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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 July 4, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-9919
PSC INC.
(Exact name of Registrant as Specified in Its Charter)
New York 16-0969362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
675 Basket Road, Webster, New York 14580
(Address of principal executive offices) (Zip Code)
(716) 265-1600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 12 months preceding (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
As of August 11, 1997 there were 11,200,689 shares of common stock outstanding.
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<PAGE>
PSC Inc. AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I FINANCIAL INFORMATION
Item 1 -Financial Statements
Consolidated Balance Sheets as of
July 4, 1997 (Unaudited) and
December 31, 1996.....................................3 - 4
Consolidated Statements of Operations and
Retained Earnings for the three
and six months ended:
July 4, 1997 (Unaudited) and
June 30, 1996 (Unaudited) ............................5 - 6
Consolidated Statements of Cash Flows
for the six months ended:
July 4, 1997 (Unaudited) and
June 30, 1996 (Unaudited) ................................7
Notes to Consolidated Financial
Statements (Unaudited) ..............................8 - 11
Item 2 -Management's Discussion and Analysis of
Financial Condition and Results of
Operations .........................................12 - 14
PART II OTHER INFORMATION
Item 1 -Legal Proceedings ..............................................15
Item 2 -Changes in Securities ..........................................15
Item 3 -Defaults upon Senior Securities ................................15
Item 4 - Submission of Matters to a Vote of Security Holders............15
Item 5 -Other Information...............................................15
Item 6 - Exhibits and Reports on Form 8-K...............................16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
<TABLE>
<CAPTION>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
July 4, 1997 December 31, 1996
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................ $ 1,897 $ 10,838
Accounts receivable, net of allowance
for doubtful accounts of $1,382
and $1,101, respectively ..................... 27,099 29,501
Inventories ..................................... 18,843 18,306
Prepaid expenses and other ...................... 2,045 1,244
----------- ----------
TOTAL CURRENT ASSETS ............................. 49,884 59,889
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation of $10,030
and $8,225, respectively ........................ 36,599 35,612
DEFERRED TAX ASSETS ..................................... 24,562 24,773
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $9,377 and $6,238 respectively ........ 60,834 63,087
---------- ----------
TOTAL ASSETS ............................................ $ 171,879 $183,361
========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
(Continued)
<CAPTION>
July 4, 1997 December 31, 1996
------------ -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt ............... $ 11,088 $ 9,459
Accounts payable ................................ 17,097 15,681
Accrued expenses ................................ 7,654 11,448
Accrued payroll and related employee benefits.... 6,274 7,509
Accrued acquisition related restructuring costs . 1,672 4,009
----------- ---------
TOTAL CURRENT LIABILITIES ..................... 43,785 48,106
LONG-TERM DEBT, less current maturities ................ 111,823 117,994
OTHER LONG-TERM LIABILITIES ............................ 3,250 1,960
SHAREHOLDERS' EQUITY
Preferred Shares, par value $.01;
10,000 authorized, none issued ................... 0 0
Common shares, par value $.01;
40,000 authorized, 11,196 and 11,161
shares issued and outstanding ................ 112 112
Additional paid-in capital ...................... 55,322 54,891
Retained earnings ............................... (41,221) (39,432)
Cumulative translation adjustment ............... (955) (33)
Less treasury stock, 39 shares
repurchased, at cost ........................... (237) (237)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY .................... 13,021 15,301
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $171,879 $183,361
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(All amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
July 4, June 30,
1997 1996
---- ----
<S> <C> <C>
NET SALES ..................................................... $ 47,301 $22,052
COST OF SALES ................................................. 29,388 13,488
-------- ---------
Gross profit ......................................... 17,913 8,564
OPERATING EXPENSES
Engineering, research and development ................ 3,447 1,611
Selling, general and administrative .................. 10,464 6,504
Severance and other costs ............................ 4,191 0
Amortization of intangibles resulting
from business acquisitions ...................... 1,672 222
--------- --------
Income/(loss) from operations ................... (1,861) 227
INTEREST AND OTHER INCOME /(EXPENSE):
Interest expense ..................................... (3,384) (12)
Interest income ...................................... 100 125
Other income/(expense) ............................... (8) (5)
------------- -----------
(3,292) 108
---------- ---------
Income/(loss) from continuing operations before
income tax provision/(benefit) .................. (5,153) 335
Income tax provision/(benefit) ....................... (1,907) 124
------- --------
Income/(loss) from continuing operations ............. (3,246) 211
Discontinued operations:
Gain from discontinued operations, net of tax ........ 180 0
Gain on sale of discontinued operations, net of tax .. 407 0
--------- ------------
Total gain from discontinued operations .............. 587 0
----------- ------------
Net income/(loss) .................................... ($2,659) $ 211
======== =========
NET INCOME/(LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE
Continuing operations ................................ ($0.29) $ 0.02
Discontinued operations .............................. 0.05 0.00
------- ---------
Net income/(loss) .................................... ($0.24) $ 0.02
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING ........................................ 11,222 10,422
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit)
beginning of period ................................ ($38,562) $ 7,983
Net income/(loss) .................................... (2,659) 211
----------- ----------
Retained earnings/(Accumulated deficit),
end of period ...................................... ($41,221) $ 8,194
========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(All amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Six Months Ended
July 4, June 30,
1997 1996
---- ----
<S> <C> <C>
NET SALES ..................................................... $101,537 $43,551
COST OF SALES ................................................. 60,923 25,831
------- ---------
Gross profit ......................................... 40,614 17,720
OPERATING EXPENSES:
Engineering, research and development ................ 6,888 3,391
Selling, general and administrative .................. 23,540 13,027
Severance and other costs ............................ 4,191 0
Amortization of intangibles resulting
from business acquisitions ...................... 3,348 445
--------- --------
Income from operations .......................... 2,647 857
INTEREST AND OTHER INCOME /(EXPENSE):
Interest expense ..................................... (6,754) (25)
Interest income ...................................... 251 236
Other income/(expense) ............................... 108 (42)
----------- ----------
(6,395) 169
--------- ---------
Income/(loss) from continuing operations before
income tax provision/(benefit) .................. (3,748) 1,026
Income tax provision/(benefit) ....................... (1,388) 380
------- --------
Income/(loss) from continuing operations ............. (2,360) 646
Discontinued operations:
Gain from discontinued operations, net of tax ........ 164 0
Gain on sale of discontinued operations, net of tax .. 407 0
--------- ---------
Total gain from discontinued operations .............. 571 0
---------- -----------
Net income/(loss) .................................... ($1,789) $ 646
======== ========
NET INCOME/(LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE:
Continuing operations ................................ ($0.21) $ 0.06
Discontinued operations .............................. 0.05 0.00
----- ---------
Net income/(loss) .................................... ($0.16) $ 0.06
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING ........................................ 11,281 10,412
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit)
beginning of period ................................ ($39,432) $ 7,548
Net income/(loss) .................................... (1,789) 646
----------- ----------
Retained earnings/(Accumulated deficit),
end of period ...................................... ($41,221) $ 8,194
========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
PSC INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
July 4, June 30,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income /(loss) ............................................ ($1,789) $ 646
Adjustments to reconcile net income/(loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization ............................ 6,264 2,170
Loss on disposition of assets ............................ 109 37
Gain on disposition of discontinued operations ........... 407 0
Deferred tax assets ...................................... 211 128
Decrease (increase) in assets:
Accounts receivable .................................. 3,514 665
Inventories .......................................... (535) (1,880)
Prepaid expenses and other ........................... (951) (2,132)
Increase (decrease) in liabilities:
Accounts payable ..................................... 1,268 2,081
Accrued expenses ..................................... (6,630) (523)
Accrued payroll and commissions ...................... (1,230) (648)
Accrued acquisition related restructuring costs ...... (2,605) (331)
--------- ----------
Net cash (used in) provided by
