993 to May 1996.
Scott D. Deverell has served as Assistant Treasurer since September 1997
and was Controller from 1990 until September 1997. Mr. Deverell, a certified
public accountant, received a B.S. in Accounting from SUNY at Geneseo and an
M.B.A. from Rochester Institute of Technology.
G. William Hartman has served as Vice President, Automation since September
1997. Prior to joining the Company, he was Senior Vice President and Chief
Operating Officer of Datamax from 1991 to 1996. Mr. Hartman holds a B.S. in
Mechanical Engineering from the University of Utah and an M.S. in Mechanical
Engineering from Villanova University.
Dennis T. Hopwood has served as Vice President, Human Resources since July
1997. Prior thereto, he was Vice President, Human Resources for Spectra from May
1985 to January 1997. Mr. Hopwood holds a B.S. in Sociology from the University
of Idaho and an M.S. in higher education administration from the University of
Wisconsin.
William L. Parnell, Jr. has served as Vice President, Operations since
October 1996. Prior thereto, he was Vice President - Operations of Spectra from
November 1990 until October 1996. Mr. Parnell received a B.S. in Physics from
Utah State University and an M.B.A. from the University of Washington.
Brad R. Reddersen has served as Vice President, Chief Technology Officer
since December 1997, as Vice President, Engineering and Product Development from
April 1997 to November 1997 and as Vice President of New Products from July 1996
to March 1997. Prior thereto, he was Vice President, New Products of Spectra
from June 1993 until July 1996. Mr. Reddersen received a B.S. in Physics and an
M.S. in Optical Engineering from the University of Rochester.
Matt D. Schler has served as Vice President, Engineering and Product
Development since November 1997. Prior thereto, he was Vice President of
Engineering at Percon Inc., Eugene, Oregon, a manufacturer of bar code reading
products, from February 1997 to November 1997 and Vice President of New
Products, Engineering Manager of Spectra from March 1992 until January 1997. Mr.
Schler received a B.S. degree in Electrical Engineering from the University of
Colorado.
Michael J. Stachura has served as Vice President, Finance since September
1997. Prior thereto, he was Vice President, Corporate Controller of Genencor
International, Inc. from January 1991 until August 1997. Mr. Stachura, a
certified public accountant, received a B.S. in Accounting from Canisius College
in Buffalo.
Roger D. Tedford has served as Vice President, Chief Information Officer
since November 1996. Prior thereto, he was Vice President, Treasurer and
Secretary of Spectra from November 1990 until November 1996. Mr. Tedford
received a B.A. in Accounting/Finance and an M.B.A. from California University
at Fullerton.
William J. Woodard has served as Vice President, Chief Financial Officer
and Treasurer since October 1996. Prior to that, he served as Vice President,
Finance and Treasurer from August 1994 until September 1996. Prior to joining
the Company, he was Vice President and Chief Financial Officer, Champion
Products (1987-1994). Mr. Woodard, a certified public accountant, received a
B.B.A. degree in Accounting from St. Bonaventure University.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
HOLDER MATTERS
a) Market Information: The Company's common shares are traded on The Nasdaq
Stock MarketSM under the symbol PSCX. The following table sets forth, for the
periods indicated, the high and low sale prices for the Common Shares.
High Low
1997
Fourth Quarter....................... $13.50 $9.06
Third Quarter........................ $10.13 $6.63
Second Quarter....................... $ 7.88 $6.13
First Quarter........................ $ 9.00 $6.88
1996
Fourth Quarter....................... $ 9.63 $6.88
Third Quarter........................ $10.00 $7.00
Second Quarter....................... $13.50 $7.13
First Quarter........................ $ 9.75 $7.63
b) Holders: As of December 31, 1997, there were approximately 1,600 holders of
record of common shares.
c) Dividends: The Company has not paid any cash dividends since 1979 and does
not anticipate paying cash dividends in the foreseeable future. The Company's
senior debt and subordinated term loan agreements restrict payment of dividends
ITEM 6: SELECTED FINANCIAL DATA
(All amounts in thousands, except per share data)
The selected consolidated financial data presented below for each of
the five years in the period ended December 31, 1997 have been derived from the
Company's consolidated financial statements, which statements have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports thereon. The selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this report.
Year Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- - ---- ----
Statement of Operations Data:
Net sales .................................. $207,840 $146,051 $87,516 $60,447 $38,894
Cost of sales .............................. 122,995 (1) 83,675 50,634 32,198 20,256
---------------------------------------------------------------------------
Gross profit ............................ 84,845 62,376 36,882 28,249 18,638
Operating expenses:
Engineering, research and development.... 13,018 11,069 4,962 3,810 3,754
Selling, general and administrative ..... 44,154 37,855 23,024 16,031 11,826
Write-off of intangible assets .......... -- -- -- -- 167
Acquisition related restructuring and
other costs ........................... -- 70,068 (2) -- 6,894 (3) --
Severance and other costs ............... 4,191 (1) -- -- -- --
Amortization of intangibles from
business acquisitions ................ 6,715 3,564 877 485 220
---------------------------------------------------------------------------
Income/(loss) from operations .............. 16,767 (60,180) 8,019 1,029 2,671
Interest and other income/expense .......... (12,016) (5,747) 676 110 45
---------------------------------------------------------------------------
Income/(loss) from continuing operations
before income tax provision/(benefit).. 4,751 (1) (65,927) (2) 8,695 1,139 (3) 2,716
Income tax provision/(benefit) ............. 1,761 (24,393) 3,246 527 865
---------------------------------------------------------------------------
Income/(loss) from continuing operations.... 2,990 (41,534) 5,449 612 1,851
Loss from discontinued operations ......... (101) (5,446) -- -- --
---------------------------------------------------------------------------
Net income/(loss) ........................ $ 2,889 (1) $(46,980) (2) $ 5,449 $ 612 (3) $ 1,851
===========================================================================
Net income/(loss) per common and common equivalent share:
Basic:
Continuing operations .................. $0.27 $(3.96) $0.58 $0.08 $0.26
Discontinued operations ................ (0.01) (0.52) -- -- --
===========================================================================
Net income/(loss) ...................... $0.26 (1) $(4.48) (2) $0.58 $0.08 (3) $0.26
===========================================================================
Diluted:
Continuing operations .................. $0.25 $(3.96) $0.54 $0.08 $0.25
Discontinued operations ................ (0.01) (0.52) -- -- --
===========================================================================
Net income/(loss) ...................... $0.24 (1) $(4.48) (2) $0.54 $0.08 (3) $0.25
===========================================================================
Weighted average number of common and
common equivalent shares outstanding:
Basic ................................. 11,197 10,490 9,329 7,319 7,202
Diluted ............................... 11,843 10,490 10,013 7,617 7,476
(1) Severance and other costs reduced 1997 income before income taxes, net
income, basic EPS and diluted EPS by $5.2 million, $3.3 million, $0.29 and
$0.28, respectively.
(2) The acquisition related restructuring and other costs reduced 1996 income
before income taxes, net income, basic EPS and diluted EPS by $70.1 million,
$44.2 million, $4.21 and $4.21, respectively.
(3) The acquisition related restructuring and other costs reduced 1994 income
before income taxes, net income, basic EPS and diluted EPS by $6.9 million, $4.5
million, $0.61 and $0.59, respectively.
Year Ended December 31,
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents .................. $2,271 $10,838 $5,538 $2,720 $9,120
Working capital ............................ 12,112 13,320 20,397 8,014 11,779
Total assets ............................... 172,798 183,361 71,237 52,763 32,063
Long-term debt, including current maturities 108,554 127,453 623 13,609 1,806
Total shareholders' equity ................. 29,330 15,301 53,327 22,233 21,265
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto appearing elsewhere in
this report.
Results of Operations
The following table sets forth, for the years indicated, certain
consolidated financial data expressed as a percentage of net sales:
Year Ended December 31,
-------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ----------------------
(dollars in thousands)
Net sales ................................. $207,840 100.0% $146,051 100.0% $87,516 100.0%
Cost of sales ............................. 122,995 (1) 59.2 83,675 57.3 50,634 57.9
----------- --------- ----------- -------- ---------- ----------
Gross profit ............................ 84,845 40.8 62,376 42.7 36,882 42.1
Operating expenses:
Engineering, research and development ... 13,018 6.3 11,069 7.6 4,962 5.7
Selling, general and administrative ..... 44,154 21.2 37,855 25.9 23,024 26.3
Severance and other costs ............... 4,191 (1) 2.0 -- -- -- --
Acquisition related restructuring and
other costs ........................... -- -- 70,068 (2) 48.0 -- --
Amortization of intangibles from business
acquisitions ......................... 6,715 3.2 3,564 2.4 877 1.0
----------- --------- ----------- -------- ---------- ----------
Income/(loss) from operations ............ 16,767 8.1 (60,180) (41.2) 8,019 9.1
Interest and other income/(expense) ....... (12,016) (5.8) (5,747) (3.9) 676 0.8
----------- --------- ----------- -------- ---------- ----------
Income/(loss) from continuing operations
before income tax provision/(benefit)...... 4,751 (1) 2.3 (65,927) (2) (45.1) 8,695 9.9
Income tax provision/(benefit) ............ 1,761 0.9 (24,393) (16.7) 3,246 3.7
----------- --------- ----------- -------- ---------- ----------
Income/(loss) from continuing operations .. 2,990 1.4 (41,534) (28.4) 5,449 6.2
Loss from discontinued operations ......... (101) -- (5,446) (3.7) -- --
=========== ========= =========== ======== ========== ==========
Net income/(loss) ......................... $ 2,889 (1) 1.4% $ (46,980) (2) (32.1%) $5,449 6.2%
=========== ========= =========== ======== ========== ==========
(1) Severance and other costs reduced 1997 income before income taxes and
net income by $5.2 million and $3.3 million, respectively.
