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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 June 28, 2002
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.)
111 S.W. Fifth Avenue, Suite 4100, Portland, Oregon 97204
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
503-553-3920
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 12 months preceding (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of August 19, 2002, there were 12,834,467 shares of common stock outstanding.
PSC INC. AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements Page Number
-----------
Consolidated Balance Sheets as of
December 31, 2001 and June 28, 2002 (Unaudited)....................3-4
Consolidated Statements of Operations and
Accumulated Deficit for the six months ended:
June 30, 2001(Unaudited) and June 28, 2002 (Unaudited) ..............5
Consolidated Statements of Cash Flows for the six months ended:
June 30, 2001 (Unaudited) and June 28, 2002 (Unaudited) .............6
Notes to Consolidated Financial Statements (Unaudited) ...........7-13
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations ...................14-17
Item 3 Quantitative and Qualitative Disclosures about Market Risk..........17
PART II: OTHER INFORMATION
Item 1 Legal Proceedings ...............................................18-19
Item 2 Changes in Securities...............................................19
Item 3 Defaults upon Senior Securities.....................................19
Item 4 Submission of Matters to a Vote of Security Holders ................19
Item 5 Other Information ................................................20
Item 6 Exhibits and Reports on Form 8-K....................................20
Item 7 Critical Accounting Policies and Estimates ........................20
2
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
PSC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
December 31, 2001 June 28, 2002
----------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $1,865 $1,317
Accounts receivable, net of allowance for doubtful
accounts of $879 and $648, respectively 33,850 32,887
Inventories, net 17,885 18,625
Prepaid expenses and other 3,195 4,433
---------------- ----------------
Total current assets 56,795 57,262
Property, Plant and Equipment, net of
accumulated depreciation of $20,707 and $22,462
respectively 8,997 8,782
Goodwill, net of accumulated amortization of $43,214 63,285 63,285
Intangibles, net of accumulated amortization of $4,921 and $5,745 6,640 8,236
---------------- ----------------
Total assets $135,717 $137,565
================ ================
See accompanying notes to the Consolidated Financial Statements.
3
PSC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
(Continued)
December 31, 2001 June 28, 2002
-----------------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current Liabilities:
Current portion of long-term debt $119,349 $122,498
Accounts payable 17,325 18,692
Accrued expenses 19,889 18,999
Accrued payroll and related employee benefits 3,836 3,422
---------------- ----------------
Total current liabilities 160,399 163,611
Long-Term Debt, less current maturities - -
Other Long-Term Liabilities 2,497 2,729
Shareholders' Equity (Deficit):
Series A convertible preferred shares, par value $.01;
110 shares authorized, issued and outstanding
($11,000 aggregate liquidation value) 1 1
Series B preferred shares, par value $.01; 175
authorized, no shares issued and outstanding - -
Undesignated preferred shares, par value $.01;
9,715 authorized, no shares issued and outstanding - -
Common shares, par value $.01; 100,000 authorized
12,834 and 12,834 shares issued and outstanding 129 129
Additional paid-in capital 73,078 73,07
Accumulated deficit (95,606) (97,904)
Accumulated other comprehensive loss (3,424) (2,722)
Less treasury stock repurchased at cost, 180 shares (1,357) (1,357)
---------------- ----------------
Total shareholders' equity (deficit) (27,179) (28,775)
---------------- ----------------
Total liabilities and shareholders' equity (deficit) $135,717 $137,565
================ ================
See accompanying notes to the Consolidated Financial Statements.
4
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(All amounts in thousands, except per share data)
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, 2001 June 28, 2002 June 30, 2001 June 28, 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $50,453 $41,985 $100,927 $84,748
Cost of sales 31,210 25,624 62,782 51,324
----------- ----------- ---------- -----------
Gross profit 19,243 16,361 38,145 33,424
Operating Expenses:
Sales & marketing expense 7,729 8,405 15,525 16,091
Engineering, research and development 4,321 2,868 9,210 6,353
General and administrative expense 3,154 3,140 7,132 7,033
Severance and other costs 169 (36) 682 -
Debt restructuring costs 500 255 2,336 675
Amortization of intangibles resulting from
business acquisitions 2,758 - 5,522 -
----------- ----------- ---------- -----------
Total Operating Expenses 18,631 14,632 40,407 30,152
----------- ----------- ---------- -----------
Income (loss) from operations 612 1,729 (2,262) 3,272
Interest and Other (Income)/Expense:
Interest expense, net 4,331 2,955 8,601 7,067
(Gain) loss from asset sale 2,883 - 309 (146)
Other (income) expense 359 (29) (281) -
----------- ----------- ---------- -----------
7,573 2,926 8,629 6,921
Loss before income tax provision/(benefit) (6,961) (1,197) (10,891) (3,649)
Income tax provision/(benefit) 328 (146) 837 (1,351)
----------- ----------- ---------- -----------
Loss before cumulative effect of accounting (7,289) (1,051) (11,728) (2,298)
change
Cumulative effect of accounting change 838 - 838 -
----------- ----------- ---------- -----------
Net income/(loss) $ (6,451) $ (1,051) $ (10,890) $ (2,298)
=========== =========== ========== ===========
Net income/(loss) per share before cumulative effect
of accounting change:
Basic and diluted: $ (0.59) $(0.08) $ (0.96) $(0.18)
Net income/(loss) per share of cumulative effect of
accounting change:
Basic and diluted: $ 0.06 - $ 0.07 -
Net income/(loss) per share after cumulative effect of
accounting change:
Basic and diluted: $ (.0.53) $ (0.08) $ (0.89) $(0.18)
Weighted average number of common and common
share equivalent shares outstanding:
Basic and diluted: 12,280 12,834 12,280 12,834
Accumulated Deficit:
Accumulated deficit, beginning of period $ (77,566) $ (96,853) $ (73,127) $ (95,606)
Net income/(loss) (6,451) (1,051) (10,890) (2,298)
----------- ----------- ---------- -----------
Accumulated deficit, end of period $ (84,017) $ (97,904) $ (84,017) $ (97,904)
=========== =========== ========== ===========
See accompanying notes to the Consolidated Financial Statements.