operating activities ........................... (1,967) 213
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ..................................... (3,619) (967)
Additions to intangible and other assets ...................... (104) (780)
Proceeds from sale of investments ............................. 0 4,167
--------- ---------
Net cash (used in) provided by investing activities (3,723) 2,420
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term liabilities ............................ 1,938 0
Principal repayments of long-term debt ........................ (4,542) (63)
Payment of other long-term liabilities ........................ (156) 0
Exercise of stock options and sale of common stock ............ 431 627
Tax benefit from exercise or early disposition
of certain stock options .................................. 0 70
----------- -----------
Net cash (used in) provided by financing activities (2,329) 634
--------- ----------
FOREIGN CURRENCY TRANSLATION ...................................... (922) (23)
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS...................................... (8,941) 3,244
CASH AND CASH EQUIVALENTS:
Beginning of period ...................................... 10,838 5,538
-------- -------
End of period ............................................ $ 1,897 $ 8,782
======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED July 4, 1997 and June 30, 1996
(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 July 4, 1997, the results of operations for the three and six
months ended July 4, 1997 and June 30, 1996 and its cash flows for the six
months ended July 4, 1997 and June 30, 1996. The results of operations for the
three and six months ended July 4, 1997 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, 1996 annual report on Form 10-K.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
The Company accounts for net income per common and common equivalent share in
accordance with the provisions of Accounting Principles Board Opinion No. 15
(APB No. 15). In March 1997, Statement of Financial Accounting Standards No. 128
(SFAS No. 128), "Earnings per Share" was issued. SFAS No. 128 replaces primary
Earnings Per Share (EPS) with basic EPS. Basic EPS is computed by dividing
reported earnings available to common stockholders by weighted average shares
outstanding. No dilution for common share equivalents is included. Fully diluted
EPS, now called diluted EPS, is still required. The Company is required to adopt
SFAS No. 128 retroactively for periods ending after December 15, 1997. On a pro
forma basis, basic EPS and diluted EPS for the three and six months ended July
4, 1997 were ($0.24) and ($0.16), respectively, the same as reported EPS.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Elements of cost include materials, labor and overhead and consist of
the following:
July 4, 1997 December 31, 1996
------------ -----------------
Raw materials $12,347 $ 10,688
Work-in-process 3,219 3,547
Finished goods 3,277 4,071
--------- ---------
$18,843 $18,306
======= =======
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED July 4, 1997 and June 30, 1996
(All amounts in thousands, except per share data)
(Unaudited)
<TABLE>
(2) LONG-TERM DEBT
<CAPTION>
Long-term debt consists of the following:
July 4, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Senior Term Loan A $51,000 $55,000
Senior Term Loan B 24,500 25,000
Senior revolving credit 12,500 12,500
Subordinated term loan 29,443 29,428
Subordinated promissory note 5,000 5,000
Other 468 525
-------- -----------
122,911 127,453
Less: current maturities 11,088 9,459
--------- ---------
$111,823 $117,994
======== ========
</TABLE>
(3) SHAREHOLDERS' EQUITY
During the six month period ended July 4, 1997, employees purchased
approximately 67 shares at $5.81 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:
<TABLE>
<CAPTION>
January 1, 1997 Weighted January 1, 1996 Weighted
to Average to Average
July 4, 1997 Price Dec. 31, 1996 Price
<S> <C> <C> <C> <C>
Options outstanding
at beginning of period 2,818 $8.33 2,138 $8.41
Options granted 369 6.55 953 7.78
Options exercised (7) 6.06 (173) 6.27
Options forfeited/canceled (542) 9.05 (100) 8.06
------- -----
Options outstanding at
end of period 2,638 7.94 2,818 8.33
Number of options at end
of period:
Exercisable 1,725 1,630
Available for grant 957 784
</TABLE>
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED July 4, 1997 and June 30, 1996
(All amounts in thousands, except per share data)
(Unaudited)
(4) PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma condensed results of operations combine the
operations of the Company with those of PSC Scanning, Inc. (formerly
Spectra-Physics Scanning Systems, Inc.), TxCOM S.A. and related businesses
("Spectra") as adjusted for the acquisition on July 12, 1996 by the Company of
certain of the assets and liabilities of Spectra. The pro forma results of
operations are presented as if the acquisition was consummated on January 1,
1996.
The pro forma information is presented after giving effect to certain
adjustments for depreciation, amortization, interest expense and related income
tax effects. The 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.
<TABLE>
<CAPTION>
Pro Forma Three Months Ended Pro Forma Six Months Ended
June 30,1996 June 30, 1996
<S> <C> <C>
Net sales $51,487 $104,504
Income from operations 3,409 8,976
Income from continuing operations 206 1,818
Net income 206 1,818
Net income per common
and common equivalent share:
Continuing operations $0.02 $0.16
Discontinued operations 0.00 0.00
-------- ------
Net income $0.02 $0.16
======= =====
Weighted average shares outstanding 11,424 11,389
</TABLE>
(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 has entered into interest rate swap agreements with its senior
lending banks in accordance with the terms of the senior loans. The Company uses
these interest rate swap agreements to reduce its exposure to variable rates.
The differentials to be received or paid under these interest rate swap
agreements are recognized as a compoenent of interest expense in the
consolidated income statement.
Foreign Currency Exchange Rate Risk:
The Company enters into forward foreign exchange contracts as a hedge against
currency fluctuations relating to net 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 or losses on the underlying hedged items and are recorded
as a component of selling, general and administrative expenses in the
consolidated income statement.
<PAGE>
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, 1996 annual report on Form 10-K.
Results of Operations: Three Months ended July 4, 1997 and June 30, 1996
- -------------------------------------------------------------------------------
Net Sales. Consolidated net sales during the three months ended July 4, 1997
increased $25.2 million or 115% compared with the same period in 1996. The
increase is due to the inclusion of Spectra product sales and increased sales
volumes of the Company's QuickScan handheld scanner products. International net
sales increased 327% primarily due to the Spectra acquisition and represented
approximately 44% of net sales in the second quarter of 1997 versus 22% of net
sales in the second quarter of 1996.
Gross Profit. Consolidated gross profit during the three months ended July 4,
1997 increased $9.3 million or 109% compared with the same period in 1996. As a
percentage of sales, gross profit decreased from 38.8% to 37.9%. The decrease in
gross profit percentage is due to a $1.0 million inventory write-off for the
discontinuation of certain products to streamline the Company's handheld and
fixed position product lines. Excluding the inventory write-off, the 1997 gross
margin would have been 40.0%. This increase in gross profit percentage is
primarily due to the acquisition of Spectra and a change in the sales mix of the
Company's handheld and fixed position scanner products.
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $1.8 million or 114%, as compared to the same period
in 1996. As a percentage of sales, ER&D was 7.3% in the second quarter of 1997
and 1996. The dollar increases were primarily due to the inclusion of Spectra.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses increased $4.0 million or 61%, as compared to the same period in 1996.
The increased dollar amount is primarily due to the inclusion of Spectra. As a
percentage of sales SG&A was 22.1% in 1997 versus 29.5% in 1996. As a result of
the acquisition and integration of Spectra, the Company has reduced its general
and administrative expenses as a percentage of sales. In addition, the Company
is now operating under the Symbol-Spectra license agreement which has reduced
royalty expenses as a percentage of sales.
Severance and Other Costs. 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 for the centralization of research
and development efforts and the relocation of manufacturing of certain product
lines between its two manufacturing facilities.
<PAGE>
Acquisition Related Restructuring and Other Costs. During the 1994 fourth
quarter, the Company recorded a one-time pretax restructuring charge of $3.0
million. The charge related to the integration of the Company's existing fixed
position scanner product lines with those of LazerData, which was acquired in
December 1994. The restructuring program in part, provided for employee
severance and benefit costs for the elimination of approximately 12
manufacturing and engineering support positions. As of July 4, 1997, all
positions targeted in the restructuring program have been eliminated. The amount
of the restructuring accrual at July 4, 1997 was approximately $0.3 million.
Restructuring actions will be substantially completed by December 31, 1997.
There have been no reallocations or reestimates to date.
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 July 4, 1997, all positions targeted in the
restructuring program have been eliminated. The amount of the restructuring
accrual at July 4, 1997 was approximately $2.2 million. Restructuring actions
will be substantially completed by December 31, 1997. There have been no
reallocations or reestimates to date.
Interest Expense. Interest expense increased $3.4 million versus the comparable
period in 1996. The interest expense relates to the debt incurred in connection
with the acquisition of Spectra in July 1996.