(2) The acquisition related restructuring and other costs reduced 1996
income before income taxes and net income by $70.1 million and $44.2
million, respectively.
Overview
Nineteen ninety-seven was the first full year in which the Company included
Spectra in its consolidated financial results. The Spectra acquisition was
accounted for as a purchase and is included in the 1996 financial statements
since July 12, 1996, the acquisition date.
During the second half of 1997, the Company's focus was on improving operational
results. In the second half of 1997, income from continuing operations improved
327% versus the first half of 1997. In the fourth quarter, the Company's net
income of $2.8 million was a record quarterly performance. The Company completed
a private equity placement with net proceeds of $10.2 million and implemented
certain actions which are expected to reduce annualized operating expenses by
$6.0 million. The Company expects that 1998 results will further reflect the
benefits of these initiatives.
For the Year Ended December 31, 1997
Net sales of $207.8 million for the year ended December 31, 1997 increased 42%
versus 1996. The increase in net sales is primarily due to the inclusion of
Spectra product sales for the full year in 1997 and increased sales volume
offset by lower average selling prices. International net sales increased 73%
over the prior year primarily due to the Spectra acquisition and represented 46%
of sales versus 38% in 1996.
Gross profit of $84.8 million for the year ended December 31, 1997 increased 36%
versus 1996. As a percentage of sales, gross profit was 40.8% in 1997 compared
to 42.7% in 1996. The increase in gross profit dollars is primarily due to the
inclusion of Spectra for the full year, while the decrease in gross profit as a
percentage of sales is primarily due to a change in the mix of products and
lower selling prices for handheld and fixed position scanner products and the
$1.0 million inventory write-off recorded in the second quarter for the
discontinuation of certain products to streamline the Company's product lines.
Engineering, research and development (ER&D) expenses of $13.0 million for the
year ended December 31, 1997 increased $1.9 million or 18% versus 1996. As a
percentage of sales, ER&D was 6.3% versus 7.6% in 1996. The dollar increase in
1997 was primarily due to the inclusion of Spectra for the full year in 1997. As
a result of efficiencies developed due to the integration of Spectra, ER&D as a
percentage of sales declined in 1997.
Selling, general and administrative (SG&A) expenses of $44.2 million for the
year ended December 31, 1997 increased $6.3 million or 16.6% versus 1996. As a
percentage of sales, SG&A declined to 21.2% in 1997 from 25.9% in 1996. The 1997
dollar increase is due to the inclusion of Spectra for the full year in 1997.
The decrease in SG&A as a percentage of sales is a result of efficiencies
developed due to the integration of Spectra. In addition, the Company is now
operating under the Spectra-Symbol License Agreement which resulted in a lower
royalty expense.
During the second quarter of 1997, the Company recorded a one-time pretax charge
of $4.2 million for severance and other costs. Of the total charge,
approximately $2.3 million was associated with the Severance Agreement with the
former CEO, $1.2 million was for employee severance and benefit costs for the
elimination of approximately 30 positions including several senior executives,
and $0.7 million was for the centralization of the research and development
efforts and relocation of manufacturing of certain product lines between its two
manufacturing facilities. Accrued expenses for these activities as of December
31, 1997 was approximately $2.9 million, of which $1.1 million related to
long-term contractual obligations. These costs and the inventory write-off
reduced 1997 income before income taxes, net income, basic EPS and diluted EPS
by $5.2 million, $3.3 million, $0.29 and $0.28, respectively.
The Company's effective tax rate was 37.1% in 1997 versus 37.0% in 1996.
For the Year Ended December 31, 1996
Net sales of $146.1 million for the year ended December 31, 1996 increased $58.5
million or 67% versus 1995. The increase in net sales was due to the inclusion
of Spectra product sales offset, in part, by the lower sales volumes of the
Company's scan engine products. International sales increased 185% in 1996
primarily due to the Spectra acquisition and represented 38% of sales versus 22%
in 1995.
Gross profit of $62.4 million for the year ended December 31, 1996 increased 69%
versus 1995. As a percentage of sales, gross profit was 42.7% in 1996 up from
42.1% in 1995. The increase in gross profit dollars and percentage of sales was
primarily due to the inclusion of Spectra.
ER&D expenses of $11.1 million for the year ended December 31, 1996 increased
$6.1 million or 123% versus 1995. As a percentage of sales, ER&D was 7.6%, an
increase from 5.7% in 1995. The 1996 dollar increase was primarily due to the
inclusion of Spectra, as well as increased expenses related to the Company's new
product development activities for its handheld and fixed position scanner
products.
SG&A expenses of $37.9 million for the year ended December 31, 1996 increased
$14.8 million or 64% versus 1995. As a percentage of sales, SG&A declined to
25.9% in 1996 from 26.3% in 1995. The 1996 dollar increase was primarily related
to the inclusion of Spectra, start-up costs associated with the Company's new
subsidiary responsible for sales and support in South and Central America and
increased patent related expenses.
During the third quarter of 1996, the Company recorded a one-time, pretax charge
of $10.0 million for the costs of restructuring its existing operations with
those of Spectra which was acquired in July 1996. Of the total restructuring
charge, approximately $5.0 million was associated with the closing of the
Company's Sanford, Florida manufacturing facility, $3.6 million was related to
the write-off of previously existing intangible and tangible assets and $1.4
million was recorded for employee severance and benefit costs for the
elimination of seven positions. As of December 31, 1997, all positions targeted
in the restructuring program have been eliminated. Restructuring activities are
expected to be substantially complete by the end of the first quarter of 1998.
The restructuring accrual as of December 31, 1997 was approximately $1.0
million.
In addition, in the third quarter of 1996, the Company allocated $60.1 million
of the Spectra purchase price to acquired in-process research and development
projects, which represents the estimated fair values related to these projects
determined by an independent appraisal. Proven valuation procedures and
techniques were utilized in determining the fair market value of each intangible
asset. The development technologies were evaluated to determine that there were
no alternative future uses. Such evaluation consisted of a specific review of
the efforts, including the overall objectives of the project, progress toward
the objectives and uniqueness of the developments toward these objectives. To
bring these projects to fruition, high risk developmental issues need to be
resolved which will require substantial additional effort and testing.
Therefore, technological feasibility of these new products has not yet been
achieved. As these projects had not reached technological feasibility and
alternative future use of these developmental technologies, apart from the
objectives of the individual projects did not exist, these costs were expensed
as of the acquisition date. The acquisition related restructuring and other
costs reduced 1996 income before income taxes, net income, basic EPS and diluted
EPS by $70.1 million, $44.2 million, $4.21 and $4.21, respectively.
The Company's effective tax rate was 37.0% in 1996 versus 37.3% in 1995. In
1996, the Company recognized a $24.4 million income tax benefit as a result of
the acquisition related restructuring and other costs discussed above.
Discontinued Operations
During the third quarter of 1996, the Company adopted a plan to dispose of its
TxCOM subsidiary. TxCOM was acquired as a part of the Spectra acquisition.
Results from operations of TxCOM were a gain of $0.2 million in 1997 and a loss
of $0.2 million in 1996. Disposal of TxCOM, which occurred in June 1997,
resulted in the recording of losses of $ 0.3 million in 1997 and $5.2 million in
1996. These losses include the write-down of the assets to their net realizable
value and the costs of disposing of the subsidiary, net of applicable tax
benefits.
Liquidity and Capital Resources
Current assets declined $3.2 million from December 31, 1996 primarily due to
decreased cash balances which were utilized to reduce the outstanding balance of
the revolving credit facility, offset by increased levels of accounts receivable
from increased sales in Europe where customers have longer credit terms. Current
liabilities declined $2.0 million from December 31, 1996 primarily due to
reduced accrued expenses and acquisition related restructuring costs, offset by
an increase in the current portion of long-term debt. As a result, working
capital decreased $ 1.2 million in 1997.
In 1996, current assets increased $23.2 million primarily due to increased
accounts receivable and inventory levels due to the acquisition of Spectra.
Current liabilities increased $30.3 million in 1996 primarily due to accrued
acquisition costs, restructuring costs and increased accounts payable to support
higher operating levels. As a result, working capital decreased $7.1 million
from 1995 to 1996.
Property plant and equipment expenditures totaled $6.6 million in 1997 and $4.8
million in 1996. The 1997 expenditures primarily related to manufacturing and
research equipment and new product tooling. The 1996 expenditures primarily
related to manufacturing equipment and new product tooling.
In September 1997, the Company completed a private placement of equity with
Hydra Investissements S.A., a Luxembourg Corporation (the Purchaser). The
Company issued and sold 110 thousand shares of Series A Convertible Preferred
Shares (the Preferred Shares) which are convertible into 1.375 million Common
Shares. In connection with the issuance of the Preferred Shares, a warrant
evidencing the right to purchase an aggregate of 180 thousand Common Shares of
the Company was issued to the Purchaser. This warrant has an exercise price of
$8.00 per share and may be exercised before September 10, 2001. As a result, the
Purchaser is the beneficial owner of 1.555 million Common Shares of the Company.
The net proceeds to the Company from the offering were $10.2 million. The
Company used the proceeds for working capital purposes and to repay a portion of
its senior revolving credit facility.
The long-term debt-to-capital percentage was 76.6% at December 31, 1997 versus
88.5% at December 31,1996 primarily due to the private placement described
above. At December 31, 1997, liquidity immediately available to the Company
consisted of cash and cash equivalents of approximately $2.3 million. The
Company's credit facilities consist of senior term loans of $ 71.0 million, a
senior revolving credit facility of $20.0 million and a subordinated term loan
of $30.0 million. The Company has $104.0 million outstanding on these
facilities. 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 twelve months.
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
The Company generates a portion of its sales from customers in the Asia Pacific
region. Less than 5% of consolidated accounts receivable as of December 31, 1997
were generated from these customers. All accounts are remitted in U.S. dollars.
