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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-9919
PSC INC.
(Exact name of Registrant as Specified in Its Charter)
New York 16-0969362
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
675 Basket Road, Webster, New York 14580
- ---------------------------------- -----
(Address of principal executive offices) (Zip Code)
(716) 265-1600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 12 months preceding (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of May 11, 1998, there were 11,727,071 shares of common stock outstanding.
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PSC Inc. AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I FINANCIAL INFORMATION
Item 1 -Financial Statements
Consolidated Balance Sheets as of
April 3, 1998 (Unaudited) and
December 31, 1997........................................3 - 4
Consolidated Statements of Operations and
Retained Earnings for the three
months ended:
April 3, 1998 (Unaudited) and
April 4, 1997 (Unaudited) ...................................5
Consolidated Statements of Cash Flows
for the three months ended:
April 3, 1998 (Unaudited) and
April 4, 1997 (Unaudited) ...................................6
Notes to Consolidated Financial
Statements (Unaudited) ..................................7 - 9
Item 2 -Management's Discussion and Analysis of
Financial Condition and Results of
Operations ..................................10 - 11
PART II OTHER INFORMATION
Item 1 -Legal Proceedings .................................................12
Item 2 -Changes in Securities..............................................12
Item 3 -Defaults upon Senior Securities....................................12
Item 4 -Submission of Matters to a Vote of Security Holders................12
Item 5 -Other Information..................................................12
Item 6 -Exhibits and Reports on Form 8-K...................................12
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
April 3, 1998 December 31, 1997
(Unaudited)
ASSETS
CURRENT ASSETS :
Cash and cash equivalents ........................ $ 4,050 $ 2,271
Accounts receivable, net of allowance
for doubtful accounts of $1,202
and $1,169, respectively ...................... 35,305 35,094
Inventories ...................................... 19,129 17,723
Prepaid expenses and other ....................... 1,720 1,569
----------- ----------
TOTAL CURRENT ASSETS .............................. 60,204 56,657
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation of $14,338
and $13,024, respectively ........................ 35,341 35,469
DEFERRED TAX ASSETS ...................................... 22,667 23,576
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $14,849 and $13,006, respectively ...... 55,599 57,096
---------- ----------
TOTAL ASSETS ............................................. $173,811 $172,798
========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
(Continued)
April 3, 1998 December 31, 1997
------------- -----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ....................... $ 12,909 $ 12,406
Accounts payable ........................................ 16,803 18,000
Accrued expenses ........................................ 8,652 7,405
Accrued payroll and related employee benefits ........... 3,815 5,559
Accrued acquisition related restructuring costs ......... 957 1,175
--------- ---------
TOTAL CURRENT LIABILITIES ............................. 43,136 44,545
LONG-TERM DEBT, less current maturities ........................ 95,059 96,148
OTHER LONG-TERM LIABILITIES .................................... 2,735 2,775
SHAREHOLDERS' EQUITY:
Preferred shares, par value $.01;
10,000 authorized, 110 shares issued
and outstanding. ($11,000 aggregate liquidation value) 1 1
Common shares, par value $.01;
40,000 authorized, 11,632 and 11,390
shares issued and outstanding ........................ 116 114
Additional paid-in capital .............................. 68,257 66,734
Retained earnings/(Accumulated deficit) ................. (34,313) (36,543)
Accumulated other comprehensive income .................. (943) (739)
Less treasury stock, 39 shares
repurchased, at cost ................................... (237) (237)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................ 32,881 29,330
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY .................................................... $ 173,811 $ 172,798
========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(All amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
April 3, April 4,
1998 1997
---- ----
NET SALES ............................................ $ 53,628 $ 54,236
COST OF SALES ........................................ 31,943 31,535
-------- --------
Gross profit ................................ 21,685 22,701
OPERATING EXPENSES:
Engineering, research and development ....... 3,884 3,534