Provision for Income Taxes. The Company recorded a $1.9 million tax benefit in
1997 primarily due to the severance and other costs discussed above. The
Company's effective tax rate was 37% in both 1997 and 1996. The Company expects
to record income tax expense at or about the combined federal and state
statutory tax rate in 1997.
Discontinued Operations. During the third quarter of 1996, the Company adopted a
plan to dispose of its TxCOM subsidiary. TxCOM was acquired as part of the
Spectra acquisition. During the second quarter of 1997, the Company completed
the sale of TxCOM for approximately $1.0 million. A gain of approximately $0.4
million, net of tax, was recorded.
Results of Operations: Six Months ended July 4, 1997 and June 30, 1996
- -----------------------------------------------------------------------
Net Sales. Consolidated net sales during the six months ended July 4, 1997
increased $58.0 million or 133% compared with the same period in 1996. The
increase is due to the inclusion of Spectra product sales and increased sales
volumes of the Company's QuickScan handheld scanner products. International net
sales increased 362% primarily due to the Spectra acquisition and represented
approximately 44% of net sales in the six months of 1997 versus 22% of net sales
in the first six months of 1996.
Gross Profit. Consolidated gross profit during the six months ended July 4, 1997
increased $22.9 million or 129% compared with the same period in 1996. As a
percentage of sales, gross profit decreased from 40.7% to 40.0%. During the
second quarter of 1997, the Company took a $1.0 million inventory write-off for
the discontinuation of certain products to streamline the Company's handheld and
fixed position product lines. Excluding the inventory write-off, the 1997 gross
margin would have been 41.0%. This increase in gross profit percentage is
primarily due to the acquisition of Spectra and a change in the sales mix of the
company's handheld and fixed position scanner products.
<PAGE>
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $3.5 million or 103%, as compared to the same period
in 1996. As a percentage of sales, ER&D was 6.8% in 1997 versus 7.8% in 1996.
The dollar increase is due to the inclusion of Spectra.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses increased $10.5 million or 81%, as compared to the same period in 1996.
The increased dollar amount is primarily due to the inclusion of Spectra. As a
percentage of sales SG&A was 23.2% in 1997 versus 29.9% in 1996. As a result of
the acquisition and integration of Spectra, the Company has reduced its general
and administrative expenses as a percentage of sales. In addition, the Company
is now operating under the Symbol-Spectra license agreement which has reduced
royalty expenses as a percentage of sales.
Interest Expense. Interest expense increased $6.7 million versus the comparable
period in 1996. The interest expense relates to the debt incurred in connection
with the acquisition of Spectra in July 1996.
Provision for Income Taxes. The Company recorded a $1.4 million tax benefit in
1997 primarily due to the severance and other costs discussed above. The
Company's effective tax rate was 37% in both 1997 and 1996. The Company expects
to record income tax expense at or about the combined federal and state
statutory tax rate in 1997.
Discontinued Operations. During the third quarter of 1996, the Company adopted a
plan to dispose of its TxCOM subsidiary. TxCOM was acquired as part of the
Spectra acquisition. During the second quarter of 1997, the Company completed
the sale of TxCOM for approximately $1.0 million. A gain of approximately $0.4
million, net of tax, was recorded.
Liquidity and Capital Resources:
Current assets decreased $10.0 million from December 31, 1996 due to a decrease
in cash offset in part by an increase to inventories. Current liabilities
decreased $4.3 million primarily due to a reduction in accrued expenses offset
in part by an increase in accounts payable. As a result, working capital
decreased $5.7 million from December 31, 1996.
Property, plant and equipment expenditures totaled $3.6 million for the six
months ended July 4, 1997 compared with $1.0 million for the six months ended
June 30, 1996. The 1997 expenditures primarily related to manufacturing
equipment and new product tooling.
The long-term debt to capital percentage was 89.6% at July 4, 1997 versus 88.5%
at December 31, 1996. At July 4, 1997, liquidity immediately available to the
Company consisted of cash and cash equivalents of $1.9 million. In addition, in
connection with the acquisition of Spectra, the Company obtained new credit
facilities totaling $130.0 million. The Company has $7.5 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.
<PAGE>
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,
1996 (the "Litigation") and in Item 1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended April 4, 1997 (the
"Arbitration"), are incorporated herein by reference. The Arbitration
was held during the week of July 21, 1997 and no decision has yet been
rendered.
Item 2: Changes in Securities: None
Item 3: Defaults upon Senior Securities: None
Item 4: Submission of Matters to a Vote of Security Holders:
(a) The Annual Meeting of Shareholders was held on May 6, 1997.
(b) The names of the directors elected at the Annual Meeting for a
three year term are as follows:
Donald K. Hess
James C. O'Shea
Justin L. Vigdor
The name of each other director whose term of office as a director
continued after the Annual Meeting is as follows:
Jay M. Eastman
Robert S. Ehrlich
James W. Henry
Thomas J. Morgan
Jack E. Rosenfeld
(c) At the Annual Meeting, the tabulation of votes with respect to
each nominee for director was as follows:
Nominee Votes FOR Authority Withheld
Donald K. Hess 9,891,550 101,844
James C. O'Shea 9,901,275 92,119
Justin L. Vigdor 9,878,651 114,473
Item 5: Other Information: None
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Employment Agreement between the Company and
Robert C. Strandberg dated as of June 2, 1997
10.2 Agreement between the Company and
Robert S. Ehrlich dated as of June 2, 1997
10.3 Second 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
10.4 Amendment 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)
(b) Reports on Form 8-K:
Report on Form 8-K, dated May 7, 1997
<PAGE>
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 18, 1997 By: /s/ Robert C. Strandberg
Robert C. Strandberg
President and Chief Executive Officer
DATE: August 18, 1997 By: /s/ William J. Woodard
William J. Woodard
Vice President and Chief Financial
Officer
DATE: August 18, 1997 By: /s/ Scott D. Deverell
Controller
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of June 2, 1997 by and between PSC Inc., a
New York corporation ("PSC" or the "Company") and ROBERT C. STRANDBERG
("Executive").
RECITALS
PSC desires to employ Executive to devote full time to the business of
PSC, and Executive desires to be so employed.
The parties agree as follows:
1. Employment. PSC hereby employs the Executive as President and Chief
Executive Officer. Executive hereby accepts such employment and agrees to remain
in the employ of PSC for the Term to perform any and all reasonable and lawful
duties prescribed by PSC's Board of Directors and to abide by the terms and
conditions of this Agreement. During the Term, in good faith, Executive shall
exert all reasonable efforts to promote the interests of the Company and shall
devote substantially all of his entire working time, attention and energies to
the business of the Company.
2. Term of Employment. The term of employment under this agreement
shall commence as of the date of this Agreement and shall terminate on June 1,
1998 (the "Initial Term"); provided, however that the term of this Agreement
shall be automatically extended for additional one year terms (each an
"Additional Term") upon the end of the Initial Term, or any successor Additional
Term unless either the Executive or the Company shall have given written notice
to the other at least seventy-five (75) days prior thereto that the term of this
Agreement shall not be so extended.
3. Compensation.
A. Base Salary.
(i) For all services to be rendered to the Company by Executive in any capacity,
including, without limitation, services as an officer, director or member of any
committee of the Board of Directors and the performance of any duties assigned
to him by the Board of Directors, PSC shall pay to Employee a salary at the
annual rate of not less than $240,000 ("Base Salary"). Base Salary shall be
payable in accordance with the customary payroll practices of PSC, subject to
such deductions and withholdings as may be required by law or agreed to by
Executive. Executive may, at his option, elect to receive up to 100% of his Base
Salary in the form of incentive stock options. Said options shall be granted
pursuant to the Company's 1994 Stock Option Plan, shall have an exercise price
equal to the fair market value of the Company's common shares on the date of
grant, which date shall be the effective date of the election by Executive,
shall be vested in four (4) equal installments on the last day of each quarter
(i.e., on August 31, 1997, November 30, 1997, February 28, 1998, and May 31,
1998), and shall be for a term of three (3) years from the date of grant. The
number of options to be granted shall be determined by the following formula:
[$ of Base Salary in options]
----------------------------
1/2 exercise price
<PAGE>
Executive must notify the Company, in writing, prior to the end of the first
payroll period subsequent to the date of this Agreement whether he wishes to
make this election and the amount of his Base Salary to be received in the form
of stock options. This election is applicable only with respect to the Base
Salary to be paid to Executive during the Initial Term.