The Company believes it has appropriate reserves such that the current economic
crisis and continued volatility in exchange rates in this region will not
materially affect results of operations of the Company.
The Company has evaluated its information technology infrastructure to ensure
that computer systems and software will recognize and process the year 2000 and
beyond with no significant effect on customers or disruptions to business
operations. The Company does not expect the cost of modifying its information
technology infrastructure for Year 2000 compliance to be material to its
financial condition or results of operations. The Company does not anticipate
any material disruption in its operations as a result of any failure by the
Company to be in compliance.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item is submitted as a separate section of this report. See Exhibits
in Part IV.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements on accounting and financial disclosure
matters.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is presented under the caption
entitled "Election of Directors - Information Concerning Nominees for Directors
and Other Incumbent Members of the Board of Directors" contained in the
definitive proxy statement issued in connection with the Annual Meeting of
Shareholders to be held May 7, 1998 and is incorporated in this report by
reference thereto. The information regarding Executive Officers of the
Registrant is found in Part I of this report.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is presented under the caption
entitled "Executive Officer Compensation" contained in the definitive proxy
statement issued in connection with the Annual Meeting of Shareholders to be
held May 7, 1998 and is incorporated in this report by reference thereto,
except, however, the sections entitled "Performance Graph" and the "Report of
the Compensation Committee of the Board of Directors" are not incorporated in
this report by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is presented under the caption
entitled "Security Ownership of Certain Beneficial Owners and Management"
contained in the definitive proxy statement issued in connection with the Annual
Meeting of Shareholders to be held May 7, 1998 and is incorporated in this
report by reference thereto.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is presented under the caption
"Executive Officer Compensation - Interest of Directors and Management in
Certain Transactions" contained in the definitive proxy statement issued in
connection with the Annual Meeting of Shareholders to be held May 7, 1998 and is
incorporated in this report by reference thereto.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 Financial Statements Page
Report of Independent Public Accountants...............34
Consolidated Financial Statements......................35
Notes to Consolidated Financial Statements.............39
(a) 2 Financial Statement Schedules:
Included in Part IV of this report:
Schedule II Valuation and Qualifying Accounts.......58
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
consolidated financial statements or notes thereto.
(a) 3 Exhibits:
2.1 Stock Purchase Agreement among BTR Dunlop Inc., Electro Corporation and
LazerData Holdings, Inc. dated December 21, 1994 (incorporated by reference
to Exhibit 2.1 of the Company's Current Report on Form 8-K dated December
21, 1994).
2.2 Asset and Stock Purchase Agreement among PSC Inc., Spectra-Physics, Inc.
and Spectra-Physics Holdings, S.A. dated May 20, 1996, as amended by letter
dated July 12, 1996 (incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K dated July 29, 1996 (the "1996 8-K")).
3.1 Restated Certificate of Incorporation of the Company and amendments thereto
(incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1996).
3.2 Certificate of Amendment of Certificate of Incorporation of PSC Inc. filed
with the Secretary of State of the State of New York on September 5, 1997
(incorporated by reference to Exhibit 3.1 of the Company's Current Report
on Form 8-K dated as of September 10, 1997 (the "1997 Form 8-K")).
3.3 Certificate of Amendment of Certificate of Incorporation of PSC Inc. filed
with the Secretary of State of the State of New York on December 30, 1997
.........................................................................59
3.4 Bylaws of the Company as currently in effect (incorporated by reference to
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994).
4.1 Form of Certificate for Common Shares of the Company (incorporated by
reference to Exhibit 4.3 of the Company's Registration Statement on Form
S-3, effective March 24, 1995 (No. 33-89178)).
4.2 Form of the 11.25% Senior Subordinated Note of SpectraScan, Inc., due June
30, 2006 (Notes were issued to seven Purchasers in the aggregate principal
amount of $30,000,000) (incorporated by reference to Exhibit 4.1 of the
1996 8-K).
4.3 Form of Note Guarantee dated July 12, 1996 made by PSC Inc. and each of the
domestic subsidiaries of PSC Inc. to each of the purchasers of the Senior
Subordinated Notes (incorporated by reference to Exhibit 4.2 of the 1996
8-K).
4.4 Form of Warrant issued to the Purchasers named in the Securities Purchase
Agreements dated July 12, 1996 (Warrants were issued to seven Purchasers
for an aggregate of 975,000 common shares of the Company) (incorporated by
reference to Exhibit 4.3 of the 1996 8-K).
4.5 Subordinated Installment Promissory Note of PSC Acquisition, Inc. issued to
Spectra-Physics, Inc. on July 12, 1996 in the principal amount of
$5,000,000 (incorporated by reference to Exhibit 4.4 of the 1996 8-K).
4.6 Note Guarantee dated July 12, 1996 made by PSC Inc. to Spectra-Physics,
Inc. (incorporated by reference to Exhibit 4.5 of the 1996 8-K).
4.7 Form of Certificate for Preferred Stock issued to Hydra Investissements
S.A. on September 10, 1997 (incorporated by reference to Exhibit 4.1 of the
1997 Form 8-K).
4.8 Form of Warrant issued to Hydra Investissements S.A. on September 10, 1997
(incorporated by reference to Exhibit 4.2 of the 1997 Form 8-K).
4.9 Form of Rights Agreement dated as of December 30, 1997 between PSC Inc. and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes
as Exhibit A - Form of Right Certificate; Exhibit B - Summary of Rights to
Purchase Preferred Stock; and Exhibit C - Form of Certificate of Amendment
designating the relative rights, preferences and limitations of the Series
B Preferred Shares (incorporated by reference to Exhibit 4.1 of the
Company's Current Report on Form 8-K dated December 30, 1997).
10.1*Severance Agreement between the Company and L. Michael Hone, dated April
30, 1997 (incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended April 4, 1997).
10.2*Agreement between the Company and Robert S. Ehrlich as of June 2, 1997
(incorporated by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended July 4, 1997 (the "July 4, 1997
Form 10-Q")).
10.3*Form of Change-in-Control/Severance Agreement between the Company and
certain of its executive officers (incorporated by reference to Exhibit
10.3 of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (the "December 31,1996 Form 10-K")).
10.4*Form of third party severance letter between Spectra-Physics Scanning
Systems, Inc. and certain executive officers (incorporated by reference to
Exhibit 10.4 of the December 31, 1996 Form 10-K).
10.5*Employment Agreement between the Company and Robert C. Strandberg, as of
June 2, 1997 (incorporated by reference to Exhibit 10.1 of the July 4, 1997
Form 10-Q).
10.6*Severance and Consulting Agreement between the Company and Jay M. Eastman
dated as of July 15, 1997................................................64
10.7*Form of Indemnification Agreement between the Company and its Directors and
Officers (incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1991).
10.8*Plan for Deferral of Directors' Fees dated as of March 4, 1992
(incorporated by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992).
10.9*Amended and Restated 1987 Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994).
10.10* 1994 Stock Option Plan (incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8 dated June 20, 1995 No.
33-60389).
10.11* 1995 Employee Stock Purchase Plan (incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-8 dated June 19, 1995
No. 33-60343).
10.12* 1997 Management Incentive Plan.........................................74
10.13* Third Restatement of the PSC Inc. 401(K) Plan dated as of July 1,
1997.....................................................................78
10.14Credit Agreement dated July 12, 1996 among PSC Acquisition, Inc., as
Borrower, PSC Inc. and Guarantor, the Initial Lenders named therein and
Fleet Bank as Initial Issuing Bank and Administrative Agent, together with
Form of Term A Note, Form of Term B Note and Form of Working Capital Note
(incorporated by reference to Exhibit 10.2 of the 1996 8-K).
10.15First Amendment dated as of September 27, 1996 to the Credit Agreement
dated as of July 12, 1996 among PSC Scanning Inc., as Borrower, PSC Inc.,
as Guarantor, the financial institutions party thereto and Fleet Bank as
initial Issuing Bank and administrative agent (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter
ended September 27, 1996 (the "September 27, 1996 Form 10-Q")).
10.16Second Amendment dated as of July 4, 1997 to the Credit Agreement dated as
of July 12, 1996 among PSC Scanning Inc., as Borrower, PSC Inc., as
Guarantor, the financial institutions party thereto and Fleet Bank as
initial Issuing Bank and administrative agent (incorporated by reference to
Exhibit 10.3 of the July 4, 1997 Form 10-Q).
10.17Amendment Three dated as of August 13, 1997 to the Credit Agreement dated
as of July 12, 1996 among PSC Scanning Inc., as Borrower, PSC Inc., as
Guarantor, the financial institutions party thereto and Fleet Bank as
initial Issuing Bank and administrative agent (incorporated by reference to
Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q/A for the
quarter ended July 4, 1997 (the "July 4, 1997 Form 10-Q/A").
10.18Consent dated as of December 8, 1997 to the Credit Agreement dated as of
July 12, 1996 among PSC Scanning Inc., as Borrower, PSC Inc., as Guarantor,
the financial institutions party thereto and Fleet Bank as initial Issuing
Bank and administrative agent...........................................107
10.19Securities Purchase Agreement dated July 12, 1996 among PSC Inc.,
SpectraScan, Inc. and Equitable Life Assurance Society of the United States
(separate but identical Securities Purchase Agreements were addressed to
each of the Other Purchasers of the Senior Subordinated Notes)
(incorporated by reference to Exhibit 10.1 of the 1996 8-K).
10.20Amendment No. 1 dated October 10, 1996 to Securities Purchase Agreements
among PSC Inc., PSC Scanning Inc., and Equitable Life Assurance Society of
the United States (separate but identical amendments were addressed to each
of the other purchasers of the Senior Subordinated Notes) (incorporated by
reference to Exhibit 10.2 of the September 27, 1996 10-Q).