Selling, general and administrative ......... 9,738 12,983
Amortization of intangibles resulting
from business acquisitions ............. 1,707 1,677
-------- --------
Income from operations ................. 6,356 4,507
INTEREST AND OTHER INCOME /(EXPENSE):
Interest expense ............................ (2,876) (3,368)
Interest income ............................. 65 151
Other income/(expense) ...................... (5) 116
-------- --------
(2,816) (3,101)
-------- --------
Income from continuing operations before
income tax provision ................... 3,540 1,406
Income tax provision ........................ 1,310 520
-------- --------
Income from continuing operations ........... 2,230 886
Discontinued operations:
Loss from discontinued operations, net of tax -- 16
Net income .................................. $ 2,230 $ 870
======== ========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE :
Basic:
Continuing operations ..................... $ 0.19 $ 0.08
Discontinued operations ................... -- --
Net income ................................ $ 0.19 $ 0.08
======== ========
Diluted:
Continuing operations ..................... $ 0.16 $ 0.08
Discontinued operations ................... -- --
-------- --------
Net income ................................ $ 0.16 $ 0.08
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic ....................................... 11,478 11,137
Diluted ..................................... 13,799 11,278
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit)
beginning of period ....................... ($36,543) ($39,432)
Net income .................................. 2,230 870
-------- --------
Retained earnings/(Accumulated deficit),
end of period ............................. ($34,313) ($38,562)
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
PSC INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Three Months Ended
April 3, April 4,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ........................................................... $ 2,230 $ 870
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization ................................... 3,157 3,275
Loss on disposition of assets ................................... -- 109
Deferred tax assets ............................................. 909 905
Decrease (increase) in assets:
Accounts receivable ......................................... (211) (404)
Inventories ................................................. (1,406) (2,075)
Prepaid expenses and other .................................. (151) (522)
Increase (decrease) in liabilities:
Accounts payable ............................................ (1,197) 3,696
Accrued expenses ............................................ 1,247 (2,065)
Accrued payroll and commissions ............................. (1,717) (4,053)
Accrued acquisition related restructuring costs ............. (218) (1,657)
-------- --------
Net cash provided by (used in) operating activities ...... 2,643 (1,921)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ............................................ (1,186) (2,499)
Additions to intangible and other assets ............................. (698) 146
Repayment of stock option loan ....................................... 325 --
-------- --------
Net cash used in investing activities .............. (1,559) (2,353)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt ............................................ (585) (2,272)
Payment of other long-term liabilities ............................... (40) (152)
Exercise of stock options and sale of common stock ................... 1,524 90
-------- --------
Net cash provided by (used in) financing activities 899 (2,334)
-------- --------
FOREIGN CURRENCY TRANSLATION ............................................. (204) (635)
NET INCREASE (DECREASE) IN CASH -------- --------
AND CASH EQUIVALENTS ............................................ 1,779 (7,243)
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................. 2,271 10,838
-------- --------
End of period ................................................... $ 4,050 $ 3,595
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED April 3, 1998 and April 4, 1997
(All amounts in thousands, except per share data)
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared by
the Company without audit. In the opinion of management, these financial
statements include all adjustments necessary to present fairly the
Company's financial position as of April 3, 1998, the results of
operations for the three months ended April 3, 1998 and April 4, 1997 and
its cash flows for the three months ended April 3, 1998 and April 4, 1997.
The results of operations for the three months ended April 3, 1998 are not
necessarily indicative of the results to be expected for the full year.
Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1997 annual report on
Form 10-K.
INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Elements of cost include materials, labor and overhead
and consist of the following:
April 3, 1998 December 31, 1997
------------- -----------------
Raw materials ........ $12,239 $10,979
Work-in-process ...... 4,033 3,727
Finished goods ....... 2,857 3,017
--------- ---------
$19,129 $17,723
======= =======
(2) LONG-TERM DEBT
Long-term debt consists of the following:
April 3, 1998 December 31, 1997
------------- -----------------
Senior Term Loan A ................ $44,500 $47,000
Senior Term Loan B ................ 23,750 24,000
Senior revolving credit ........... 5,500 3,000
Subordinated term loan ............ 29,502 29,488
Subordinated promissory note ...... 4,375 4,688
Other ............................. 341 378
-------- -----------
107,968 108,554
Less: current maturities ......... 12,909 12,406
--------- ---------
$95,059 $96,148
======= =======
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED April 3, 1998 and April 4, 1997
(All amounts in thousands, except per share data)
(Unaudited)
(3) SHAREHOLDERS' EQUITY
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income", which requires comprehensive
income and its components to be presented in the financial statements.
Comprehensive income, which includes net income and foreign currency
translation adjustments, was $2,026 and $235 for the three months ended
April 3, 1998 and April 4, 1997, respectively.
During the three month period ended April 3, 1998, employees purchased
approximately 47 shares at $5.95 per share under the provisions of the
Company's Employee Stock Purchase Plan.
Changes in the status of options under the Company's stock option plans
are summarized as follows:
January 1, 1998 Weighted January 1, 1997 Weighted
to Average to Average
April 3, 1998 Price Dec. 31, 1997 Price
------------- ----- ------------- -----
Options outstanding
at beginning of period 3,046 $7.76 2,818 $8.33
Options granted 75 10.74 1,094 6.98
Options exercised (249) 7.33 (162) 7.51
Options forfeited/canceled (69) 10.37 (704) 9.00
------ -----
Options outstanding at
end of period 2,803 7.81 3,046 7.76
Number of options at end
of period:
Exercisable 1,725 1,884
Available for grant 388 394
(4) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Basic EPS was computed by dividing reported earnings available to common
shareholders by weighted average shares outstanding during the year.
Diluted EPS for the three months ended April 3, 1998 and April 4, 1997 was
determined on the following assumptions:
1) Warrants issued in connection with the private placement of equity
were converted upon issuance on January 1, 1998,
2) Warrants issued in connection with the acquisition of Spectra were
converted on January 1, 1998 and
3) Preferred Shares were converted on January 1, 1998.
Options to purchase 77 and 1,299 common shares at an average price of
$12.33 and $9.30 per share were outstanding for the three months ended
April 3, 1998 and April 4, 1997, respectively. Warrants to purchase 975
common shares at $8.00 per share were outstanding for the three months
ended April 3, 1997. These options and warrants were not included in the
computation of diluted EPS since the exercise prices were greater than the
average market price of Common Shares.
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED April 3, 1998 and April 4, 1997
(All amounts in thousands, except per share data)
(Unaudited)
April 3, 1998 April 4, 1997
------------- -------------
Income Shares Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator)(denominator) Amount
-------------------------------------- -----------------------------------
Basic EPS
Income Available to
Common shareholders .......... $ 2,230 11,472 $ 0.19 $ 870 11,137 $ 0.08
======= ========
Effect of Dilutive securities
Options .......... ........... -- 649 -- 141
Warrants ........... ......... -- 297 -- --
Preferred Shares ............ -- 1,375 -- --
---------- ------- ------- ------
Diluted EPS
Income Available to
Common shareholders
And assumed conversion ....... $ 2,230 13,793 $ 0.16 $ 870 11,278 $ 0.08
======= ====== ====== ====== ====== =========
(5) 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. 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.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
of the Company's December 31, 1997 annual report on Form 10-K.
Results of Operations:
Net Sales. Consolidated net sales during the three months ended April 3, 1998
decreased $0.6 million or 1% compared with the same period in 1997. The decrease
is primarily due to effects of the stronger U.S. dollar. The translation of
sales denominated in foreign currencies was negatively impacted by $1.4 million
in 1998 versus 1997. International net sales increased 15% primarily due to the
introduction of new products and represented approximately 52% of net sales in
the first quarter of 1998 versus 45% of net sales in the first quarter of 1997.