B.
Performance Bonus. Pursuant to PSC's 1997 Management Incentive Plan, for the
year ending December 31, 1997, if and to the extent PSC achieves its
pre-established performance goals for 1997, Executive shall be entitled to a
performance bonus in an amount equal to the percentage of his Base Salary for
1997 opposite the performance goal percentage below:
% of Performance Goal Achieved % of Base Salary
Threshold 40%
Target 60%
133% of Target 90%
150% of Target 130%
170% of Target 170%
In subsequent years, Executive shall be entitled to a performance bonus based
upon the performance goals and targets established for that year by the Board of
Directors.
4. Benefits. In addition to his Base Salary, Executive shall also be entitled
throughout the Term to all benefits of full time employees or officers as set
forth in the Company's Policy Manual as to which he meets the eligibility
requirements universally applicable to all employees and such other benefits as
may be accorded to executives of his rank by written notification from the
Company given from time to time. The Company also agrees to pay the initiation
fee and the monthly dues associated with Executive's membership in a country
club of Executive's choice.
5. Options. Pursuant to the Company's 1994 Stock Option Plan, PSC hereby grants
Executive a stock option for 225,000 Common Shares of the Company at an exercise
price of $6.50 per share, the fair market value of the Company's Common Shares
on the date hereof, upon the terms and conditions set forth in the Option
Agreement attached hereto as Exhibit A.
6. Relocation Assistance. The Company will reimburse Executive for relocation
expenses in the manner and to the extent set forth in the memorandum entitled
"PSC Scanning, Inc., Employee Relocation Program, Effective: February 1997",
attached hereto as Exhibit B. For purposes of this Agreement, all references in
that memorandum to "PSC Scanning, Inc." shall mean "PSC Inc."; all references to
"Eugene" shall mean "Webster, NY" and all references to "Human Resources
Manager" shall mean "Chairman of the Board". In addition, the Company will
reimburse Executive for such other relocation expenses as it may deem
reasonable, including, but not limited to, those expenses set forth on Exhibit
C.
7. Confidential Information. Executive agrees that during the Initial Term and
the Additional Term, if any, and for five years thereafter, he will not, except
as required by the performance of his duties under this Agreement, disclose or
authorize anyone else to disclose or use or make known for his or another's
benefit, any confidential information or knowledge or data of the Company,
whether or not patentable or copyrightable, in any way acquired by Executive
from the inception of his employment with the Company through the expiration of
the Term (hereinafter "Confidential Information"). Confidential Information for
the purposes of this Agreement, shall include, but not be limited to, matters
not readily available to the public which are:
A. of a technical nature, such as, but not limited to, methods, know-how,
formulae, compositions, drawings, blueprints, compounds, processes, discoveries,
machines, prototypes, inventions, computer programs;
<PAGE>
B. of a business nature, such, as, but not limited to, information about sales
or lists of customers, prices, costs, purchasing, profits, markets, strengths
and weaknesses of products, business processes, business and marketing plans and
activities and employee personnel records;
C. pertaining to future developments, such as, but not limited to, research and
development, future marketing or merchandising plans or ideas. Immediately upon
termination of Executive's services, Executive shall deliver to the Company all
originals and copies of everything in his possession or under his control which
embodies or contains any Confidential Information, including, without
limitation, all documents, correspondence, specifications, blueprints,
notebooks, reports, sketches, formulae, computer programs, computer discs,
prototypes, price lists, customer lists or information, samples and all other
materials.
Confidential Information shall not include information which
(i) is published or otherwise becomes generally available to the public other
than by a breach of confidentiality, or (ii) Employee can show by documentation
was properly in his possession prior to his employment with the Company, or
(iii) becomes available to Employee from an independent source without breach of
this Agreement or violation of law, or (iv) is independently developed by
Employee without the use of the Company's Confidential Information.
<PAGE>
8. Covenant Not to Compete
A. In light of the special and unique services that have been and will be
furnished to the Company by Executive and the Confidential Information that has
been and will be disclosed to him during his employment, Executive agrees that
during the Initial Term and the Additional Term, if any, and for a period of
twenty-four (24) months thereafter (the "Non-Competition Period"), he will not,
without the written consent of the Company, directly or indirectly, whether as
principal, agent, officer, director, consultant, employee, partner, stockholder
or owner of or in any capacity with any corporation, partnership, business,
firm, individual company or any entity located any where in the world engage in,
or assist another to engage in, any work or activity in any way competitive with
the Business of the Company (as hereinafter defined). However, nothing herein
shall prevent Executive from owning not more than five percent (5%) of the
outstanding publicly traded shares of common stock of a corporation, as to which
corporation Executive has no relationship other than as a shareholder. In
addition, during the Non-Competition Period, Executive will not, directly or
indirectly, (a) induce or attempt to induce any officer or employee of the
Company to leave the employ of the Company, or in any way interfere with the
relationship between the Company and any officer, employee, director or
shareholder thereof, (b) hire directly or through another entity any person who
is an employee of the Company on the date of termination of employment of
Executive, or (c) induce or attempt to induce any customer, dealer, supplier or
licensee to cease doing business with the Company, or in any way interfere with
the relationship between any such customer, dealer, supplier or licensee and the
Company.
Executive specifically agrees that because of his special expertise and the
special and unique services that he will be furnishing the Company, and because
of the Confidential Information that has been acquired by him or that will be
disclosed to him during his employment with the Company, the above stated
geographic areas and time period, in and during which he will not compete with
the Company, are reasonable in scope and duration and are necessary to afford
the Company just and adequate protection against the irreparable damage which
would result to the Company from any activities prohibited by this Section.
<PAGE>
B. If Executive in any way breaches the obligations specified in this Section,
the Company shall have the right, in addition to any other remedies available to
it, to terminate the further payment of any amounts due or the further
provisions of any benefits under Sections 3 and 4 hereof.
C. If any provision hereof is found to be unreasonably broad, it shall
nevertheless be enforceable to the extent reasonably necessary for the
protection of the Company and to carry out to the fullest extent the parties'
mutual intent in entering into this Agreement, which intent is that the
provisions of this Section will be strictly enforced as agreed to.
D. For purposes of this Agreement, the "Business of the Company" is the
development, manufacturing and marketing of technologies, products and services
for the automatic identification and keyless data entry industry, and includes,
but is not limited to, products, services, applications, systems and
technologies relating to bar coded data, magnetic stripe encoded data, radio
frequency communications of bar coded or related data, optical character
recognition, machine vision as applied to the recognition of bar coded data and
electronic interchange of bar coded or related data. The Business of the Company
shall also include any business in which the Company is actually engaged or as
to which it is doing research and development during Executive's employment with
the Company. Notwithstanding anything to the contrary in the preceding two
sentences, Business of the Company shall not include the manufacturing, design,
engineering, distributing, marketing, selling or reselling of thermal or thermal
transfer bar code printers, bar code verifiers or labeling media and ribbons
used in connection with thermal bar code printers.
9. Injunctive Relief. Executive agrees that in the event of a breach or
threatened breach by the Employee of any of the provisions of Section 7 or 8
hereof, the Company shall be entitled to an injunction restraining the Executive
from such breach or threatened breach without posting any bond or other
security. Nothing herein, however, shall be construed as prohibiting the Company
from pursuing, in conjunction with an injunction or otherwise, any other
remedies available to the Company for such breach or threatened breach,
including the recovery of damages from the Executive.
