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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 April 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 May 9, 1997 there were 11,176,300 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
April 4, 1997 (Unaudited) and
December 31, 1996..................................3 - 4
Consolidated Statements of Operations and
Retained Earnings for the three
months ended:
April 4, 1997 (Unaudited) and
March 31, 1996 (Unaudited) ............................5
Consolidated Statements of Cash Flows
for the three months ended:
April 4, 1997 (Unaudited) and
March 31, 1996 (Unaudited) ............................6
Notes to Consolidated Financial
Statements (Unaudited) ............................7 - 9
Item 2 -Management's Discussion and Analysis of
Financial Condition and Results of
Operations ......................................10 - 11
PART II OTHER INFORMATION
Item 1 -Legal Proceedings......................................12
Item 2 -Changes in Securities..................................12
Item 3 -Defaults upon Senior Securities........................12
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 5 -Other Information......................................12
Item 6 - Exhibits and Reports on Form 8-K......................12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
April 4, Dec. 31,
1997 1996
(Unaudited)
----------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................... $ 3,595 $ 10,838
Accounts receivable, net of allowance
for doubtful accounts of $1,107
and $1,101, respectively ................... 29,905 29,501
Inventories ................................... 20,381 18,306
Prepaid expenses and other .................... 1,766 1,244
----- -----
TOTAL CURRENT ASSETS .......................... 55,647 59,889
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation of $9,563
and $8,225, respectively ...................... 36,544 35,612
DEFERRED TAX ASSETS ................................ 23,868 24,773
INTANGIBLE AND OTHER ASSETS,
net of accumulated amortization
of $7,566 and $6,238, respectively ................ 61,124 63,087
-------- --------
TOTAL ASSETS ....................................... $177,183 $183,361
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
(Continued)
April 4, Dec. 31,
1997 1996
(Unaudited)
---------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt ............. $ 9,773 $ 9,459
Accounts payable .............................. 19,377 15,681
Accrued expenses .............................. 9,383 11,448
Accrued payroll and related employee benefits . 3,529 7,509
Accrued acquisition related restructuring costs 2,442 4,009
--------- ---------
TOTAL CURRENT LIABILITIES ...................... 44,504 48,106
LONG-TERM DEBT, less current maturities .............. 115,408 117,994
OTHER LONG-TERM LIABILITIES .......................... 1,645 1,960
SHAREHOLDERS' EQUITY
Preferred shares, par value $.01;
10,000 shares authorized, none issued ....... -- --
Common shares, par value $.01;
40,000 authorized, 11,176 and 11,161
shares issued and outstanding ............... 112 112
Additional paid-in capital .................... 54,981 54,891
Retained earnings/(Accumulated deficit) ....... (38,562) (39,432)
Cumulative translation adjustment ............. (668) (33)
Less treasury stock, 39 shares
repurchased, at cost ......................... (237) (237)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ..................... 15,626 15,301
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ............................................ $ 177,183 $ 183,361
========= =========
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>
Three Months Ended
April 4, March 31,
1997 1996
---- ----
<S> <C> <C>
NET SALES .................................................. $ 54,236 $ 21,499
COST OF SALES .............................................. 31,535 12,343
-------- --------
Gross profit ......................................... 22,701 9,156
OPERATING EXPENSES:
Engineering, research and development ................ 3,441 1,780
Selling, general and administrative .................. 13,076 6,523
Amortization of intangibles resulting
from business acquisitions ........................ 1,677 223
-------- --------
Income from operations .......................... 4,507 630
INTEREST AND OTHER INCOME/(EXPENSE):
Interest expense ..................................... (3,368) (13)
Interest income ...................................... 151 111
Other income/(expense) ............................... 116 (37)
-------- --------
(3,101) 61
Income from continuing operations before
income tax provision ............................... 1,406 691
Income tax provision ................................. 520 256
-------- --------
Income from continuing operations .................... 886 435
Discontinued operations:
Loss from discontinued operations .................... 16 --
-------- --------
Net income ........................................... $ 870 $ 435
======== ========
NET INCOME PER COMMON &
COMMON EQUIVALENT SHARE:
Continuing operations ................................ $ 0.08 $ 0.04
Discontinued operations .............................. 0.00 0.00
-------- --------
Net income ........................................... $ 0.08 $ 0.04
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING: .................................... 11,302 10,204
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated
deficit), beginning of period ..................... ($39,432) $ 7,548
Net income ........................................... 870 435
--- ---
Retained earnings/(Accumulated deficit), end of period ($38,562) $ 7,983
======== ========
</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>
Three Months Ended