5
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
Six months Ended
-------------------------------------------------
June 30, 2001 June 28, 2002
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net loss $ (10,890) $ (2,298)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,330 3,923
Change in fair value of fee option and warrants 380 1
Gain on dispositions of assets (281) -
Cumulative effect of accounting change
(838) -
(Increase)/decrease in assets:
Accounts receivable, net (837) 963
Inventories 637 (740)
Prepaid expenses and other 1,481 (1,235)
Increase/(decrease) in liabilities:
Accounts payable (2,587) 1,367
Accrued expenses 1,770 (1,688)
Accrued payroll and related employee benefits (482) (418)
Additions/(reductions) to other long-term liabilities, net 175 1,027
---------------- ----------------
Net cash provided by / (used in) operating activities (3,142) 902
---------------- ----------------
Cash Flows From Investing Activities:
Capital expenditures, net (533) (1,648)
Additions to intangible and other assets (1,217) (2,278)
Proceeds from sales of assets 9,283 -
---------------- ----------------
Net cash provided by / (used in) investing activities 7,533 (3,926)
---------------- ----------------
Cash Flows From Financing Activities:
Additions to long-term debt - 1,775
Payments of long-term debt (5,602) -
Exercise of options and issuance of common shares 98 -
---------------- ----------------
Net cash provided by / (used in) financing activities (5,504) 1,775
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (1,379) 701
---------------- ----------------
Net increase / (decrease) in cash and cash equivalents (2,492) (548)
Cash And Cash Equivalents:
Beginning of period 5,461 1,865
---------------- ----------------
End of period $ 2,969 $ 1,317
================ ================
Supplemental Cash Flow Information:
Interest paid $ 5,595 $ 1,954
Income taxes paid $4 $22
See accompanying notes to the Consolidated Financial Statements.
6
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 28, 2002
(All amounts in thousands)
(Unaudited)
(1) DESCRIPTION OF BUSINESS AND CURRENT EVENTS
PSC Inc. (the Company) is a leading provider of retail automation
solutions, mobile and wireless systems, and automated data collection
products. Its range of products includes wireless portable, vehicle mount
and fixed station data collection terminals, warehouse management software,
self-checkout systems and handheld and fixed-position bar code scanners.
PSC products are used in supply chain management solutions in the retail,
manufacturing, warehousing, distribution and logistics markets.
Approximately 49% of the sales are reported in the United States, 33% in
Europe and the remaining 18% occur in South America, Australia, Asia and
Japan.
In November 2000, the Company announced a restructuring plan to reduce its
debt and to achieve future profitability and growth. These restructuring
plans included replacement of executive management, consolidation of
redundant administrative activities, sale or disposal of unprofitable
operations and streamlining of product lines and production operations to
reduce cost and increase profit contribution for products sold.
In February 2001, the Company sold its verification and imager product
lines for $3.8 million. The gain on the sale was $3.2 million, recorded in
other income/expense on the consolidated statement of operations.
In May 2001, the Company sold its Webster, New York facility for $5.0
million. The transaction resulted in a gain of $0.1 million in 2001, after
a write-down of the facility value in 2000 of $7.9 million.
In July 2001, the Company sold its LazerData business for $6.4 million. The
loss on the sale was $2.9 million recorded in other (income)/expense in the
consolidated statement of operations.
During 2001, 50% of all asset disposition proceeds were applied to reduce
indebtedness to PSC's senior lenders.
In July 2001, the Company substantially completed the process of hiring a
new executive management team and relocated its corporate headquarters to
Portland, Oregon.
In September 2001, the Company completed its restructuring process with a
further reduction in costs and expenses, including staffing costs. Total
severance and other restructuring costs during 2001 and 2000 were
approximately $1.5 million and $4.9 million, respectively. Debt
restructuring costs for legal and consulting totaled $3.6 million in 2001
and $0.7 million for the first six months of 2002. Total cost reductions
related to all restructuring activities, including sales of businesses
referred to above was estimated to be approximately $40.0 million on an
annualized basis.