10. Severance Payment.
A. Termination of Employment - In General. In the event of the termination of
employment of Executive by the Company for any reason other than Termination for
Cause (as hereinafter defined), death, disability, or a Change in Control (as
hereinafter defined), or in the event the employment of the Executive is not
renewed after the Initial Term, the Company will continue to pay the Executive
for a period of one year following such termination or expiration of the Initial
Term an amount equal to the Executive's Base Salary at the annual rate then in
effect. Such amount shall be payable bi-weekly. In addition, the Company will
provide Executive with Executive's then current health, dental, life and
accidental death and dismemberment insurance benefits for a period of one year
following such termination. In the event of Executive's death while receiving
severance payments hereunder, all remaining severance installment payments
otherwise payable to Executive hereunder will be paid in the same amounts and in
the same manner to Executive's heirs and legal representatives. All payments
made to Executive hereunder will be subject to all applicable employment and
withholding taxes.
<PAGE>
B. Termination of Employment - Change in Control. In the event of the
termination of employment of Executive within the two year period following a
Change in Control (as hereinafter defined) of the Company, and such termination
is (i) by the Company for any reason other than Termination for Cause (as
hereinafter defined), death or disability, or (ii) by the Executive for "Good
Reason" (as hereinafter defined), the Company will pay the Executive for a
period of three years following such termination an amount equal to the product
of the sum of (x) Executive's Base Salary at the annual rate then in effect and
(y) the highest annual bonus paid to Executive under the Company's current
Management Incentive Plan or any successor plan in the three full fiscal years
preceding termination multiplied by 2.9. In addition, Executive will be
immediately vested in any retirement, incentive, or option plans then in effect
and the Company will continue to provide Executive with Executive's then current
health, dental, life and accidental death and dismemberment insurance benefits
for a period of three years. All payments made to Executive hereunder will be
subject to all applicable employment and withholding taxes.
C. Limitations. Notwithstanding anything in this Section to the contrary, the
maximum amount of cash and other benefits payable (whether on a current or
deferred basis and whether or not includible in income for income tax purposes)
under this Section (the "Severance Benefits") shall be limited to the extent
necessary to avoid causing any portion of such Severance Benefits, or any other
payment in the nature of compensation to the Executive, to be treated as a
"parachute payment" within the meaning of Section 280G(b)(2) of the Internal
Revenue Code of 1986, as amended. Any adjustment required to satisfy the
limitation described in the preceding sentence shall be accomplished first by
reducing any cash payments that would otherwise be made to the Executive and
then, if further reductions are necessary, by adjusting other benefits as
determined by the Company.
D. Certain Definitions.
Change in Control. A "Change in Control" shall be deemed to have occurred (i) on
the date that any person or group deemed a person under Sections 3(a)(9) and
13(d)(3) of the Securities Exchange Act of 1934, other than the Company, in a
transaction or series of transactions, has become the beneficial owner, directly
or indirectly (with beneficial ownership as determined as provided in Rule
13d-3, or any successor rule under such Act), of 30% or more of the outstanding
voting securities of the Company; or (ii) on the date on which one third or more
of the members of the Board of Directors shall consist of persons other than
Current Directors (for these purposes, a "Current Director" shall mean any
member of the Board of Directors elected at or continuing in office after, the
1997 Annual Meeting of Shareholders, any successor of a Current Director who has
been approved by a majority of the Current Directors then on the Board, and any
other person who has been approved by a majority of the Current Directors then
on the Board); or (iii) on the date of approval of (x) the merger or
consolidation of the Company with another corporation where the shareholders of
the Company, immediately prior to the merger or consolidation, would not
beneficially own, immediately after the merger or consolidation, shares
entitling such shareholders to 50% or more of all votes (without consideration
of the rights of any class of stock to elect directors by a separate class vote)
to which all shareholders of the corporation would be entitled in the election
of directors or where the members of the Board of Directors of the Company,
immediately prior to the merger or consolidation, would not immediately after
the merger or consolidation, constitute a majority of the Board of Directors of
the corporation issuing cash or securities in the merger or consolidation or (y)
on the date of approval of the sale or other disposition of all or substantially
all the assets of the Company.
<PAGE>
Termination for Cause. The Company shall have the right to terminate the
services of Executive at any time without further liability or obligations to
Executive if: (i) Executive has failed or refused to perform such services as
may reasonably be delegated or assigned to Executive consistent with the
Executive's position, by the Board of Directors, (ii) Executive has been grossly
negligent in connection with the performance of Executive's duties, (iii)
Executive has committed acts involving dishonesty, willful misconduct, breach of
fiduciary duty, fraud, or any similar offense which materially affects
Executive's ability to perform Executive's duties for the Company or may
materially adversely affect the Company, or (iv) Executive has been convicted of
a felony.
Termination of the services of Executive for Cause shall not be effective unless
and until acted upon by the Board of Directors and unless and until written
notice shall have been given to Executive which notice shall include
identification with specificity of each and every factual basis or incident upon
which the termination is based. Notwithstanding the preceding sentence, in
connection with the termination of the services of Executive for Cause under
section (i) above, the Board of Directors shall take no action until the
Executive has been provided written notice of the services Executive has failed
or refused to perform and such failure or refusal remains unremedied for 30 days
after Executive has received such notice.
Good Reason. Good Reason shall mean the occurrence or existence of any of the
following with respect to Executive: (i) Executive's annual rate of salary is
reduced from the annual rate then currently in effect or Executive's other
employee benefits are in the aggregate materially reduced from those then
currently in effect (unless such reduction of employee benefits applies to
employees of the Company generally), or (ii) Executive's place of employment is
moved more than 25 miles from its then current location, or (iii) Executive's
title is changed or he is assigned duties that are demeaning or are otherwise
materially inconsistent with the duties then currently performed by Executive.
Before Executive may terminate his employment for Good Reason, Executive must
notify the Company in writing of his intention to terminate and the Company
shall have 15 days after receiving such written notice to remedy the situation,
if possible.
11. Notices. All notices given in connection with this Agreement shall be in
writing and shall be delivered either by personal delivery, by telegram, telex,
telecopy or similar facsimile means, by certified or registered mail, return
receipt requested, or by express courier or delivery services, addressed to the
parties hereto at the following addresses:
To Strandberg: To PSC:
Robert C. Strandberg PSC Inc.
55 South Main Street 675 Basket Road
Pittsford, NY 14534 Webster, NY 14580
FAX: (716) 265-6409
<PAGE>
or at such other address and number as either party shall have previously
designated by written notice given to the other party in the manner hereinabove
set forth. Notice shall be deemed given when received, if sent by telegram,
telex, telecopy or similar facsimile means (confirmation of such receipt by
confirmed facsimile transmission being deemed receipt of communications sent by
telex, telecopy or other facsimile means); and when delivered and receipted for
(or upon the date of attempted delivery where delivery is refused), if
hand-delivered, sent by express courier or delivery services, or sent by
certified or registered mail, return receipt requested.
12. Waiver. Any waiver of a breach of any of the terms of this Agreement shall
not operate as a waiver of any other breach of such terms or of any other terms,
nor shall failure to enforce any term hereof operate as a waiver of any such
term or of any other
term.
13. Severability. If any term of this Agreement or the application thereof is
held invalid or unenforceable, the validity or unenforceability shall not effect
any other term of this Agreement which can be given effect without the invalid
or unenforceable term.
14. Governing Law; Venue. This Agreement shall be construed and enforced in
accordance with and governed by the internal laws of the State of New York,
without reference to conflict of law principles of any jurisdiction (including
without limitation New York) which would result in the application of the
domestic substantive laws of any other jurisdiction. The parties consent to the
exclusive jurisdiction of the Supreme Court of New York, Monroe County or of the
United States District Court for the Western District of New York for any legal
action instituted by any party against any other with respect to the subject
matter hereof.
15. Prior Agreements. This Agreement supersedes all previous agreements related
to the subject matter herein.
16. Termination of Obligations. Executive agrees that in the event his
employment with the Company is terminated for any reason, that he will meet with
a representative of the Company and discuss, among other matters, the provisions
of this Agreement and the Executive's obligations hereunder.
17. Entire Agreement. This Agreement contains the entire agreement between the
parties with respect to the subject matter hereof. This Agreement may not be
amended or changed except by a writing signed by both parties.
<PAGE>
IN WITNESS WHEREOF, Executive has executed this Agreement and the
Company has caused this Agreement to be executed as of the date set forth above.
PSC INC.