April 4, March 31,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ..................................................... $ 870 $ 435
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization ................................. 3,275 1,139
Loss on disposition of assets ................................. 109 37
Deferred tax assets ........................................... 905 64
Decrease (increase) in assets:
Accounts receivable ........................................ (404) 668
Inventories ................................................ (2,075) (937)
Prepaid expenses and other ................................. (522) (130)
Increase (decrease) in liabilities:
Accounts payable ........................................... 3,696 (1,379)
Accrued expenses ........................................... (2,065) 757
Accrued payroll and related employee benefits .............. (4,053) (444)
Accrued acquisition related restructuring costs ............ (1,657) (292)
------ ----
Net cash used in operating activities .................... (1,921) (82)
------ ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ........................................ (2,499) (519)
Additions to intangible and other assets, net .................... 146 (428)
Proceeds from sale of investments ................................ -- 4,167
-- -----
Net cash (used in) provided by investing activities ...... (2,353) 3,220
------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt ...................................... -- --
Principal repayments of long-term debt ........................... (2,272) (30)
Payment of other long-term liabilities ........................... (152) --
Exercise of stock options and sale of common stock ............... 90 118
-- ---
Net cash (used in) provided by financing activities ...... (2,334) 88
FOREIGN CURRENCY TRANSLATION ........................................ (635) (33)
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS ............... (7,243) 3,193
CASH AND CASH EQUIVALENTS:
Beginning of period ........................................... 10,838 5,538
-------- --------
End of period ................................................. $ 3,595 $ 8,731
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED April 4, 1997 and March 31, 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 April 4, 1997, and the results of operations and
its cash flows for the three months ended April 4, 1997 and March 31, 1996.
The results of operations for the three months ended April 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's 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 month period ended April 4, 1997 were $0.08,
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:
April 4, 1997 December 31, 1996
------------- -----------------
Raw materials $ 11,602 $ 10,688
Work-in-process 4,036 3,547
Finished goods 4,743 4,071
---------- ---------
$ 20,381 $18,306
======== =======
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED April 4, 1997 and March 31 1996
(All amounts in thousands, except per share data)
(Unaudited)
(2) LONG-TERM DEBT
Long-term debt consists of the following:
April 4, Dec. 31,
1997 1996
---- ----
Senior Term Loan A .............. $ 53,000 $ 55,000
Senior Term Loan B .............. 24,750 25,000
Senior revolving credit ......... 12,500 12,500
Subordinated term loan .......... 29,443 29,428
Subordinated promissory note .... 5,000 5,000
Other ........................... 488 525
-------- --------
125,181 127,453
Less: current maturities ....... 9,773 9,459
-------- --------
$115,408 $117,994
======== ========
(3) SHAREHOLDERS' EQUITY
During the three month period ended April 4, 1997, employees purchased
approximately 15 shares at $6.06 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>
Jan. 1, Jan 1,
1997 1996
to Weighted to Weighted
Apr. 4, Average Dec. 31, Average
1997 Price 1996 Price
---- ----- ---- -----
<S> <C> <C> <C> <C>
Options outstanding at beginning of period 2,818 $8.33 2,138 $8.41
Options granted ........................... 5 7.73 953 7.78
Options exercised ......................... (1) 6.12 (173) 6.27
Options forfeited/canceled ................ (263) 9.17 (100) 8.06
Options outstanding at end of period ...... 2,559 8.25 2,818 8.33
Number of options at end of period:
Exercisable ............................. 1,727 1,630
Available for grant ..................... 1,042 784
</TABLE>
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED April 4, 1997 and March 31 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.
Pro Forma Three
Months Ended
March 31,1996
-------------
Net sales ..................................... $53,017
Income from operations ........................ 5,567
Income from continuing operations ............. 1,611
Loss from discontinued operations ............. --
Net income .................................... 1,611
Net income per common and common equivalent share:
Continuing operations ....................... $0.14
Discontinued operations ..................... 0.00
----
Net income .................................. $0.14
=====
Weighted average shares outstanding ........... 11,181
(5) SUBSEQUENT EVENT
On April 30, 1997, L. Michael Hone resigned as Chief Executive Officer, as
Chairman of the Board of Directors and as a member of the Board of
Directors of the Company. In connection with the resignation, the Company
entered into a Severance Agreement with Mr. Hone. The agreement provides
Mr. Hone with severance payments of up to $1.25 million, a performance
bonus for 1997 if the Company achieves certain sales and profitability
targets, forgiveness of certain promissory notes and continued health and
other benefits for a period of three years. The agreement contains a
covenant not to compete and also requires Mr. Hone to provide consulting
services for no additional consideration.