Also in September 2001, the Company initiated efforts to attract new equity
capital to reduce and refinance its indebtedness and provide additional
equity resources to support ongoing operations. The Company secured the
services of an investment banking firm to assist in this effort. At June
28, 2002, these efforts are ongoing. In all presently contemplated
recapitalization transactions, the Company anticipates that the equity
interests of all existing shareholders will be extinguished. However, the
precise outcome of existing equity
7
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 28, 2002
(All amounts in thousands)
(Unaudited)
shareholder interests will be dependent upon further negotiations and
discussions with prospective private equity investors and cannot be
predicted with assurance at this time. As with all business transactions,
it is not possible to predict whether any transaction will be consummated.
Management's cash flow projections for the Company balances the cash
collections from revenue activities with the disbursement requirements for
suppliers, capital expenditures and personnel costs. The Company's cost
reduction efforts have been focused on achieving a neutral or positive cash
flow from operations. Successfully continuing to operate in this neutral to
positive cash flow pattern is dependent upon the Company's ability to
effectively achieve its sales plan as well as its continued cost control
performance. Management believes that its revenue and cost performance
objectives are achievable and sustainable during this period of
recapitalization. If the Company's performance deviates negatively from
this objective, management intends to take all steps necessary to reduce
cash costs to rebalance the Company's operations to return to a neutral or
positive cash flow performance.
In March 2002, the Company and its lenders reached an agreement in
principle to extend the maturities of the Company's existing financing
facilities to August 1, 2002. On August 1, 2002, the Company and its
lenders agreed to extend the maturities of the Company's existing financing
facilities to September 1, 2002, and the Company anticipates that it will
be able to obtain additional extensions as necessary. The terms of the
extended financing arrangements were substantially unchanged from the prior
agreements. The Company is required to achieve certain milestones in its
recapitalization process. Management believes that a restructuring
transaction acceptable to the Company's lenders can be achieved, although
there can be no assurance that such a transaction will be accomplished. In
the event that the Company is unsuccessful in these restructuring efforts,
the lenders would be entitled to exercise their respective rights and
remedies under the credit facilities and applicable law, in which case the
Company would not have sufficient funds to repay its outstanding debt and
no assurance can be given that alternative sources of sufficient financing
would be available on acceptable terms, or on any terms at all.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared by
the Company without audit, or concurrent review by outside auditors, as
required by the reporting provisions of the Securities and Exchange
Commission. See Item 7, "Critical Accounting Policies and Estimates", on
page 21.
In the opinion of management, these financial statements include all
adjustments necessary to present fairly the Company's financial position as
of June 28, 2002, the results of operations for the three and six months
ended June 30, 2001 and June 28, 2002 and its cash flows for the six months
ended June 30, 2001 and June 28, 2002. The results of operations for the
three and six months ended June 28, 2002 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, 2001 annual report on
Form 10-K.
8
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 28, 2002
(All amounts in thousands)
(3) INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Inventory costs include material, direct labor and
overhead and consist of the following:
December 31, 2001 June 28, 2002
----------------- -----------------
Raw materials $14,586 $14,518
Work-in-process 3,522 4,803
Finished goods 4,071 3,329
------------ ------------
22,179 22,650
Less inventory reserve (4,294) (4,025)
------------ ------------
$17,885 $18,625
============ ============
(4) LONG TERM DEBT
Current maturities of long-term debt consists of the following:
December 31, 2001 June 28, 2002
----------------- -------------
Term loan, net of debt discount
of $1,265 and $0 $58,935 $60,106
Senior revolving credit 30,419 32,271
Subordinated term loan, net of
discount of $943 and $868 29,057 29,183
Subordinated promissory note 938 938
------------ ------------
Long term debt, net $119,349 $122,498
============ ============
The company has continued to negotiate with its senior and subordinated
lenders to provide extensions to its credit facilities. The term loan and
senior revolving credit agreements expire on September 1, 2002.
Accordingly, the company has classified the entire term loan and senior
revolving credit facility as current. In addition all subordinated
indebtedness has been reclassified as current. See Note 1, "Description of
Business And Current Events".
(5) ASSET SALES
As part of the Company's overall restructuring plans, the Company sold its
verification and imager product lines on February 16, 2001 for $3.8
million. The gain realized on the sale was approximately $3.2 million.
On May 14, 2001, the Company completed the sale of its Webster, New York
facility for $5.0 million. The gain realized from the sale was $0.1
million. In November 2000, the Company announced the
9
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 28, 2002
(All amounts in thousands)
(Unaudited)
consolidation of its Webster, New York headquarters with its operations in
Eugene, Oregon. As a result, the Company recorded an $8.6 million
write-down in connection with the anticipated sale of the Webster, New York
facility in accordance with Statement of Financial Accounting Standards No.
121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of". SFAS No. 121 requires an
impairment loss to be recognized if the carrying amount of an asset held
for disposal exceeds the fair value of the asset less the cost to sell the
asset. The loss recognized in 2000 was $7.9 million on the facility and
related leasehold improvements and $0.7 million on other assets and is
included in the consolidated statements of operations.