By:
Robert S. Ehrlich
Its: Chairman of the Board
Robert C. Strandberg
AGREEMENT
THIS AGREEMENT dated as of June 2, 1997 by and between PSC Inc., a New York
corporation ("PSC" or the "Company") and ROBERT S. EHRLICH ("Ehrlich").
WHEREAS, Ehrlich was elected Chairman of the Board of Directors of PSC on
April 30, 1997, and
WHEREAS, the Company desires to terminate all existing agreements and
understandings with Ehrlich, and in lieu thereof, to enter into this Agreement
providing, among other things, for his services as Chairman of the Board, and
WHEREAS, Ehrlich is willing to enter into this Agreement upon the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties agree as follows:
1. Services. Ehrlich shall perform such duties and exercise such powers as are
customarily associated with the position of Chairman of a Board of
Directors, including but not limited to, presiding at all meetings of the
Board of Directors, selecting and chartering Board committees, establishing
Board agendas, and monitoring and reviewing the performance of the
President and Chief Executive Officer. In addition, he shall perform such
other duties as the Board may from time to time direct, including but not
limited to, services in such areas as strategic planning, corporate
development, mergers and acquisitions, and development of overseas markets.
During the Term, in good faith, Ehrlich shall exert all reasonable efforts
to promote the interests of the Company and shall devote such time,
attention and energies to the performance of his responsibilities and
duties hereunder and at such locations as may reasonably be deemed
necessary or appropriate by the parties. During the Term, Ehrlich may have
other business investments and participate in other unrelated and
non-competitive business ventures, but these shall not interfere or be
inconsistent with his duties hereunder. Ehrlich may perform his services at
such times, at such locations and by such means (i.e., in person, by phone,
by fax or other electronic devices) as shall be reasonably appropriate and
mutually agreeable.
<PAGE>
2. Term. Ehrlich shall serve as Chairman of the Board of Directors at the
pleasure of the Board of Directors or until his successor shall have been
duly elected or until he shall have been removed with or without cause by a
vote of a majority of the entire Board of Directors then in office at a
meeting called for that purpose whenever in its judgment the best interests
of the Company will be served thereby (the "Term").
3. Compensation. For all services to be rendered to the Company by Ehrlich in
any capacity, PSC shall pay to Ehrlich a fee at the annual rate of $75,000.
The fee shall be payable biweekly.
4. Options.
a. As additional compensation for services to be rendered as
Chairman of the Board, PSC, pursuant to the Company's 1994
Stock Option Plan, hereby grants Ehrlich a stock option for
35,000 Common Shares of the Company at an exercise price of
$6.50 per share, the fair market value of the Company's Common
Shares on the date hereof, upon the terms and conditions set
forth in the Option Agreement attached hereto as Exhibit A.
<PAGE>
b. As compensation in full for significant past services rendered
to the Company as a consultant in the integration of the
Company and Spectra-Physics Scanning Systems, Inc., PSC,
pursuant to the Company's 1994 Stock Option Plan, hereby
grants to Ehrlich a stock option for 50,000 Common Shares of
the Company at an exercise price of $6.50 per share, the fair
market value of the Company's Common Shares on the date
hereof, upon the terms and conditions set forth in the Option
Agreement attached hereto as Exhibit B.
5. Confidential Information. Ehrlich agrees that during the Term and for five
years thereafter, he will not, except as required by the performance of his
duties under this Agreement, disclose or authorize anyone else to disclose
or use or make known for his or another's benefit, any confidential
information, knowledge or data of the Company, whether or not patentable or
copyrightable, in any way acquired by him from the inception of his
original relationship with the Company in any capacity through the
expiration of the Term (herein "Confidential Information"). Confidential
Information, for purposes of this Agreement, shall include, but not be
limited to, matters not readily available to the public which are:
a. of a technical nature, such as, but not limited to, methods, know-how,
formulae, compositions, drawings, blueprints, compounds, processes,
discoveries, machines, inventions, computer programs and similar items:
b. of a business nature, such as, but not limited to, information about sales
or lists of customers, prices, costs, purchasing, profits, markets,
strengths and weaknesses of products, business processes, business and
marketing plans and activities and employee personnel records;
c. pertaining to future developments, such as, but not limited to, research
and development, future marketing or merchandising plans or ideas.
Immediately upon termination of Ehrlich's services, Ehrlich shall deliver to the
Company all originals and copies of everything in his possession or under his
control which embodies or contains Confidential Information, including, without
limitation, all documents, correspondence, specifications, blueprints,
notebooks, reports, sketches, formulae, computer programs, computer discs, sales
and other materials, price lists, customer lists or information, samples, and
all other materials.
<PAGE>
Confidential Information shall not include information which (i) is
published or otherwise becomes generally available to the public other than by a
breach of confidentiality, or (ii) Ehrlich can show by documentation was
properly in his possession prior to the commencement of his original
relationship with the Company, or (iii) becomes available to Ehrlich from an
independent source without breach of his Agreement or violation of law, or (iv)
is independently developed by Ehrlich without the use of the Company's
Confidential Information. 6. Covenant Not to Compete.
a. In light of the special and unique services that have been and will be
furnished to the Company by Ehrlich and the Confidential Information that
has been and will be disclosed to him during his relationship with the
Company, Ehrlich agrees that during the Term, and for a period of eighteen
(18) months thereafter, he will not, without the written consent of the
Company, directly or indirectly, whether as principal, agent, officer,
director, consultant, employee, partner, stockholder or owner of or in any
capacity with any corporation, partnership, business, firm, individual
company or any entity located any where in the world engage in, or assist
another to engage in, any work or activity in any way competitive with the
Business of the Company (as hereinafter defined). However, nothing herein
shall prevent Ehrlich from owning not more than five percent (5%) of the
outstanding publicly traded shares of common stock of a corporation, as to
which corporation Ehrlich has no relationship other than as a shareholder.
Ehrlich specifically agrees that because of his special expertise and the
special and unique services that he will be furnishing the Company, and
because of the Confidential Information that has been acquired by him or
that will be disclosed to him during the Term, the above stated geographic
areas and time period, in and during which he will not compete with the
Company, are reasonable in scope and duration and are necessary to afford
the Company just and adequate protection against the irreparable damage
which would result to the Company from any activities prohibited by this
Section.
b. If Ehrlich in any way breaches the obligations specified in this Section, the
Company shall have the right, in addition to any other remedies available to it,
to terminate the further payment of any amounts due under Section 3 hereof.
c. If any provision hereof is found to be unreasonably broad, it shall
nevertheless be enforceable to the extent reasonably necessary for the
protection of the Company and to carry out to the fullest extent the parties'
mutual intent in entering into this Agreement, which intent is that the
provisions of this Section will be strictly enforced as agreed to.
d. For purposes of this Agreement, the "Business of the Company" is the
development, manufacturing and marketing of technologies, products and services
for the automatic identification and keyless data entry industry, and includes,
but is not limited to, products, services, applications, systems and
technologies relating to bar coded data, magnetic stripe encoded data, radio
frequency communications of bar coded or related data, optical character
recognition, machine vision as applied to the recognition of bar coded data,
electronic interchange of bar coded or related data, and custom reed-relay
switching systems. The Business of the Company shall also include any business
in which the Company is actually engaged or as to which it is doing research and
development during Ehrlich's services with the Company.
<PAGE>
7. Injunctive Relief. Ehrlich agrees that in the event of a breach or threatened
breach by Ehrlich of any of the provisions of Sections 5 or 6 hereof, the
Company shall be entitled to an injunction restraining Ehrlich from such breach
or threatened breach without posting any bond or other security. Nothing herein,
however, shall be construed as prohibiting the Company from pursuing, in
conjunction with an injunction or otherwise, any other remedies available to the
Company for such breach or threatened breach, including the recovery of damages
from Ehrlich.
8. Notices. All notice given in connection with this Agreement shall be in
writing and shall be delivered either by personal delivery, by telegram, telex,
telecopy or similar facsimile means, by certified or registered mail, return
receipt requested, or by express courier to the parties hereto at the following
addresses:
To Ehrlich: To PSC:
------------------------- -------------------------------
------------------------- -------------------------------
Robert S. Ehrlich PSC Inc.