Gross Profit. Consolidated gross profit during the three months ended April 3,
1998 decreased $1.0 million or 4% compared with the same period in 1997. The
decreased dollar amount is primarily due to the decrease in net sales. As a
percentage of sales, gross profit decreased from 41.9% to 40.4% due to lower
average selling prices in certain fixed position retail product lines.
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $0.4 million or 10%, as compared to the same period in
1997. As a percentage of sales, ER&D was 7.2% in the first quarter of 1998
versus 6.5% of net sales in the first quarter of 1997. The dollar and percentage
of sales increases are due to additional investments in developing new products
and enhancing existing products.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses decreased $3.2 million or 25%, as compared to the same period in 1997.
As a percentage of sales, SG&A was 18.2% in 1998 versus 23.9% in 1997. As a
result of efficiencies developed due to the integration of Spectra, the Company
has continued to reduce its general and administrative expenses as a percentage
of sales.
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. The restructuring program in part, provided for employee
severance and benefit costs for the elimination of certain positions. As of
April 3, 1998, all positions targeted in the restructuring program have been
eliminated. Restructuring actions are expected to be completed by the end of
1998. The amount of the restructuring accrual at April 3, 1998 was approximately
$0.9 million which relates to current contractual obligations. There have been
no reallocations or reestimates to date.
Interest Expense. Interest expense decreased $0.5 million versus the comparable
period in 1997. The decrease is due to lower principal balances outstanding.
Provision for Income Taxes. The Company recorded a $1.3 million tax provision in
1998 primarily due to an increase in pretax income. The Company's effective tax
rate was 37% in both 1998 and 1997. The Company expects to record income tax
expense at or about the combined federal and state statutory tax rate in 1998.
Discontinued Operations. During the second quarter of 1997, the Company
completed the sale of TxCOM, which was acquired as part of the Spectra
acquisition, for approximately $1.0 million. A loss of approximately $0.3
million, net of tax, was recorded.
Liquidity and Capital Resources:
Current assets increased $3.6 million from December 31, 1997 primarily due to an
increase in cash and inventory. Current liabilities decreased $1.4 million
primarily due to a reduction in accounts payable and accrued payroll and related
employee benefits offset in part by an increase in accrued expenses. As a
result, working capital increased $5.0 million from December 31, 1997.
Property, plant and equipment expenditures totaled $1.2 million for the three
months ended April 3, 1998 compared with $2.5 million for the three months ended
April 4, 1997. The 1998 expenditures primarily related to manufacturing
equipment and new product tooling.
The long-term debt to capital percentage was 74.3% at April 3, 1998 versus 76.6%
at December 31, 1997. At April 3, 1998, liquidity immediately available to the
Company consisted of cash and cash equivalents of $4.0 million. In connection
with the acquisition of Spectra during 1996, the Company obtained new credit
facilities totaling $130.0 million. The Company has $14.5 million available 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.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings:
The descriptions of the Company's legal proceedings with Symbol
Technologies, Inc. ("Symbol"), set forth in Item 3 of the Company's
Annual Report on Form 10-K for the fiscal period ended December 31,
1997 (the "Litigation") are incorporated herein by reference.
A trial on the contract issues is tentatively scheduled to begin on
October 13, 1998.
Item 2: Changes in Securities: None
Item 3: Defaults upon Senior Securities: None
Item 4: Submission of Matters to a Vote of Security Holders: None
Item 5: Other Information: None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Fourth Amendment dated as of April 8, 1998 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
.................................................................... 14
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSC Inc.
DATE: May 14, 1998 By: /s/ Robert C. Strandberg
-------------------------------
Robert C. Strandberg
President and Chief Executive Officer
DATE: May 14, 1998 By: /s/ William J. Woodard
-----------------------------
William J. Woodard
Vice President and Chief Financial Officer
DATE: May 14, 1998 By: /s/ Michael J. Stachura
-----------------------------
Michael J. Stachura
Vice President of Finance
(Principal Accounting Officer)