On July 13, 2001, the Company announced the completion of the sale of its
LazerData business as part of its plan to divest non-core assets, and
recorded an estimated loss on disposition of that business of $2.9 million
into the second quarter of 2001. Net assets written off in connection with
the sale totaled $6.7 million.
The Company was required to use 50% of the net cash proceeds to repay
amounts borrowed under its senior credit facilities.
(6) SEVERANCE AND OTHER COSTS
As of December 31, 2001, the amount of the severance accruals was
approximately $0.3 million. As of June 28, 2002, the amount of the
severance accruals was approximately $0.1 million, which relates to
current contractual obligations.
(7) SHAREHOLDERS' EQUITY
Other comprehensive loss reports changes in equity that result from
transactions and economic events other than transactions with owners.
Other comprehensive loss is the total of net loss and all other non-owner
changes in equity.
Three Months Ended
------------- -------------
June 30, 2001 June 28, 2002
Net income/(loss) ($6,451) ($1,051)
Foreign currency translation adjustment (249) 702
------------- -------------
Comprehensive loss ($6,700) ($379)
============= =============
Six Months Ended
------------- -------------
June 30, 2001 June 28, 2002
Net income/(loss) ($10,890) ($2,298)
Foreign currency translation adjustment (1,379) 1,708
------------- -------------
Comprehensive loss ($12,269) ($590)
============= =============
10
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 28, 2002
(All amounts in thousands)
(Unaudited)
Changes in the status of options under the Company's stock option plan are
summarized as follows:
January 1, 2001 Weighted January 1, 2002 Weighted
to Average to Average
June 30, 2001 Price June 28, 2002 Price
--------------------- ---------------- -------------------- ----------------
Options outstanding at
beginning of period 3,222 $3.55 3,521 $2.64
Options granted 52 1.41 161 .56
Options exercised - - - -
Options forfeited/canceled (173) 4.15 (37) 2.50
-------- --------
Options outstanding at
end of period 3,101 $3.95 3,645 2.56
======== ========
Number of options at end
of period:
Exercisable 1,900 $4.99 2,314 $3.23
Available for grant 263 514
During the six month period ended June 28, 2002, 30,000 forfeited options
were cancelled due to the expiration of the 1987 Stock Option Plan in
December 1997. These options are not available for future grants.
(8) NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Basic EPS was computed by dividing reported earnings available to common
shareholders by weighted average common shares outstanding during the
period. Diluted EPS was the same as basic EPS for the three and six months
ended June 30, 2001 and June 28, 2002 as the affect of options, warrants
and preferred shares would have been antidilutive. Options, warrants and
preferred shares of 3,101, 975 and 180 common shares, respectively, were
outstanding for the six months ended June 30, 2001. Options, warrants and
preferred shares to purchase 3,647, 975 and 180 of common shares were
outstanding for the six months ended June 28, 2002.
Three Months Ended
-----------------------------------------------------------------------------------------------
June 30, 2001 June 28, 2002
----------------- ---------------- ----------- -------------- ---------------- -----------
Per Per
Basic and Diluted Net loss Shares Share Net loss Shares Share
EPS: (numerator) (denominator) Amount (numerator) (denominator) Amount
Net loss available to
common =============== ======= ===============
shareholders $ (6,451) 12,280 $(0.53) $ (1,051) 12,834 $(0.08)
========= =============== ======= ========= =============== =======
11
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 28, 2002
(All amounts in thousands)
(Unaudited)
Six Months Ended
-----------------------------------------------------------------------------------------------
June 30, 2001 June 28, 2002
----------------- ---------------- ----------- -------------- ---------------- -----------
Per Per
Basic and Diluted Net loss Shares Share Net loss Shares Share
EPS: (numerator) (denominator) Amount (numerator) (denominator) Amount
Net loss available to
common -------------- ----------
shareholders $ (10,890) 12,280 $ (0.89) $ (2,298) 12,834 $(0.18)
============== ------------ ------- ---------- --------------- --------
(9) Derivatives
The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
as amended as of January 1, 2001 and the effect of adoption was not
material to the Company's financial statements.
Foreign Currency Exchange Rate Risk:
The Company's exposure to foreign currency relates primarily to its
international subsidiaries. Sales to certain countries are denominated in
their local currency. The Company enters into foreign currency forward
exchange contracts to minimize the effect of foreign currency fluctuations
relating to these transactions and commitments denominated in foreign
currencies. The foreign exchange contracts generally have maturities of up
to 60 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.
The foreign exchange contracts have not been designated as hedging
instruments and the gains and losses on forward contracts are recorded in
the consolidated statements of operations.
Effective January 1, 2002, the Company discontinued the use of foreign
exchange forward contract for hedging purposes. As of June 28, 2002, there
were no foreign exchange forward contracts outstanding.