10.21Amendment No. 2 dated July 4, 1997 to Securities Purchase Agreements among
PSC Inc., PSC Scanning Inc., and Equitable Life Assurance Society of the
United States (separate but identical amendments were addressed to each of
the other purchasers of the Senior Subordinated Notes) (incorporated by
reference to Exhibit 10.4 of the July 4, 1997 Form 10-Q).
10.22Amendment No. 3 dated August 18, 1997 to Securities Purchase Agreements
and Warrants among PSC Inc., PSC Scanning Inc., and the Purchasers named in
the Securities Purchase Agreements (incorporated by reference to Exhibit
10.6 of the July 4, 1997 Form 10-Q/A).
10.23Consent dated as of December 29, 1997 to Securities Purchase Agreements
and Warrants among PSC Inc., PSC Scanning Inc., and the Purchasers named in
the Securities Purchase agreements......................................109
10.24Stock and Warrant Purchase Agreement dated September 4, 1997 by and
between PSC Inc. and Hydra Investissements S.A. (incorporated by reference
to Exhibit 10.1 of the 1997 Form 8-K).
10.25Registration and Investor Rights Agreement dated September 10, 1997 by and
between PSC Inc. and Hydra Investissements S.A. (incorporated by reference
to Exhibit 10.2 of the 1997 Form 8-K).
22.1 Subsidiaries of Registrant..............................................115
24.1 Consent of Independent Public Accountant, dated March 25,
1998....................................................................116
(b):Reports on Form 8-K:
Report on Form 8-K, dated December 30, 1997
* Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 24, 1998 PSC Inc.
/s/ Robert C. Strandberg
Robert C. Strandberg
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 24, 1998 Principal Executive Officer
/s/ Robert C. Strandberg
Robert C. Strandberg
President and Chief Executive Officer
Date: March 24, 1998 Chief Financial Officer
/s/ William J. Woodard
William J. Woodard
Vice President, Chief Financial
Officer and Treasurer
Date: March 24, 1998 Principal Accounting Officer
/s/ Michael J. Stachura
Michael J. Stachura
Vice President, Finance
Date: March 24, 1998 /s/ Jay M. Eastman
------------------
Jay M. Eastman
Director
Date: March 24, 1998 /s/ Robert S. Ehrlich
---------------------
Robert S. Ehrlich
Director, Chairman of the Board
Date: March 24, 1998 /s/ James W. Henry
------------------
James W. Henry
Director
Date: March 24, 1998 /s/ Donald K. Hess
------------------
Donald K. Hess
Director
Date: March 24, 1998 /s/ Thomas J. Morgan
--------------------
Thomas J. Morgan
Director
Date: March 24, 1998 /s/ James C. O'Shea
-------------------
James C. O'Shea
Director
Date: March 24, 1998 /s/ Jack E. Rosenfeld
---------------------
Jack E. Rosenfeld
Director
Date: March 24, 1998 /s/ Justin L. Vigdor
--------------------
Justin L. Vigdor
Director
Date: March 24, 1998 /s/ Romano Volta
----------------
Romano Volta
Director
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PSC Inc.:
We have audited the accompanying consolidated balance sheets of PSC Inc. (a New
York corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PSC Inc. and subsidiaries as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Rochester, New York
January 30, 1998
PSC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except per share data)
ASSETS
December 31,
-------------------------------
1997 1996
-------------- -------------
Current Assets:
Cash and cash equivalents ................................. $ 2,271 $ 10,838
Accounts receivable, net of allowance for doubtful accounts
of $1,169 in 1997 and $1,101 in 1996 .................... 35,094 29,501
Inventories, net .......................................... 17,723 18,306
Prepaid expenses and other ................................ 1,569 1,244
-------- --------
Total current assets ................................... 56,657 59,889
Property, Plant and Equipment, net .......................... 35,469 35,612
Deferred Tax Assets ......................................... 23,576 24,773
Intangible and Other Assets, net ............................ 57,096 63,087
======== ========
Total assets ........................................... $172,798 $183,361
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ........................ $ 12,406 $ 9,459
Accounts payable ......................................... 18,000 15,681
Accrued expenses ......................................... 7,405 9,911
Accrued payroll and related employee benefits ............ 5,559 7,509
Accrued acquisition related restructuring costs........... 1,175 4,009
-------- --------
Total current liabilities ............................. 44,545 46,569
Long-Term Debt, less current maturities .................... 96,148 117,994
Other Long-Term Liabilities ................................ 2,775 3,497
Commitments and Contingencies
Shareholders' Equity:
Preferred shares, par value $.01; 10,000 authorized,
110 and 0 issued and outstanding at December 31,
1997 and 1996, respectively.
($11,000 aggregate liquidation value) ................... 1 --
Common shares, par value $.01; 40,000 authorized,
11,390 and 11,161 issued at December 31, 1997 and 1996,
respectively ............................................ 114 112
Additional paid-in capital ............................. 66,734 54,891
Retained earnings/(Accumulated deficit) ................ (36,543) (39,432)
Cumulative translation adjustment ...................... (739) (33)
Less - 39 treasury shares, repurchased at cost ......... (237) (237)
-------------- -------------
Total shareholders' equity 29,330 15,301
============== =============
Total liabilities and shareholders' equity $172,798 $183,361
============== =============
See accompanying notes to the Consolidated Financial Statements.
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
------------- ------------- -------------
Net Sales ................................................ $207,840 $146,051 $87,516
Cost of Sales ............................................ 122,995 83,675 50,634
------------- ------------- -------------
Gross profit ........................................ 84,845 62,376 36,882
Operating Expenses:
Engineering, research and development ............... 13,018 11,069 4,962
Selling, general and administrative ................. 44,154 37,855 23,024
Amortization of intangibles resulting from business
acquisitions ................................. 6,715 3,564 877
Severance and other costs ........................... 4,191 -- --
Acquisition related restructuring and other costs ... -- 70,068 --
------------- ------------- -------------
Income/(loss) from operations ................. 16,767 (60,180) 8,019
Interest and Other Income/(Expense):
Interest expense .................................... (12,563) (5,835) (306)
Interest income ..................................... 440 568 594
Other income/(expense) .............................. 107 (480) 388
------------- ------------- -------------
(12,016) (5,747) 676
------------- ------------- -------------
Income/(Loss) from Continuing Operations Before
Income Tax Provision/(Benefit) ...................... 4,751 (65,927) 8,695
Income Tax Provision/(Benefit) ........................... 1,761 (24,393) 3,246
------------- ------------- -------------
Income/(Loss) from Continuing Operations ................. 2,990 (41,534) 5,449
Discontinued Operations:
Gain/(loss)from discontinued operations, net of tax . 164 (229) --
Loss on disposal of discontinued operations ......... (265) (5,217) --
------------- ------------- -------------
Total Loss from Discontinued Operations .................. (101) (5,446) --
============= ============= =============
Net Income/(Loss) ........................................ $2,889 $(46,980) $5,449
============= ============= =============
Net Income/(Loss) Per Common and
Common Equivalent Share:
Basic:
Continuing operations ............................... $0.27 $(3.96) $0.58
Discontinued operations ............................. (0.01) (0.52) --
============= ============= =============
Net income/(loss) ................................... $0.26 $(4.48) $0.58
============= ============= =============
Diluted:
Continuing operations ............................... $0.25 $(3.96) $0.54
Discontinued operations ............................. (0.01) (0.52) --
============= ============= =============
Net income/(loss) ................................... $0.24 $(4.48) $0.54
============= ============= =============
Weighted Average Number of Common
and Common Equivalent Shares Outstanding:
Basic ............................................... 11,197 10,490 9,329
Diluted ............................................. 11,843 10,490 10,013
See accompanying notes to the Consolidated Financial Statements.
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(All amounts in thousands)
Year Ended December 31,
---------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
---------- -------------- ---------- ------------- ---------- -----------
Preferred Shares
Balance, beginning of year .......... -- $-- -- $-- -- $--
Issuance of preferred shares ........ 110 1 -- -- -- --
---------- -------------- ---------- ------------- ---------- -----------
Balance, end of year ............... 110 $1 -- $-- -- $--
========== ============== ========== ============= ========== ===========
Common Shares
Balance, beginning of year .......... 11,122 $112 9,946 $100 7,433 $ 75
Issuance of shares pursuant to
Employee Stock Purchase Plan ...... 67 1 26 -- 9 --
Issuance of common shares ........... -- -- 977 10 2,310 23
Exercise of options ................. 162 1 173 2 194 2
========== ============== ========== ============= ========== ===========
Balance, end of year ................ 11,351 $114 11,122 $112 9,946 $100
========== ============== ========== ============= ========== ===========
Additional Paid-In Capital
Balance, beginning of year .......... $54,891 $ 45,881 $20,288
Issuance of shares pursuant to
Employee Stock Purchase Plan ...... 390 201 87
Exercise of options 1,150 1,079 1,269
Issuance of common shares, net ...... -- 6,990 23,552
Issuance of preferred shares, net ... 9,595 -- --
Issuance of warrants ................ 617 600 --
Tax benefit from exercise or early
disposition of stock options ...... 91 140 685
============== ============= ===========
Balance, end of year ................ $66,734 $ 54,891 $45,881
============== ============= ===========
Retained Earnings/(Accumulated
Deficit)
Balance, beginning of year .......... $(39,432) $ 7,548 $2,099
Net income/(loss) ................... 2,889 (46,980) 5,449
============== ============= ===========
Balance, end of year ................ $(36,543) $(39,432) $7,548
============== ============= ===========
Cumulative Translation Adjustment
Balance, beginning of year .......... $( 33) $ 35 $ 8
Translation adjustment .............. (706) (68) 27
============== ============= ===========
Balance, end of year ................ $ (739) $( 33) $ 35
============== ============= ===========
Treasury Shares
Balance, beginning of year .......... $(237) $(237) $(237)
Shares repurchased .................. -- -- --
============== ============= ===========
Balance, end of year ................ $(237) $(237) $(237)
============== ============= ===========
See accompanying notes to the Consolidated Financial Statements.