P.O. Box 1334 675 Basket Road
Efrat 90962 Webster, NY 14580
Israel Attn: Chief Executive Officer
Fax: 011-972-293-2189 Fax: 716-265-6406
or at such other address and number as either party shall have previously
designated by written notice given to the other party in the manner hereinabove
set forth. Notice shall be deemed given when received, if sent by telegram,
telex, telecopy or similar facsimile means (confirmation of such receipt by
confirmed facsimile transmission being deemed receipt of communications sent by
telex, telecopy or other facsimile means); and when delivered and receipted for
(or upon the date of attempted delivery where delivery is refused), if
hand-delivered, sent by express courier or delivery service, or sent by
certified or registered mail, return receipt requested.
9. Waiver. Any waiver of a breach of any of the terms of this Agreement shall
not operate as a waiver of any other breach of such terms or of any other terms,
nor shall failure to enforce any term hereof operate as a waiver of any such
term or of any other term.
10. Severability. If any term of this Agreement or the application thereof is
held invalid or unenforceable, the validity or unenforceability shall not affect
any other terms of this Agreement which can be given effect without the invalid
or unenforceable term.
<PAGE>
11. Governing Law: Venue. This Agreement shall be construed and enforced in
accordance with and governed by the internal laws of the State of New York,
without reference to conflict of law principles or the domicile or residence of
any individual party if other than New York. The parties hereby submit and
consent to the exclusive personal jurisdiction of the Supreme Court of New York,
Monroe County or of the United States District Court for the Western District of
New York for any legal action instituted by any party against any other with
respect to the subject matter hereof and process in such action shall be
effectively served if served in accordance with Section 8 hereof.
12. Prior Agreement. This Agreement supersedes all previous agreements and
understandings relating to the subject matter herein.
13. Entire Agreement. This Agreement contains the entire agreement between the
parties with respect to the subject matter hereof. This Agreement may not be
amended or changed except by a writing signed by both parties.
IN WITNESS WHEREOF, Ehrlich has executed this Agreement and the
Company has caused this Agreement to be executed as of the date set forth above.
PSC INC.
By: ------------------------------
Robert C. Strandberg
President & Chief Executive Officer
---------------------------------
Robert S. Ehrlich
Amendment Two and Waiver
to Credit Agreement
THIS AMENDMENT TWO AND WAIVER is dated as of July 4, 1997 and is made in respect
of the Credit Agreement dated as of July 12, 1996 and as amended and in effect
immediately prior to the date hereof (the "Credit Agreemtn") by and among PSC
SCANNING INC., a Delaware corporation formerly known as SpectraScan, Inc., which
is successor by merger to PSC Acquisition, Inc., (the "Borrower"), PSC Inc.
("PSC"), the financial institutions party to the Credit Agreement (the "Lender
Parties"), FLEET BANK as the "Initial Issuing Bank", and FLEET BANK, as
administrative agent (the "Administrative Agent") under the Credit Agreement.
Statement of the Premises
The Borrower, PSC, the Lender Parties, the Initial Issuing Bank and the
Administrative Agent previously entered into the Credit Agreement and the First
Amendment to Credit Agreement dated as of September 27, 1996. The Borrower has
requeted that the Lender Parties amend a certain definition and corresponding
schedule to the Credit Agreement and waiver noncompliance by the Borrower with
certain covenants in the Credit Agreement. The Lender Parties are willing to do
so upon certain contingencies.
Statement of Consideration
Accordingly, in consideration of the premises, and under the authority of
Section 5-1103 of the New York General Obligations Law, the parties hereto agree
as follows.
Agreement
1. Defined Terms. The terms "this Agreement," "hereunder" and similar references
in the Credit Agreement shall be deemed to refer to the Credit Agreement as
amended hereby. Capitalized terms used and not otherwise defined herein shall
have the meanings ascribed to such terms in the Credit Agreement.
2. Amendment. Effective as of April 1, 1997, upon the satisfaction of all
conditions set forth in Section 4 hereof, Schedule 4.01 (hh) is amended by
deleting therefrom the reference to the Employment Agreement between L. Michael
Hone dated September 14, 1995; and "Material Contract" as defined in Section
1.01 of the Credit Agreement shall be deemed not to include the Severance
Agreement dated April 30, 1997 between PSC and L. Michael Hone or any ancillary
agreement or instrument pertaining to the resignation of L. Michael Hone from
eployment with PSC and all of its subsidiaries and other affiliates
(collectively with PSC, the "Companies") and his positions and offices as
Chairman, Chief Executive Officer, President and as a member of the Board of
Directors of PSC as well as all other positions, offices and directorships with
any of the Companies.
<PAGE>
3. Waiver. Upon the satisfaction of all conditions set forth in Section 4
hereof, the Lender Parties hereby waive any and all noncompliance by PSC with
Subsections (a), (b), (c) and (d) of Section 5.04 of the Credit Agreement
computed as at the fiscal quarter end-date of July 4, 1997 (and only in respect
of compliance required or computed as at such fiscal quarter end-date) and any
and all noncompliance by PSC with Subsection (e) of Section 5.04 of the Credit
Agreement through August 15, 1997, together with the right to deem any such
noncompliance within the description of the foregoing waiver as an "Event of
Default" pursuant to Section 6.01 of the Credit Agreement or a failure of a
condition precedent pursuant to Section 3.02 of the Credit Agreement.
4. Conditions Precent to Effectiveness. This Amendment Two and Waiver shall not
become effective unless and until: (a) the holders of the Subordinated Debt
shall have entered into an amendment or waiver in substantially the form of
Exhibit A annexed hereto; and (b) the Borrower shall have paid to the Agent for
the account of each of the Lender Parties, pro-rata according to the amount of
the Commitment of each Lender Party, a fee equal to one-sixteenth of one percent
of the total amount of the Commitment.
5. Effect on the Credit Agreement. Except as specifically amended and waived
above, the Credit Agreement shall remain in full force and effect and is hereby
ratified and confirmed. The Borrower and PSC each acknowledge and agree that the
Credit Agreement (as amended by this Amendment) and each other Loan Document to
which each is a party is in full force and effect, that its Obligations
thereunder and under this Amendment are its legal valid and binding obligations
enforceable against it in accordance with the terms thereof and hereof, and it
has no defense, whether legal or equitable, setoff or counter claim to the
payment and performance of such Obligations.
6. Expenses. The Borrower shall pay promptly when billed all reasonable out-of-
pocket expenses of each of the Lender Parties and the Agent (including, but not
limited to, reasonable fees, charges and reimbursements of counsel to each of
the Lender Parties and the Agent) incident to the preparation, negotiation,
execution, administration and enforcement of this Amendment Two and Waiver and
all documents and transactions required in connection with this Amendment Two
and Waiver.
<PAGE>
7. Execution in Counterparts and Effectiveness. This Amendment Two and Waiver
may be executed in any number of counterparts and by the different parties
hereto on separate counterparts, each of which shall be deemed to be an
original, and all of which taken together shall constitute one and the same
Amendment Two and Waiver, regardless of whether or not the execution by all
parties shall appear on any single counterpart. Delivery of an executed
counterpart of a signature page to this Amendment Two and Waiver by telecopier
shall be effective as delivery of a manually executed counterpart of this
Agreement. This Amendment Two and Waiver will become effective (subject to the
conditions precedent set forth in Section 4 above) when the Administrative Agent
shall have received counterparts of this Amendment Two and Waiver which, hwen
taken together, bear the signatures of the Borrower, PSC, the Administrative
Agent and the Required Lenders.
8. Applicable Law. Pursuant to Section 5-1401 of the New York General
Obligationis Law, the laws of the State of New York shall govern the validity,
construction, enforcement and interpretation of this Amendment Two and Waiver in
whole without regard to any rules of conflicts-of-laws that would require the
application of the laws of any jurisdiction other than the State of New York.
9. Headings. The headings of this Amendment Two and Waiver are for the purposes
of reference only and shall not limit or otherwise affect the meanings hereof.
IN WITNESS WHEREOF, the parties hereto have caused a counterpart of this
Amendment Two and Waiver to be executed and delivered by their respect
representatives thereunto duly authorized, as of the date first above written.
<PAGE>
PSC Inc. PSC SCANNING, INC.