Warrants:
Effective April 13, 2001, the Company adopted Emerging Issues Task Force
Issue 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"), which
prescribes accounting treatment for freestanding contracts that are indexed
to, and potentially settled in, a company's own stock. On April 13, 2001,
the Company entered into a refinancing modification agreement with its
subordinated lenders, in which a portion of the consideration involved a
warrant for 975 Common Shares and is held by the Company's subordinated
creditors. In March 2000, the strike price of this warrant was lowered from
$8.00 to $5.25 and subsequently lowered to $1.15 on April 13, 2001 as part
of the modification agreement reached on that date. The adoption of EITF
00-19 resulted
12
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 28, 2002
(All amounts in thousands)
(Unaudited)
in a reclassification of $254 of additional paid-in capital to warrants, a
temporary equity item, at December 31, 2000. Immediately prior to the April
13, 2001, the warrants were repriced to fair value, resulting in an
increase in the book value of the warrants of $108, and a corresponding
decrease to cumulative effect of accounting change. Simultaneously, EITF
00-19 required an adjustment of the original value of the warrants of $600
as well as the increase in their fair market value determined at the time
of their first repricing of $600 less the amount previously reclassified of
$254 for a total adjustment of $946 recorded as a reduction to additional
paid-in capital and an increase to cumulative effect of accounting change.
The warrant is now marked to market at its fair value at the end of each
reporting period and the gain/loss is recorded in Other (income) / expense.
In connection with the debt modification, the Company has agreed to pay the
subordinated lenders on a pro rata basis for fees up to a maximum payment
of $1.5 million based upon the average prevailing per share market price of
the Company's Common Shares on the 15 trading days immediately prior to
April 2, 2003.
These warrants and fee option are accounted for under SFAS 133 as
derivative instruments. These derivatives do not qualify for hedge
accounting, in accordance with SFAS 133, because they relate to the
Company's stock price and not to the underlying debt with which they were
issued. A mark-to-market loss of $33 on both the warrants and fee option is
recorded as Other (income) / expense in current earnings for the three- and
six-month period ended June 28, 2002.
(10) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
Goodwill, which represents the excess of cost over the fair value of the
acquisition, was previously amortized using the straight-line method over
5-10 years. Effective January 1, 2002, the Company stopped amortizing its
goodwill in accordance with Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company
has completed its initial assessment of adopting SFAS 142, which requires
the the identification of any identifiable intangibles that may be
associated with the previously recognized goodwill. Based on the Company's
assessment, there are no identifiable intangibles that should be
separately identified from previously recognized goodwill. The Company is
in the process of the second step, testing for impairment based on the
fair value of the goodwill. The Company believes that the value of
goodwill has been impaired. Although the amount of impairment has not been
determined, the Company believes that the range of adjustment to goodwill
will be $25-50 million. The amounts used in the transitional goodwill
impairment test shall be measured as of the beginning of the year of
initial application. The Company is in the process of completing its
analysis and anticipates that it will record the impact of adopting SFAS
142 as an accounting change no later than the end of the year.
(11) RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform to the
current year presentation.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The company has undertaken steps to recapitalize its operations through a
new equity contribution and restructuring of its indebtedness. See Note 1,
"Description of Business And Current Events".
General
- -------
13
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, 2001 annual report on Form 10-K.
Results of Operations: Three Months ended June 30, 2001 and June 28, 2002
Net Sales. Net sales during the three months ended June 28, 2002 decreased $8.5
million or 16.8% compared with the same period in 2001. $1.3 million of this
decrease related to the sale of business and product lines in 2001, for which
there was no revenue in 2002. The remaining decrease in net sales is attributed
primarily to lower sales of handheld scanners and scan engines of $3.4 million,
mobile and wireless products of $1.5 million, and other products and services of
$2.3 million.
Gross Profit. Gross profit during the three months ended June 28, 2002 decreased
$2.9 million or 15.0% compared with the same period in 2001. As a percentage of
sales, gross profit percentage increased to 39.0% for the second quarter of
2002, as compared to 38.1% in the first quarter of 2001. The increase in gross
profit percent was a result of the streamlining of product lines and production
operations that reduced costs.
Sales and Marketing. Sales and marketing expenses for the three months ended
June 28, 2002 increased $0.7 million compared to the same period in 2001. As a
percentage of sales, sales and marketing expense was 20.0% in 2002 versus 15.3%
in 2001. The percentage increase is primarily attributable to the increased
investment in the direct sales organization to enhance contact with and expand
relationships with end user customers.
Engineering, Research and Development (ER&D). ER&D expenses for the three months
ended June 28, 2002 decreased $1.5 million or 33.6 %, compared to the same
period in 2001. As a percentage of sales, ER&D was 6.8% in the second quarter of
2002, versus 8.6% of net sales in the second quarter of 2001. The decrease in
ER&D is primarily attributable to cost reimbursement from an independent company
with which the Company is involved in a joint venture new product development
project.
General and Administrative. General and administrative expenses for the three
months ended June 28, 2002 were unchanged as compared to the same period in
2001. Administrative costs decreased by approximately $0.5 million in 2002
compared to 2001, offset by a similar increase in legal costs relating to
certain litigation.
Debt Restructuring Costs. Debt restructuring costs for the second quarter of
2002 decreased 49.0% to $0.3 million from $.5 million for the same period in
2001. The decrease is due to reduced consulting costs necessary to manage the
debt restructuring process.
Amortization of Goodwill. Effective January 1, 2002, the Company ceased the
amortization of goodwill, in accordance with Statement of Financial Accounting
Standards No. 142. See Note 10, "Adoption Of New Accounting Pronouncement". The
amortization expense for goodwill was $2.8 million for the three months ended
June 30, 2001.