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) ................................................ $2,889 ($46,980) $5,449
Adjustments to reconcile net income/(loss) to
net cash provided by operating activities:
Depreciation and amortization .............................. 13,735 9,169 2,784
(Gain)/loss on disposition of assets ....................... 109 3,860 (161)
Acquired research and development write-off ................ -- 60,100 --
Loss on disposal of discontinued operations ................ 265 5,217 --
Deferred tax assets ........................................ 1,197 (23,033) 668
(Increase) decrease in assets:
Accounts receivable, net ................................ (6,705) 1,760 (2,669)
Inventories ............................................. 581 (1,199) (4,031)
Prepaid expenses and other .............................. 80 (147) 301
Increase (decrease) in liabilities:
Accounts payable ........................................ 2,467 1,461 699
Accrued expenses ........................................ (3,190) (5,535) 1,297
Accrued payroll and related employee benefits ........... (1,855) 6,272 (333)
Accrued acquisition related restructuring costs ......... (3,830) 4,278 (1,107)
----------- ------------ -----------
Net cash provided by operating activities ............. 5,743 15,223 2,897
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................. (6,557) (4,843) (7,418)
Cash paid for acquisition of business ............................ -- (10,124) --
Additions to intangible and other assets ......................... (343) (1,238) (4,443)
Issuance of notes for stock option activity ...................... -- (382) (593)
Repayment of notes for stock option activity ..................... 278 -- --
Proceeds from sale of marketable securities ...................... -- 4,167 --
----------- ------------ -----------
Net cash used in investing activities ................. (6,622) (12,420) (12,454)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt ...................................... 5,000 --- 1,046
Additions to other long-term liabilities ......................... 1,398 648 230
Principal repayments of long-term debt ........................... (23,899) (105) (14,126)
Payment of other long-term liabilities ........................... (655) -- (420)
Exercise of options and the issuance of common shares and warrants 1,542 1,882 24,933
Issuance of preferred shares and warrants, net ................... 10,213 -- --
Tax benefit from exercise or early disposition of stock options .. 91 140 685
----------- ------------ -----------
Net cash (used in) provided by financing activities ... (6,310) 2,565 12,348
----------- ------------ -----------
Foreign currency translation ..................................... (1,378) (68) 27
----------- ------------ -----------
Net Increase (Decrease) in Cash and Cash Equivalents ............. (8,567) 5,300 2,818
CASH AND CASH EQUIVALENTS:
Beginning of year ................................ 10,838 5,538 2,720
=========== ============ ===========
End of year ...................................... $ 2,271 $10,838 $5,538
=========== ============ ===========
Supplemental disclosures of cash flow information:
Interest paid .................................................. $13,804 $3,994 $ 306
Income taxes paid .............................................. $ 438 $ 833 $ 3,009
Capital leases ................................................. $ -- $ 35 $ 131
See accompanying notes to the Consolidated Financial Statements.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
1. DESCRIPTION OF BUSINESS
PSC Inc. (the Company) manufactures the world's broadest line of
handheld and fixed position bar code readers, verifiers, integrated sortation
and point-of-sale scanning systems. The Company has developed products for
automatic data collection at every stage of the product supply chain from raw
material, manufacturing and warehousing, to logistics, transportation, inventory
management and point-of-sale. These products are used throughout the world in
food, general retail, health care and other industries, and in government.
The Company's corporate headquarters are located in the Rochester, New
York suburb of Webster. The Company designs, manufactures, sells, distributes
and services its products from world-class manufacturing facilities in Webster,
New York and Eugene, Oregon. These products are sold through original equipment
manufacturers, value-added resellers, distributors, systems integrators and a
professional sales force worldwide. The Company has sales and service operations
in the Americas, Europe, Asia and Australia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts
of PSC Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with original
maturities of three months or less. The cost of the cash equivalents
approximates fair market value.
Inventories
Inventories are stated at the lower of cost or market using the
first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and includes certain
capitalized leases. For financial reporting purposes, depreciation and
amortization are computed using the straight-line method over the following
estimated useful lives:
Building and improvements 10-40 years
Office furniture and equipment 3-7 years
Production equipment 3-8 years
Leasehold improvements 3-15 years
Equipment under capital leases and leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful lives of
the assets or the lease term.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
Intangibles Resulting from Business Acquisitions
Intangibles resulting from business acquisitions represent the excess purchase
price over the fair value of net assets acquired and are amortized using the
straight-line method over five to ten years, their current estimated useful
lives.
Other Intangibles
Other intangibles, which consist of technology and license agreements,
patents and trademarks, are recorded at cost. Amortization is calculated on a
straight-line basis over periods ranging from two to five years, their current
estimated useful lives.
The Company reviews its long-lived assets, including certain
intangibles and goodwill, in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and
Long-lived Assets to be Disposed of" for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. If such events or changes in circumstances are present, a loss is
recognized to the extent the carrying value of the asset is in excess of the sum
of the undiscounted cash flows expected to result from the use of the asset and
its eventual disposition.
Income Taxes
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109) "Accounting for Income
Taxes." SFAS No. 109 requires an asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for temporary differences between financial statement
and income tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using tax rates expected to apply to taxable income in
the years that the temporary differences are expected to be realized. In
addition, the amount of any future tax benefits is reduced by a valuation
allowance until it is more likely than not that such benefits will be realized.
Net Income per Common and Common Equivalent Share
In February 1997, Statement of Financial Accounting Standards No.
128 (SFAS No. 128), "Earnings Per Share" was issued. SFAS No. 128 replaces
Accounting Principles Board Opinion No. 15. SFAS No. 128 replaces primary
Earnings Per Share (EPS) with basic EPS. Basic EPS is computed by dividing
reported earnings available to common shareholders by the weighted average
shares outstanding during the year. No dilution for common share equivalents is
included. Fully diluted EPS, now called diluted EPS, also is required to be
presented. The Company adopted SFAS No. 128 retroactively for all periods
presented. Accordingly, the Company has restated its previously presented EPS
amounts.
Foreign Currency Translation
The financial statements of foreign operations are translated into
U.S. dollars in accordance with Statement of Financial Accounting Standards No.
52 "Foreign Currency Translation." Accordingly, all
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
assets and liabilities are translated at year-end exchange rates. The gains and
losses that result from this process are shown in the cumulative translation
adjustment account in the shareholders' equity section of the balance sheet.
Operating transactions are translated at weighted average rates prevailing
during the year. Transaction gains and losses are reflected in net income and
were not material.
Derivatives
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.
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 exchange changes relates
primarily to its international subsidiaries. Sales to certain countries are
denominated in their local currency. The Company may occasionally enter into
forward foreign exchange contracts as a hedge against currency fluctuations
relating to these foreign 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. There were no foreign exchange contracts
outstanding at December 31, 1997.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade receivables,
other current assets, accounts payable, and amounts included in accruals meeting
the definition of a financial instrument, approximate fair value because of the
short-term maturity of these instruments. The carrying value and related
estimated fair values for the Company's remaining financial instruments are as
follows:
1997 1996
---------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ---------- --------- ----------
Interest rate swap agreements $ -- $ 451 $ -- $ --
Long-term debt, including current portion $108,554 $108,554 $127,453 $127,453
Based on borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair value of its debt approximates
its recorded value. Interest rate swap agreements are estimated by obtaining
quotes from brokers and reflecting the cost to terminate the agreements.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
Product Warranty
The Company's products have a warranty period of 12 to 30 months.
Estimated warranty costs are provided at the time of sale. The Company maintains
an accrual for warranty claims and adjusts this accrual periodically based on
historical experience and known warranty claims.
Research and Development Costs
All research and development costs are expensed as incurred.
Revenue Recognition
Revenue from sales of the Company's scanning products is recognized
upon shipment. In conjunction with these sales, field service maintenance
agreements are entered into for certain products. Maintenance revenues are
deferred and recognized ratably over the term of the related maintenance period,
which is typically one to three years. Revenue from sales of the Company's
self-checkout systems is recognized upon installation and acceptance from the
customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts in prior years have been reclassified to conform to the
1997 presentation.
3. ACQUISITIONS AND DISPOSITIONS
On July 12, 1996, the Company completed its purchase agreement with
Spectra-Physics AB of Sweden to acquire Spectra-Physics Scanning Systems, Inc.,
TxCOM S.A. and related businesses (Spectra). Spectra, which is headquartered in
Eugene, Oregon, is one of the world's leading manufacturers of countertop and
in-counter fixed position bar code scanners for retail point-of-sale
applications. The purchase price was approximately $140.0 million. The purchase
was funded by $125.0 million in cash, $10.0 million in the Company's common
shares less a $3.0 million discount as the shares were unregistered and a $5.0
million subordinated promissory note. The $125.0 million cash portion was funded
by a combination of the Company's cash, senior debt of $92.5 million and
subordinated debt of $30.0 million. The acquisition was accounted for as a
purchase and is included in the 1996 Consolidated Financial
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
Statements since the date of acquisition. The Company allocated $60.1 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 of 1996. The remaining excess of the
purchase price over the fair value of net assets acquired was approximately
$58.0 million and is being amortized on a straight-line basis over 10 years.
The following table sets forth the unaudited pro forma results of
operations of the Company for the years ended December 31, 1996 and 1995. The
unaudited pro forma results of operations assume that the operations of the
Company were combined with those of Spectra as if the acquisition occurred on
January 1, 1995. The unaudited pro forma results of operations are presented
after giving effect to certain adjustments for depreciation, amortization of
goodwill, interest expense on the acquisition financing and related income tax
effects. The unaudited pro forma results of operations were based upon currently
available information and upon certain assumptions that the Company believes
were reasonable. The unaudited pro forma results do not purport to be indicative
of the results that actually would have been achieved during the periods
indicated and are not intended to be indicative of future results.