Vice President,Finance Vice President & Chief
and Treasurer Financial Officer
FLEET BANK, as Initial Issuing Bank FLEET BANK, as Admin. Agent
Acting Vice President Acting Vice President
FLEET BANK CORESTATES BANK, N.A.
Acting Vice President Senior Vice President
MANUFACTURERS & TRADERS KEY BANK NATIONAL
TRUST COMPANY ASSOCIATION
Regional Senior VP Vice President
PILGRIM AMERICA PRIME RATE
SUMITOMO TRUST
Vice President, NY Office Vice President
PSC Inc.
PSC SCANNING, INC.
675 Basket Road
Webster, NY 14580
As of July 4, 1997
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
200 Clarendon Street
Boston, Massachusetts 02117
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN NATIONAL INCOME FUND, INC.
c/o Lincoln Investment Management, Inc.
200 East Berry Street
Renaissance Square
Ft. Wayne, Indiana 46802
SECURITY-CONNECTICUT CORPORATION
SECURITY-CONNECTICUT LIFE INSURANCE COMPANY
20 Security Drive
Avon, Connecticut 06001
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
c/o Alliance Capital Managment L.P.
1345 Avenue of the Americas, 37th Floor
New York, New York 10105
Re: Amendment No. 2 and Waivers under Securities Purchase Agreements
Ladies and Gentlemen:
PSC Inc., a New York corporation (the "Holding Company"), and PSC SCANNING Inc.,
a Delaware corporation (formerly named SpectraScan, Inc.) and a Wholly- Owned
Subsidiary of the HOlding Company (the "Operating Company") (the Holding Company
and the Operating Company are sometimes collectively referred to herein as the
"Companies" and each as a "Company"), jointly and severally agree with you as
follows:
1. Definitions. Reference is hereby made to those certain Securities Purchase
Agreements dated July 12, 1996, as amended by Amendment No. 1 dated October 10,
1996 (as the same may be amended, modified or supplemented from time to time,
the "Securities Purchase Agreements"), among the Holding Company, the Operating
Company and each of you. Capitalized terms used herein without definition have
the meanings ascribed to them in the Securities Purchase Agreements.
<PAGE>
2. Amendments and Waivers under the Securities Purchase Agreements;
Acknowledgment of Amendments and Waivers under Bank Credit Agreement.
(a) Section 11.1(a) of the Securities Purchase Agreements is hereby amended by
deleting the phrase "the one year anniversary of the Closing Date" appearing in
the first sentence thereof and inserting "September 15, 1997" in place therof.
(b) Each of you hereby waives any default in the performance or observance of
any covenant, condition or agreement contained in Section 14.7 of the Securities
Purchase Agreements with respect to the fiscal quarter ended on July 4, 1997,
and, for section 14.7(d) only, through August 15, 1997.
(c) Each of you hereby acknowleges that section 14.16(c) of the Securities
Purchase Agreements permits the amdnemdnet and waivers under the Bank Credit
Agreement as provided for in that certain Amendment Two and Waiver to Credit
Agreement dated as of July 4, 1997, among the Holding Company, as Initial
Issuing Agent, and Fleet Bank, as administrative agent, substantially in the
form attached hereto as Exhibit A.
3. No Default, Representations and Warranties, etc.
(a) The Companies represent and warrant that, except as otherwise modified by
(i) the Holding Company's (A) Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, including all exhibits and appendices thereto, (b)
Quarterly Report on Form 10-Q for the quarter ended April 4, 1997, and (c)
Current Report on Form 8-K filed with the Commission on May 7, 1997, true
correct and complete copies of which have been furnished to you, (ii) the
projections referred to on Exhibit B attached hereto, and (iii) the information
delivered to the Purchasers on June 11, 1997, which is attached hereto as
Exhibit C, the representations and warranties contained in the Securities
Purchase Agreements and the other Operative Documents are in all material
respects correct on and as of the date hereof as if made on such date (except to
the extent affected by the consummation of transactions permitted by the
Securities Purchase Agreements), and that, after giving effect to the provisions
of this Letter Agreement, no Default or Event of Default exists.
(b) The Companies each ratify and confirm the Securities Purchase Agreements (as
amended hereby) and each of the other Operative Documents to which each is a
party and agree that each such agreement, document and instrument is in full
force and effect, that its obligations thereunder and under this Letter
Agreement are its legal, valid and binding obligations enforceable against it in
acccordance with the terms thereof and hereof and that it has no defense,
whether legal or equitable, setoff or counterclaim to the payment and
performance of such obligations.
<PAGE>
(c) The Companies agree that (i) if any default shall be made in the performance
or observance of any covenant, agreement or condition contained in this Letter
Agreement or in any agreement, document or instrument executed in connection
herewith or pursuant hereto (ii) if any representation or warranty made by the
Companies herein or therein shall prove to have been false or incorrect on the
date as of which made, the same shall constitute an Event of Default under the
Securities Purchase Agreements and the other Operative Documents and, in such
event, you and each other holder of any of the Notes shall have all rights and
remedies provided by law and/or provided or referred to in the Securities
Purchase Agreements and the other Operative Documents. The Companies further
agree that this Letter Agreement is an Operative Document and all references
thereto in the Securities Purchase Agreements and in any other of the Operative
Documents shall include this Letter Agreement.
4. Payment of Transaction Costs. The Companies shall pay all reasonable fees and
disbursements incurred by you in connnection herewith, including, without
limitation, the reasonable fees, expenses and disbursements of your special
counsel.
5. Governing Law. This Letter Agreement, including the validity hereof and the
rights and obligations of the parties hereunder, shall be construed in
accordance with and governed by the domestic substantive laws of the State of
New York without giving effect to any choice of law or conflicts of law
provision or rule that would cause the application of the domestic substantive
laws of any other jurisdiction.
6. Miscellaneous. The headings in this Letter Agreement are for purposes of
reference only and shall not limit otherwise affect the meanings hereof. This
Letter Agreement embodies the entire agreement and understanding among the
parties thereto and supersedes all prior agreements and understandings relating
to the subject matter hereof. In case any provision in this Letter Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
imparied thereby. This Letter Agreement may be executed in any number of
counterparts and by the parties hereto on separate counterparts but all such
counterparts shall together constitute but one and the same instrument.
<PAGE>
If you are in agreement with the foregoing, please sign the form of agreement
on the accompanying counterpart hereof, whereupon this Letter Agreement shall
become a binding agreement under seal among the parties hereto. Please then
return one of such counterparts to the Companies.
Very truly yours,
PSC Inc.
/s/ William J. Woodard
PSC SCANNING, INC.
/s/ William J. Woodard
Each of the undersigned (a) acknowledges and assents to the terms and provisions
of the foregoing Letter Agreement and (b) ratifies and confirms each of the
Operative Documents to which it is a party and agrees that each such operative
Documents to which it is a party and agrees that each such operative Document is
in full force and effect, that its obligations thereunder are its legal, valid
and binding obligations enforceable against it in accordance with the terms
thereof and that it has no defense, whether legal or equitable, setoff or
counterclaim, to the payment and performance of such obligations.
INSTAREAD CORPORATION
/s/ William J. Woodard
PSC AUTOMATION, INC.
(formerly named Laserdata Corporation).
/s/ William J. Woodard
<PAGE>
LASERDATA HOLDINGS, INC.
/s/ William J. Woodard
PSC S.A., INC.
/s/ William J. Woodard
PSC SCANNING SYSTEMS, INC.
/s/ William J. Woodard
The foregoing is hereby accepted and agreed to:
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
/s/ D. Dana Donovan
JOHN HANCOCK VARIABLE LIFE
INSURANCE COMPANY
/s/ D. Dana Donovan
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
By: Lincoln Investment Management, Inc.
Its Attorney-in-Fact
LINCOLN NATIONAL INCOME FUND. INC.
By: David C. Fissler
SECURITY-CONNECTICUT CORPORATION
By: /s/ Richard D. Mocarski
SECURITY-CONNECTICUT LIFE
INSURANCE COMPANY
By: /s/ Richard D. Mocarski
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
By: /s/ William Gobbo, Jr.
<TABLE> <S> <C>
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(Replace this text with the legend)
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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0
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