Interest Expense. Interest expense for the three months ended June 28, 2002
decreased $1.4 million or 31.8% as compared to the second quarter of 2001. This
reduction resulted from lower interest rates and a reduction in loan origination
and amendment fees related to the company's senior and subordinated
indebtedness.
Income Tax Provision/(Benefit). The Company's effective tax rate was 12.2 % for
the three months ended June 28, 2002 versus (4.7%) for the three months ended
June 30, 2001. A valuation allowance was recorded against the Company's deferred
tax assets including the current operating losses in 2000. All tax expense or
benefit is recorded on a cash basis. The effective tax rates in both 2002 and
2001 reflect the cash-basis income tax payments made or tax refunds received
during the period.
14
Results of Operations: Six Months ended June 30, 2001 and June 28, 2002
- ------------------------------------------------------------------------
Net Sales. Net sales during the six months ended June 28, 2002 decreased $16.1
million or 16.0% compared with the same period in 2001. $3.7 million of this
decrease related to the sale of business and product lines in 2001, for which
there was no revenue in 2002. The remaining decrease in net sales is attributed
primarily to lower sales of handheld and scan engines of $8.2 million, lower
fixed scanning product sales of $2.2 million and lower services and other
miscellaneous products of $2.5 million. Mobile and wireless product sales
increased by $0.5 million.
Gross Profit. Gross profit during the six months ended June 28, 2002 decreased
$4.7 million or 12.4% compared with the same period in 2001. As a percentage of
sales, gross profit percentage increased to 39.4% for the six months ended June
28, 2002, as compared to 37.8% in the same period in 2001. The increase in gross
profit was a result of the streamlining of product lines and cost reductions in
manufacturing overhead.
Sales and Marketing. Sales and marketing expenses for the six months ended June
28, 2002 increased to $0.6 million to $16.1 million compared to the same period
in 2001. As a percentage of sales, sales and marketing expense was 20.0% in 2002
versus 18.3% in 2001. The percentage increase is primarily attributable to the
increased investment in a direct sales organization to enhance contact with and
expand relationships with end user customers.
Engineering, Research and Development (ER&D). ER&D expenses for the six months
ended June 28, 2002 decreased $2.9 million or 31.0 %, compared to the same
period in 2001. As a percentage of sales, ER&D was 7.5% in the first six months
of 2002, versus 10.9% of net sales in the first six months of 2001. The decrease
in ER&D is primarily attributable to cost reimbursement from an independent
company with which the Company is involved in a joint venture new product
development project, and cost savings efforts brought about by business
restructuring.
General and Administrative. General and administrative expenses for the six
months ended June 28, 2002 decreased by $0.1 million to $7.0 million compared to
the same period in 2001. As a percentage of sales, general and administrative
expense was 8.3% versus 7.1% in 2001. General and administrative costs decreased
as a result of the shutdown of the Webster, New York facility and reduction in
personnel costs that was associated with the consolidation of operations and
administration to Oregon. These costs were offset by legal expenses associated
with certain litigation, of approximately $0.7 million.
Severance and Other Costs. During the first six months of 2001, the Company
recorded a pretax charge of $0.7 million for employee severance and benefit
costs resulting primarily from the consolidation of the Webster, New York
operations with its Eugene, Oregon personnel and operations. For the period
ended June 28, 2002, there was no severance expense.
Debt Restructuring Costs. Debt restructuring costs for the first six months of
2002 decreased 77.1% to $0.7 million from $2.3 million for the same period in
2001. The decrease is due to reduced legal and consulting costs necessary to
manage the restructuring process during 2002.
Amortization of Goodwill. Effective January 1, 2002, the Company ceased the
amortization of goodwill, in accordance with Statement of Financial Accounting
Standards No. 142. See Note 10, "Adoption Of New Accounting Pronouncement". The
amortization expense for goodwill was $5.5 million for the six months ended June
30, 2001.
Interest Expense. Interest expense for the period ended June 28, 2002 decreased
17.8% to $7.1 million for the six months ended June 28, 2002, as compared the
same period in 2001. This reduction resulted from lower interest rates and a
reduction in loan origination and amendment fees related to the company's senior
and subordinated indebtedness.
15
Income Tax Provision/(Benefit). The Company's effective tax rate was 37.1 % for
the six months ended June 28, 2002 versus (7.7%) for the six months ended June
30, 2001. The Company recognized a $1.3 million tax receivable, in the quarter
ended March 29, 2002 associated with the expected refund from a net operating
loss carryback to prior years. The refund was received in July 2002. A valuation
allowance was recorded against the Company's deferred tax assets including the
current operating losses in 2000. All tax expense or benefit is recorded on a
cash basis. The effective tax rates in both 2002 and 2001 reflect the cash-basis
income tax payments made or tax refunds received during the period.
Liquidity and Capital Resources:
- -------------------------------
Current assets at June 28, 2002 were relatively unchanged from December 31,
2001. Current liabilities increased by $3.2 million, primarily due to an
increase in senior indebtedness. All senior and subordinated debt has been
recorded as current liabilities.