Pro Forma
Twelve Months Ended
-------------------
12/31/96 12/31/95
---------- ---------
Net sales ...................................... $210,961 $189,143
Income/(loss) from operations .................. (51,800) 15,444
Income/(loss) from continuing operations ....... (40,148) 1,931
Total loss from discontinued operations ........ (5,446) --
Net income/(loss) .............................. (45,594) 1,931
Net income/(loss) per common and common
equivalent share:
Basic:
Continuing operations ....................... $ (3.83) $ 0.21
Discontinued operations ..................... (0.52) --
------ -----------
Net income/(loss) ........................... $ (4.35) $ 0.21
========== ==========
Diluted:
Continuing operations ....................... $ (3.65) $ 0.17
Discontinued operations ..................... (0.49) --
------ -----------
Net income/(loss) ........................... $ (4.14) $ 0.17
========== ==========
Weighted average shares outstanding:
Basic ....................................... 10,490 9,329
Diluted ..................................... 11,008 11,216
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
In connection with the acquisition, liabilities assumed and cash paid
were as follows:
Fair value assets acquired ............ $161,162
Liabilities assumed ................... 17,138
Total consideration paid ............ 144,024
Less issuance of stock ................ 7,000
Less amounts borrowed ................. 126,900
-------
Net cash paid for acquisition .......$ 10,124
=========
In April 1995, the Company completed the sale of substantially all of
the assets related to its image products business. This resulted in a gain of
approximately $161 which was included in other income in 1995.
4. INVENTORY
Inventory consists of the following at December 31:
1997 1996
----------- ------------
Raw materials ...... $10,979 $10,688
Work-in-process .... 3,727 3,547
Finished goods ..... 3,017
4,071
=========== ============
$17,723 $18,306
=========== ============
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consist of the following at
December 31:
1997 1996
------------ ------------
Land $ 2,312 $ 2,304
Building and improvements 17,782 17,592
Office furniture and equipment 11,169 9,583
Production equipment 16,529 13,849
Leasehold improvements 701 509
------------ ------------
48,493 43,837
Less: accumulated depreciation and amortization 13,024 8,225
============ ============
$35,469 $35,612
============ ============
Depreciation expense for 1997, 1996 and 1995 amounted to $6,478, $4,947 and
$1,673, respectively. Amortization of capital lease assets is included in
depreciation expense.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
6. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following at December 31:
1997 1996
------------ ------------
Intangibles resulting from business acquisitions $66,846 $65,750
Other intangibles 2,565 2,234
Other assets 691 1,341
------------- ------------
70,102 69,325
Less: accumulated amortization 13,006 6,238
------------ ------------
$57,096 $63,087
============ ============
Amortization expense for 1997, 1996 and 1995 amounted to $7,257, $4,222
and $1,111, respectively.
SCHEDULE 7. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
1997 1996
----------- -----------
Accrued warranty .......... $1,818 $1,641
Accrued royalty ........... 862 1,261
Accrued interest .......... 105 1,687
Accrued relocation ........ 939 1,185
Deferred revenue .......... 758 714
Other expenses ............ 2,923 3,423
=========== ===========
$7,405 $9,911
=========== ===========
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1997 1996
---------------- -------------
Senior term loan A ................. $ 47,000 $ 55,000
Senior term loan B ................. 24,000 25,000
Senior revolving credit ............ 3,000 12,500
Subordinated term loan ............. 29,488 29,428
Subordinated promissory note ....... 4,688 5,000
Other .............................. 378 525
---------------- -------------
108,554 127,453
Less: current maturities ........ 12,406 9,459
---------------- -------------
$ 96,148 $117,994
================ =============
During 1996, the Company negotiated a series of debt agreements in
connection with the funding of its acquisition of Spectra. Term loan A is a
senior loan with five lenders, having a final maturity in June
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
2001, at a current floating interest rate of 8.7% and a swapped fixed rate of
9.4%. Term loan B is a senior loan with four lenders, having a final maturity in
December 2002, at a current floating interest rate of 9.2% and a swapped fixed
rate of 9.9%. The swaps for both loans expire on September 30, 1998.
The revolving credit is with the term loan lenders, matures in 2001 and
has a current floating interest rate of 9.0%. The total revolving credit
facility is $20.0 million, of which $3.0 million is outstanding at December 31,
1997. The unused portion of the revolving credit facility is subject to a
commitment fee of between 0.375% and 0.5%. The senior debt facilities have
collateral in all of the assets of the Company.
The subordinated term loan is from five lenders, at a fixed rate of
11.25%, with principal payments starting in June 2003 and a final maturity in
June 2006. This debt has an associated unamortized discount of $512 which has
been netted against the total outstanding balance of $30.0 million.
The subordinated promissory note matures in 2001 and has a current
floating interest rate of 9.5%. The subordinated term loan and promissory note
are unsecured.
The other debt is principally composed of capital lease obligations.
The senior debt and subordinated term loan agreements restrict payment
of dividends, limit stock repurchases and require the maintenance of certain
financial ratios. The Company was in compliance with all of these covenants and
ratios as of December 31, 1997.
Long-term debt maturities are as follows for years ending December 31:
1998 $ 12,406
1999 14,402
2000 16,281
2001 25,449
2002 10,507
Thereafter 29,509
----------------
$108,554
================
The Company is a guarantor under a mortgage agreement through February
2001 relating to its former principal manufacturing facility up to $500.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
9. INCOME TAXES
The provision for (benefit from) income taxes consisted of the
following for the years ended December 31:
1997 1996 1995
------------ ------------- -----------
Current:
Federal .................... $ 244 $ (1,589) $1,686
State ...................... 59 65 341
Foreign .................... 261 164 551
Deferred:
Federal .................... 1,658 (21,176) 585
State ...................... (461) (1,857) 83
============ ============= ===========
Total .................. $1,761 $(24,393) $3,246
============ ============= ===========
A reconciliation between the statutory U.S. federal income tax rate and
the Company's effective tax rate is as follows for the years ended December 31:
1997 1996 1995
----------- ---------- -----------
Computed "expected" tax expense 34.0% 34.0% 34.0%
Change in valuation reserve -- 2.3% (4.7%)
State income taxes, net of
federal income tax benefit 4.2% 1.8% 3.2%
Goodwill amortization 2.7% 0.2% 1.4%
FSC benefit (3.7%) (0.1%) (1.0%)
Meals and entertainment 2.1% 0.3% 0.7%
Miscellaneous items, net (2.2%) (1.5%) 3.7%
----------- ---------- -----------
37.1% 37.0% 37.3%
=========== ========== ===========
The deferred tax assets/(liabilities) are comprised of the following at December
31:
1997 1996
------------ ------------
Acquired in-process research and development costs . $21,703 $23,305
Intangibles resulting from business acquisitions ... (2,869) (1,079)
Tax credit carryforward ............................ 1,271 --
Warranty reserve ................................... 1,170 1,175
Severance accrual .................................. 1,072 --
Inventory reserve .................................. 1,018 1,405
Acquisition related restructuring and other costs .. 494 1,828
Other, net ......................................... 1,283 275
------------ ------------
25,142 26,909
Less: valuation allowance ......................... (1,566) (2,136)
============ ============
Net deferred tax asset ............................. $23,576 $24,773
============ ============
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management considers among other
things, the scheduled reversal of deferred tax liabilities, projected future
taxable income, tax planning strategies and positions taken by taxing
authorities on various issues related to the deductibility of certain costs in
making this assessment. The Company has recorded a valuation allowance to
reflect the estimated realizable amount of deferred tax assets and it primarily
relates to state tax benefits. The deferred tax asset related to the acquisition
of Spectra has been adjusted along with the related valuation allowance.
10. COMMITMENTS AND CONTINGENCIES
Operating Lease Agreements
Certain equipment and properties are rented under noncancelable
operating leases that expire at various dates through 2002. Total rental expense
under operating leases was approximately $2,214, $1,214 and $786, for the years
ended December 31, 1997, 1996 and 1995, respectively.
Future minimum lease payments required under these agreements are as follows for
the years ending December 31:
1998 $2,232
1999 1,709
2000 1,080
2001 878
2002 233
---
$6,132
Royalty Agreements
The Company currently has cross-license agreements with certain
industry competitors. Under these agreements, royalties are paid by the Company
on sales of certain licensed products. Royalty expense under these agreements
was included in selling, general and administrative expense in 1997, 1996 and
1995.
Legal Matters
The automatic identification and data capture industry is characterized
by substantial litigation regarding patent and other intellectual property
rights. There is litigation pending in the United States District Court for the
Western District of New York between the Company and one of its customers, on
the one hand, and Symbol Technologies, Inc. (Symbol) on the other, involving
certain of Symbol's patents. In that action, the Company has also alleged
violation of the antitrust laws and unfair practices by Symbol and Symbol has
alleged breaches of certain license agreements between the Company and Symbol,
including claims that royalties have been underpaid. The Company has also
assumed the responsibility of defending the action on behalf of its customer and
has provided certain rights of indemnification to its
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
customer. The Company intends to defend itself and its customer vigorously.
Although the Company maintains that Symbol's patents are invalid, that the
Company has not infringed the patents, or both, and that the Company has not, as
was alleged, breached the Symbol license, nor underpaid royalties, there can be
no assurance that this or any other action will be decided or settled in the
Company's favor. There can be no assurance that others will not assert claims
against the Company that result in litigation. Any such litigation could result
in significant expense, adversely impact the Company's marketing, give rise to
certain indemnity rights on the part of customers and divert the Company's
attention from other matters. If any of the Company's products were found to
infringe a third-party patent, the third party could be entitled to injunctive
relief, which would prevent the Company from selling any such infringing
products. In addition, the Company could be required to pay monetary damages.
Although the Company could seek a license to sell products determined to
infringe a third-party patent, there can be no assurance that a license would be
available on terms acceptable to the Company. The Company could also attempt to
redesign any infringing products so as to avoid infringement, although any
effort to do so could be costly and time-consuming, and there can be no
assurance the effort would be successful.
11. SHAREHOLDERS' EQUITY
In September 1997, the Company completed a private placement of equity
with Hydra Investissements S.A., a Luxembourg Corporation (the Purchaser). The
Company issued 110 shares of Series A Convertible Preferred Shares (the
Preferred Shares) which are convertible into 1.375 million Common Shares. The
Preferred Shares are convertible at anytime at the option of the holders into
Common Shares of the Company. The conversion price is $8.00 per Common Share or
one Preferred Share for 12.5 Common Shares. In connection with the issuance of
Preferred Shares, a warrant evidencing the right to purchase an aggregate of 180
Common Shares of the Company was issued to the Purchaser. This warrant has an
exercise price of $8.00 per share and may be exercised at anytime prior to
September 10, 2001. As a result, the Purchaser beneficially owns 1.555 million
Common Shares of the Company. The net proceeds to the Company from the offering
were $10.2 million. The Company used the proceeds for working capital purposes
and to repay a portion of its senior revolving credit facility.
In March 1995, the Company completed a secondary stock offering. The
Company sold approximately 2.3 million shares at a price of $11.00 per share.
The net proceeds to the Company from the offering were approximately $23.6
million. The Company used approximately $7.2 million of the net proceeds from
the offering to repay in full the outstanding indebtedness under the Company's
construction loan used to finance its new headquarters, manufacturing and
engineering facility. The Company also used approximately $6.8 million of the
net proceeds from the offering to repay in full the outstanding indebtedness
under the Company's term loan that was used to finance a portion of its
acquisition of LazerData Corporation in December 1994.
Shareholder Rights Plan
In December 1997, the Company adopted a Shareholder Rights Plan in
which one Preferred Share Purchase Right (the Right) was granted for each
outstanding Common Share. The Rights are exercisable only if a person or group
acquires or tenders an offer that would result in the beneficial ownership of
20% or more of the then outstanding Common Shares of the Company. Each Right
entitles the holder to
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
purchase one one-thousandth of a share of the Company's Series B Preferred
Shares at a purchase price of $45. Under certain circumstances, the Rights are
redeemable at a price of $0.01 per Right and, unless redeemed earlier, will
expire in December 2007. There were no issued or outstanding Series B Preferred
Shares at December 31, 1997.
Stock Option Plans
Options under the Company's Stock Option Plans (the SOP) may be granted
to employees, consultants, directors and officers and may vest over time or
based upon the performance of the Company's stock, or both, at the discretion of
the Board of Directors. Options must be issued at an exercise price not less
than fair market value on date of grant and expire five to ten years from date
of grant unless employment is terminated or death occurs earlier.
In accordance with the provisions of the SOP, the Company may make
loans to participants to finance the exercise price and related income taxes
upon the exercise of an option. During 1997, the Company received loan
repayments from participants totaling $278. During 1996, the Company granted two
loans to the Chairman and Chief Executive Officer, totaling $382. Each loan is a
five-year loan at an interest rate of 9.50% and is secured by the shares
purchased with the proceeds of the loan. During 1995, the Company granted a loan
to the Chairman and Chief Executive Officer and a loan to a member of the Board
of Directors of the Company, totaling $593. Each loan is a five-year loan at an
interest rate of 7.34% and is secured by the shares purchased with the proceeds
of the loan.
The Company accounts for its SOP and Employee Stock Purchase Plan under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost was recognized. In October 1995, Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation," was issued. This statement encourages, but does not require,
companies to use the fair value based method to measure compensation cost, which
is then recognized over the service period (usually the vesting period). The
Company continues to measure compensation cost using the intrinsic value method
as prescribed by APB Opinion No. 25. Had compensation cost for these plans been
determined based on the fair value at the grant dates for awards consistent with
SFAS No. 123, the Company's pro forma amounts for net income and earnings per
share would have been as follows:
1997 1996 1995
---- ---- ----
Net income/(loss) as reported ............ $2,889 $(46,980) $5,449
Net income/(loss) pro forma .............. $2,175 $(48,501) $5,325
Net income/(loss) per common and common
equivalent share as reported:
Basic ................................ $0.26 $(4.48) $0.58
Diluted .............................. $0.24 $(4.48) $0.54
Net income/(loss) per common and
common equivalent share pro forma:
Basic ................................ $0.19 $(4.62) $0.57
Diluted .............................. $0.18 $(4.62) $0.53
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
SFAS No. 123 has only been applied to options granted and Employee
Stock Purchase Plan purchases after January 1, 1995. As a result, the pro forma
compensation expense may not be representative of that to be expected in future
years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Risk free interest rate 6.19% 5.95% 6.66%
Expected dividend yield 0% 0% 0%
Expected lives 4 years 4 years 4 years
Expected volatility 45% 45% 45%
Fair value of options granted $2.89 $3.31 $5.45
The following is a summary of the activity in the Company's SOP for the years
ended December 31:
1997 1996 1995
------------------------ ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
---------- -------- ---------- --------- ---------- --------
Options outstanding at beginning of
period .................................. 2,818 $8.33 2,138 $8.41 2,299 $8.02
Options granted ............................ 1,094 6.98 953 7.78 105 12.54
Options exercised .......................... (162) 7.51 (173) 6.27 (200) 6.52
Options forfeited/canceled ................. (704) 9.00 (100) 8.06 (66) 6.84
---------- ----------
==========
Options outstanding at end of period ....... 3,046 $7.76 2,818 $8.33 2,138 $8.41
========== ========== ==========
Number of options at end of period:
Exercisable ............................. 1,884 1,630 1,575
Available for grant ..................... 394 784 1,637
The Company was able to realize an income tax benefit in 1997, 1996 and
1995 from the exercise or early disposition of stock options. For financial
reporting purposes, this benefit resulted in a decrease in current income taxes
payable and an increase in additional paid-in capital.
Warrants
In connection with the issuance of Preferred Shares, a warrant
evidencing rights to purchase an aggregate of 180 Common Shares of the Company
were issued and sold to the Purchaser of the Preferred Shares. This warrant has
an exercise price of $8.00 per share and may be exercised prior to September 10,
2001.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
The acquisition of Spectra was financed, in part, by the subordinated term loan.
In connection with the subordinated term loan, warrants evidencing rights to
purchase an aggregate of 975 Common Shares of the Company were issued and sold
to the purchasers of the subordinated term loan. These warrants have an exercise
price of $8.00 per share and may be exercised at anytime prior to July 12, 2006.
The holders of these warrants have certain rights relating to
registration and to the repurchase by the Company of the warrants and the shares
issued upon the exercise of the warrants under certain circumstances.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the Plan) under which
250 Common Shares can be issued. Under the terms of the Plan, eligible employees
may purchase the Company's Common Shares semi-annually on approximately January
1 and July 1 through payroll deductions. The purchase price is the lower of 85%
of the fair market value of the shares on the first or last day of each six
month offering period. Employees purchased approximately 67 shares at an average
price of $5.81 per share, 26 shares at an average price of $7.82 per share and 9
shares at an average price of $9.16 per share during 1997, 1996 and 1995,
respectively. The Plan expires on December 31, 2000.
The fair value of the purchase rights is estimated on the first day of
the offering period using the Black-Scholes option pricing model with the
following weighted average assumptions for grants in 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Risk free interest rate 5.12% 5.89% 6.10%
Expected dividend yield 0% 0% 0%
Expected lives 6 mos. 6 mos. 6 mos.
Expected volatility 45% 45% 45%
Fair value of purchase rights granted $2.06 $2.54 $3.78
12. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Year Ended December 31, 1997
--------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------- ------------------ ----------------
Basic EPS
Income available to
common shareholders $2,889 11,197 $0.26
================
Effect of dilutive securities:
Options -- 29
Warrants -- 422
Preferred shares -- 195
---------------- ------------------
Diluted EPS
Income available to common
shareholders and assumed conversions $2,889 11,843 $0.24
================ ================== ================
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
Year Ended December 31, 1996
--------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------- ------------------- ---------------
Basic EPS
Income available to
common shareholders ...................... $(46,980) 10,490 $(4.48)
================ =================== ===============
Diluted EPS
Income available to common
shareholders and assumed conversions ..... $(46,980) 10,490 $(4.48)
================ =================== ===============
Year Ended December 31, 1995
--------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------- ------------------ ---------------
Basic EPS
Income available to
common shareholders ....................... $5,449 9,329 $0.58
===============
Effect of dilutive securities:
Options .................................. -- 684
---------------- ------------------
Diluted EPS
Income available to common
shareholders and assumed conversions ...... $5,449 10,013 $0.54
================ ================== ===============
Basic EPS were computed by dividing reported earnings available to
common shareholders by weighted average shares outstanding during the year.
Diluted EPS for the years 1997 and 1996 were determined on the following
assumptions: 1) warrants issued in connection with the private placement of
equity were converted upon issuance on September 10, 1997, 2) warrants issued in
connection with the acquisition of Spectra were converted on July 12, 1996 and
January 1, 1997 and 3) Preferred Shares were converted on September 10, 1997.
Options to purchase 1,148, 2,495, and 151 Common Shares at an average
price of $9.52, $9.70 and $12.72 per share were outstanding for the years ending
December 31, 1997, 1996, and 1995, respectively, but were not included in the
computation of diluted EPS since the options' exercise price was greater than
the average market price of Common Shares.