Property, plant and equipment expenditures totaled $1.6 million for the six
months ended June 28, 2002 compared with $0.5 million for the six months ended
June 30, 2001. The 2002 expenditures are related to new product tooling for new
product introductions.
Additions to intangible assets relates primarily to the development of software
for the Company's retail self-checkout system, which is expected to be released
in 2002. Intangible additions for the six months ended June 28, 2002 were $2.3
million, compared to additions of $1.2 million in the six months ended June 30,
2001.
In March 2002, the Company and its lenders reached an agreement in principle to
extend the maturities of the Company's existing financing facilities to August
1, 2002. The extension documents were signed and effective on April 3, 2002. On
August 1, 2002, the Company and its lenders agreed to extend the maturities of
the Company's existing financing facilities to September 1, 2002.
The terms of the financing arrangements with the Company's senior lenders are
substantially unchanged from the previously disclosed April 13, 2001
modification agreement. Among other provisions, the commitment from the senior
lender for the working capital facility is $34.0 million and the commitment for
fixed financing is $60.2 million. The interest rate for the senior credit
facilities is prime + 3.50%. The Company is required to apply 50% of net cash
proceeds from asset sales to repay amounts borrowed under its senior credit
facilities. In addition, the company is required to achieve certain milestones
in its recapitalization process.
In connection with the debt modification agreements reached with its lenders on
April 13, 2001, the Company accrued $4.1 million for debt modification fees
payable and recorded a related discount on the debt. Debt discount was amortized
through April 1, 2002, the expiration date of the prior amendment.
At June 28, 2002, liquidity immediately available to the Company consisted of
cash and cash equivalents of $1.3 million. The Company had a revolving credit
facility totaling $34.0 million, of which $32.3 million was outstanding at June
28, 2002. The Company believes that the liquidity available for operations is a
limiting factor in its ability to finance normal operations.
The Company has experienced recurring losses from operations, has undergone
repeated renegotiations with its lenders of senior and subordinated indebtedness
and has a significant working capital deficit. All of the Company's debt,
totaling $122.5 million at June 28, 2002, is recorded as current.
These matters present the Company with a liquidity issue and raises substantial
doubts about its ability to continue as a going concern. Management's plans in
regard to these matters are discussed in Note 1, "Description Of Business And
Current Events". The financial statements do not include any adjustments
relating to the recoverability and
16
classification of asset carrying amounts or the amount and classification of
liabilities that might result, should the Company be unable to continue as a
going concern.
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
There has been no significant change in market risk from that disclosed in the
Company's December 31, 2001 annual report on Form 10-K.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
- --------------------------------------------------------------------------------
Securities Litigation Reform Act of 1995
- ----------------------------------------
Certain statements contained in this Management's Discussion and Analysis
may be forward-looking in nature, or "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995. Management
cautions that these statements are estimates of future performance and are
highly dependent upon a variety of important factors, which could cause
actual results to differ materially from the estimate. These factors
include the market acceptance of existing and new products, competitive
product offerings and pricing pressures, the successful completion of the
Company's recapitalization efforts, successfully negotiating extensions to
existing financing or the negotiation of new financing on acceptable terms,
foreign currency and interest rate fluctuations, fulfillment of lending
agreements and the disposition of legal issues. Profits and available cash
flows also will be affected by the Company's ability to control
manufacturing and operating costs. Reference should be made to filings with
the Securities and Exchange Commission for further discussion of factors
that could affect the Company's future results.
17
PART II: OTHER INFORMATION
Item 1: Legal Proceedings:
-----------------
Symbol Technologies, Inc.
In November, 2000, the Company settled all then pending litigation with
Symbol Technologies, Inc. ("Symbol"). The agreements resolved all claims
between the parties, settled all disputed royalty payments, amended and
clarified the Company's existing license agreement, and included certain
new patents. ("Settlement Agreement"). Under the Settlement Agreement the
parties also entered into product supply agreements for products that began
shipping in early 2001. Under the terms of the supply agreements, the
Company agreed to purchase hand-held laser scanners and scan engines from
Symbol and Symbol agreed to purchase fixed position retail PCS scanners
from the Company.
On June 21, 2002, the Company gave official notice to Symbol that the
Company believed Symbol had breached the Settlement Agreement in two
respects. A week later, Symbol brought suit against the Company in New York
State Court in Suffolk County. The lawsuit alleges, among other things,
that the Company failed to deliver new fixed scanner products to Symbol on
a timely basis. Symbol also requested injunctive relief requiring the
Company to deliver certain products to Symbol for distribution under the
Settlement Agreement. The parties have submitted written arguments to the
court for determination. A decision on the request for injunctive relief is
expected within 60 days.
Lemelson
The declaratory judgment action filed by the Company and six other
prominent leaders in the Automatic Identification and Data Capture industry
("Plaintiffs") on July 21, 1999 continues to move forward.
In March of 2000, the District Court had dismissed one count (the
prosecution laches claim) presented by Plaintiffs' in the action.
Plaintiffs' filed an appeal of the dismissal of that count to the United
States Court of Appeals for the Federal Circuit ("Circuit Court"). On
January 24, 2002, the Circuit Court reversed the District Court's decision,
revitalizing Plaintiffs' ability to present the prosecution laches claim in
the trial of the case. In June of 2002, the Lemelson Medical, Educational &
Research Foundation, Limited Partnership ("Lemelson") filed a Petition for
Writ of Certiorari to the Supreme Court of the United States ("Petition")
asking the Court to review the Circuit Court's decision concerning
prosecution laches. Plaintiffs' will be filing an Opposition to Lemelson's
Petition soon.
Since the end of second quarter, Plaintiffs have presented a number of new
motions for summary judgment to the District Court. These motions continue
to make their way through the judicial process. There have been no rulings
on these motions to date. The trial of this case has been postponed from
August 2002 to November 2002. The Company, and as we understand, the other
plaintiffs, continue to be confident of prevailing in this case.
International Automated Systems
International Automated Systems (IAS) filed a lawsuit in July, 1999,
against Optimal Robotics and the Company alleging that the Optimal U-Scan
self-checkout device infringes certain IAS patents. The U-Scan device is
the subject of an agreement between Optimal and the Company. The Company is
indemnified by Optimal under the terms of the agreement and Optimal is
defending this action on behalf of the Company.
18
Metrologic Instruments, Inc.
Metrologic Instruments, Inc. brought suit against the Company, in October
1999 in the U.S. District Court for the District of New Jersey, alleging
infringement of seven patents belonging to Metrologic. The Company
considers all of Metrologic's patent infringement claims to be without
merit based on non-infringement and/or invalidity of the Metrologic
patents. A Markman hearing was held by the presiding judge on August 6-7,
2002, to address technical issues related to the patents. Pending the
outcome of the Markman hearing, any remaining issues in the case will be
set for trial in late fall of 2002.
Plesko Suit
Mr. Plesko, currently an employee of PSC, brought suit in July 2001 in the
state courts of New York against PSC and Symbol Technologies, alleging
among other things, that PSC had failed to properly exploit technology that
it earlier purchased from Mr. Plesko's company, GAP/GEO Technologies,
resulting in a loss of royalty revenue. PSC subsequently transferred the
technology to Symbol as part of the settlement of claims between PSC and
Symbol. The complaint originally sought damages of $30.0 million from PSC
and a greater amount from Symbol.. Symbol was subsequently successful on
dismissing the actions against it. PSC considers the complaint to be
without merit and intends to vigorously defend the case,. The Company also
has recently brought a motion for summary judgment requesting that the
judge determine there are no issues of fact and that the Company would
prevail on the issues of law. The hearing is scheduled for September 7,
2002.
Item 2: Changes in Securities:
---------------------
Nasdaq Delisting
On July 3, 2002 the Company was notified by Nasdaq (the Nasdaq Stock
Market, Inc.), of its failure to meet minimum listing requirements for
continued reporting on the Nasdaq Small Cap stock market exchange.
On July 11, 2002, the Company responded to the notification, requesting an
Appeal Hearing, which was subsequently scheduled for August 22, 2002. Upon
further assessment by the Company, it concluded that the Company's grounds
for appeal would be insufficient to prevail at the Appeal Hearing. As a
result, on August 19, 2002, the Company withdrew its request for an Appeal
Hearing.
The Company believes that Nasdaq will halt trading on the Company's stock
within several days of receipt of the Appeal Hearing withdrawal letter. The
Company believes that it qualifies to be traded on the "Over The Counter"
(OTC) Bulletin Board, once trading is halted on Nasdaq. The Company intends
to transition to the OTC Bulletin Board as quickly as possible, at that
time.
Item 3: Defaults upon Senior Securities:
-------------------------------
None.
Item 4: Submission of Matters of Shareholders to a Vote of Security Holders:
-------------------------------------------------------------------
None.
Item 5: Other Information:
-----------------
19
None.
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
99.1 Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K: None
Item 7: Critical Accounting Policies and Estimates
There has been no change in the Company's critical accounting policies and
estimates from those disclosed in the Company's December 31, 2001 annual
report on Form 10-K.
The Company has prepared this 10-Q without concurrent review by outside
auditors, as prescribed under the reporting provisions of the Securities
and Exchange Commission (SEC). On July 29, 2002, the Company notified the
SEC on Form 8-K that it had terminated its auditing relationship with
Arthur Andersen. The Company is in the process of selecting replacement
auditors, but that process has not yet been completed. Once replacement
auditors have been selected, appropriate notification on Form 8-K will be
filed and the Company will arrange for the new auditors to perform a review
of the quarterly financial statements and disclosures reported in this
10-Q. An amendment to this 10-Q will also be filed, to confirm the
completion of the quarterly review process, and adjustments, if any, will
be disclosed at that time.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSC Inc.
DATE: AUGUST 19, 2002 By:/s/EDWARD J. BOREY
------------------------------------------
Edward J. Borey
President, Chief Executive Officer and Director
DATE: August 19, 2002 By:/s/PAUL M. BROWN
------------------------------------------
Paul M. Brown
Vice President and Chief Financial Officer
(Principal Financial Officer)
21