The Company is required to adopt SFAS No. 128 retroactively for all
periods presented. The effect of this accounting change on previously reported
EPS data was as follows:
1996 1995
---------------- ----------------
Primary EPS as reported $(4.48) $0.54
Effect of SFAS No. 128 ............ -- 0.04
---------------- ----------------
Basic EPS as restated ............. $(4.48) $0.58
================ ================
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
13. 401(K) PLANS
During 1997, the former Spectra 401(k) plan was merged into the
Company's 401(k) plan. The plan is available to U.S. employees meeting certain
service and eligibility requirements. The Company pays a monthly matching
contribution equal to 50% of the employees' contributions up to a maximum of 6%
of their eligible compensation. Plan expense was $717, $377 and $193 for 1997,
1996 and 1995, respectively.
14. SEVERANCE AND OTHER COSTS
During the second quarter of 1997, the Company recorded a one-time
pretax charge of $5.2 million for severance and other costs. Of the total
charge, approximately $2.3 million was associated with the Severance Agreement
with the former CEO, $1.2 million was for employee severance and benefit costs
for the elimination of approximately 30 positions including several senior
executives, a $1.0 million inventory write-off for the discontinuation of
certain products, and $0.7 million for the centralization of research and
development efforts and the relocation of manufacturing of certain product lines
between its two manufacturing facilities.
15. ACQUISITION RELATED RESTRUCTURING AND OTHER COSTS
During the third quarter of 1996, the Company recorded a one-time,
pretax charge of $10.0 million for the cost of restructuring its existing
operations with those of Spectra which was acquired in July 1996. Of the total
restructuring charge, approximately $5.0 million was associated with the closing
of the Company's Sanford, Florida manufacturing facility and relocating those
operations to its Webster, New York facility, $3.6 million was related to the
write-off of previously existing intangible and tangible assets and $1.4 million
was recorded for employee severance and benefit costs for the elimination of
seven positions. As of December 31, 1997, all positions targeted in the
restructuring program were eliminated. Restructuring actions are expected to be
completed by the end of 1998. The Company recorded charges against the accrual
of $3.7 million and $5.3 million in 1997 and 1996, respectively. The
restructuring accrual as of December 31, 1997 was approximately $1.0 million
which relates to current contractual obligations. There have been no
reallocations or reestimates to date.
In addition, in the third quarter of 1996, the Company allocated $60.1
million of the Spectra purchase price to acquired in-process research and
development projects, which represents the estimated fair values related to
these projects determined by an independent appraisal. Proven valuation
procedures and techniques were utilized in determining the fair market value of
each intangible asset. The development technologies were evaluated to determine
that there were no alternative future uses. Such evaluation consisted of a
specific review of the efforts, including the overall objectives of the project,
progress toward the objectives and uniqueness of developments toward these
objectives. To bring these projects to fruition, high risk developmental issues
need to be resolved which will require substantial additional effort and
testing. Therefore, technological feasibility of these new products has not yet
been achieved. As these projects have not reached technological feasibility and
alternative future use of these developmental technologies, apart from the
objectives of the individual projects, does not exist, these costs were expensed
as of the acquisition date. The acquisition related restructuring and other
costs reduced 1996 income before income taxes, net income, basic EPS and diluted
EPS by $70.1 million, $44.2 million, $4.21 and $4.21, respectively.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
16. DISCONTINUED OPERATIONS
In June 1997, the Company disposed of its TxCOM subsidiary, which was
acquired as part of the Spectra acquisition. For 1997 and 1996, results of
operations were reported as discontinued operations in the Consolidated
Statements of Operations. The Company recognized a net gain on operations of
$164 in 1997 and a net loss on operations of $229 in 1996. Disposal of TxCOM,
which occurred in June 1997, resulted in the recording of losses of $265 and
$5,217 in 1997 and 1996, respectively. These losses include the write-down of
the assets to their net realizable value and the costs of disposing of the
subsidiary, net of applicable tax benefits.
17. SIGNIFICANT CUSTOMER INFORMATION
The Company sells its products principally to original equipment
manufacturers, value-added resellers, distributors and systems integrators.
During 1997 and 1996, no individual customer accounted for greater than 10% of
net sales. During 1995, net sales to the Company's largest customer accounted
for approximately 17%. No other customers were responsible for greater than 10%
of net sales in 1995. The Company's arrangements with major customers are
generally nonexclusive.
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data
18. SELECTED QUARTERLY FINANCIAL DATA: (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ----------- ------------
Year Ended December 31, 1997
- ----------------------------
Net sales ............................................. $54,236 $47,301 $53,191 $53,112
Gross profit .......................................... 22,701 17,913 22,167 22,064
Income (loss) from continuing
operations ........................................ 886 (3,246) 2,542 2,808
Loss from discontinued operations ..................... (16) (85) -- --
Net income (loss) ..................................... 870 (3,331) 2,542 2,808
Net income (loss) per common
and common equivalent share:
Basic:
Continuing operations .............................. $0.08 $(0.29) $0.23 $0.25
Discontinued operations ............................ -- (0.01) -- --
---------- ---------- ----------- ------------
Net income (loss) .................................. $0.08 $(0.30) $0.23 $0.25
========== ========== =========== ============
Diluted:
Continuing operations .............................. $0.08 $(0.29) $0.22 $0.20
Discontinued operations ............................ -- (0.01) -- --
========== ========== =========== ============
Net income (loss) .................................. $0.08 $(0.30) $0.22 $0.20
========== ========== =========== ============
Year Ended December 31, 1996
- ----------------------------
Net sales ............................................. $21,499 $22,052 $46,486 $56,014
Gross profit .......................................... 9,156 8,564 20,283 24,373
Income (loss) from continuing
operations ........................................ 435 211 (43,444) 1,264
Loss from discontinued operations ..................... -- -- (5,331) (115)
Net income (loss) ..................................... 435 211 (48,775) 1,149
Net income (loss) per common
and common equivalent share:
Basic:
Continuing operations .............................. $0.04 $0.02 $(3.99) $0.11
Discontinued operations ............................ -- -- (0.49) (0.01)
---------- ---------- ----------- ------------
Net income (loss) .................................. $0.04 $0.02 $(4.48) $0.10
========== ========== =========== ============
Diluted:
Continuing operations .............................. $0.04 $0.02 $(3.99) $0.11
Discontinued operations ............................ -- -- (0.49) (0.01)
========== ========== =========== ============
Net income (loss) .................................. $0.04 $0.02 $(4.48) $0.10
========== ========== =========== ============
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(All amounts in thousands, except per share data)
19. OPERATIONS BY GEOGRAPHIC AREA
The Company is engaged in one industry, specifically the design,
manufacture and marketing of handheld and fixed position bar code readers,
verifiers, integrated sortation and point-of-sale scanning systems. Operations
in this business segment are summarized below by geographic area. The Company's
operations in Europe and the Rest of the World (ROW) primarily consist of
selling and performing field service maintenance on products designed and
manufactured in the United States.
In determining earnings before provision for income taxes for each
geographic area, sales and purchases between areas have been accounted for on
the basis of internal transfer prices set by the Company. Certain U.S. operating
expenses are allocated between geographic areas based upon the percentage of
geographic area revenue to total revenue.
Identifiable assets are those tangible and intangible assets used in
operations in each geographic area.
Year Ended December 31, 1997 North
America Europe ROW Eliminations Total
--------------- --------------- -------------- ---------------- ---------------
Sales to unaffiliated
customers ..................... $120,606 $57,518 $29,716 $ $207,840
--
Transfers between
geographic areas .............. 39,820 157 -- (39,977) --
--------------- --------------- -------------- ---------------- ---------------
Total net sales .................. 160,426 57,675 29,716 (39,977) 207,840
=============== =============== ============== ================ ===============
Earnings before provision
for income taxes .............. 2,333 1,284 1,134 -- 4,751
=============== =============== ============== ================ ===============
Identifiable assets .............. $187,943 $17,996 $ 3,730 $(36,871) $172,798
=============== =============== ============== ================ ===============
Year Ended December 31, 1996 North
America Europe ROW Eliminations Total
--------------- -------------- -------------- ---------------- --------------
Sales to unaffiliated
customers ......................... $ 96,321 $31,968 $17,762 $ -- $146,051
Transfers between
geographic areas .................. 18,165 -- -- (18,165) --
--------------- -------------- -------------- ---------------- --------------
Total net sales ...................... 114,486 31,968 17,762 (18,165) 146,051
=============== ============== ============== ================ ==============
Earnings before provision
for income taxes .................. (49,843) (3,102) (12,982) -- (65,927)
=============== ============== ============== ================ ==============
Identifiable assets .................. $204,414 $12,962 $ 4,196 $(38,211) $183,361
=============== ============== ============== ================ ==============
Year Ended December 31, 1995 North
America Europe ROW Eliminations Total
-------------- -------------- --------------- --------------- ---------------
Sales to unaffiliated
customers ......................... $70,189 $10,996 $6,331 $ -- $87,516
Transfers between
geographic areas ................. 1,861 -- -- (1,861) --
-------------- -------------- --------------- --------------- ---------------
Total net sales ...................... 72,050 10,996 6,331 (1,861) 87,516
============== ============== =============== =============== ===============
Earnings before provision
for income taxes .................. 5,837 2,295 563 -- 8,695
============== ============== =============== =============== ===============
Identifiable assets .................. $69,006 $ 2,231 $ - $ -- $71,237
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SCHEDULE II
PSC INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(All amounts in thousands)
1997 1996 1995
---------------- ---------------- ----------------
Accounts Receivable Reserve-
BALANCE, at beginning of year $1,101 $387 $576
Provision for doubtful accounts 346 168 (134)
Write-offs of doubtful accounts,
net of recoveries (278) (200) (55)
Other -- 746 (1) --
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BALANCE, at end of year $1,169 $1,101 $387
================ ================ ================
(1) Amount represents the reserve recorded in connection with the acquisition of
Spectra.