<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:
Net Sales. Consolidated net sales during the three months ended April 4, 1997
increased $32.7 million or 152% 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 and its scan engine
products. International net sales increased 406% primarily due to the Spectra
acquisition and represented approximately 45% of net sales in the first quarter
of 1997 versus 22% of net sales in the first quarter of 1996.
Gross Profit. Consolidated gross profit during the three months ended April 4,
1997 increased $13.5 million or 148% compared with the same period in 1996. As a
percentage of sales, gross profit decreased from 42.6% to 41.9%. The decrease in
gross profit percentage is primarily due to lower average selling prices of
certain of its products and the effect of foreign currency translation.
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $1.7 million or 93%, as compared to the same period in
1996. As a percentage of sales, ER&D was 6.3% in the first quarter of 1997
versus 8.3% in the first quarter of 1996. The dollar increases were primarily
due to the inclusion of Spectra.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses increased $6.6 million or 100%, as compared to the same period in 1996.
As a percentage of sales, SG&A was 24.1% in 1997 versus 30.3% in 1996. The
increased dollar amount is primarily due to the inclusion of Spectra and
litigation expenses related to the Company's patent infringement lawsuit with
Symbol Technologies, Inc.
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 April 4, 1997, all
positions targeted in the restructuring program have been eliminated. The amount
of the restructuring accrual at April 4, 1997 was approximately $0.3 million.
Restructuring actions are substantially complete as of April 4, 1997. There have
been no reallocations or reestimates to date.
<PAGE>
During the third quarter of 1996, the Company recorded a one-time, pretax charge
of $10.0 million for the cost of restructuring its existing operations with
those of Spectra which was acquired in July 1996. The restructuring program in
part, provided for employee severance and benefit costs for the elimination of
certain positions. As of April 4, 1997, all positions targeted in the
restructuring program have been eliminated. The amount of the restructuring
accrual at April 4, 1997 was approximately $3.1 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 $0 in the
comparable period in 1996. The interest is payment for debt incurred in
connection with the acquisition of Spectra in July 1996.
Provision for Income Taxes. Provision for income tax dollar amounts increased
$0.3 million due to the increase in pretax net income. The Company's effective
tax rate was 37.0% 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.
Liquidity and Capital Resources:
Current assets decreased $4.2 million from December 31, 1996 due to a decrease
in cash offset in part by increases to accounts receivable and inventories.
Current liabilities decreased $3.6 million primarily due to a reduction in
accrued expenses offset in part by an increase in accounts payable. As a result,
working capital decreased $0.6 million from December 31, 1996.
Property, plant and equipment expenditures totaled $2.5 million for the three
months ended April 4, 1997 compared with $0.5 million for the three months ended
March 31, 1996. The 1997 expenditures primarily related to manufacturing
equipment and new product tooling.
The long-term debt to capital percentage was 88.1% at April 4, 1997 versus 88.5%
at December 31, 1996. At April 4, 1997, liquidity immediately available to the
Company consisted of cash and cash equivalents of $3.6 million. In addition, in
connection with the acquisition of Spectra, the Company obtained new credit
facilities totaling $130.0 million. The Company has $120.3 million outstanding
on these facilities. The Company believes that its cash resources and available
credit facilities, in addition to its operating cash flows, are sufficient to
meet its requirements for the next twelve months.
<PAGE>
Part II: OTHER INFORMATION
Item 1: Legal Proceedings:
The description 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") is incorporated herein by reference.
When the Company acquired Spectra-Physics Scanning Systems, Inc.
("Spectra") in July of 1996, Spectra was a party to a 1985 License
Agreement, as modified in 1995, with Symbol (the "Spectra License") which
provided for arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association in Chicago, Illinois with
respect to issues (among others) of which products may be deemed licensed
products.
On March 10, 1997, in accordance with the Spectra License, the Company
demanded arbitration (the "Arbitration") to determine whether the Company
is entitled to sell its QS 6000 scan module as a licensed device pursuant
to the Spectra License and whether customers who purchase said module may
incorporate it into portable data terminals without fear of suit from
Symbol or need to pay any royalties beyond those paid by the Company on
the module itself.
Symbol moved in the United States District Court for the Western New York
(the "Court") to either enjoin the Arbitration or stay the Arbitration
pending the outcome of certain proceedings in the Litigation.
On May 9, 1997, the Court denied Symbol's motion to enjoin or stay the
Arbitration, and stayed the Markman hearing in the Litigation that had
been scheduled for July 14, 1997 pending the outcome of the Arbitration.
Item 2: Changes in Securities: None
Item 3: Defaults upon Senior Securities: None
Item 4: Submission of Matters to a Vote of Security Holders: None
Item 5: Other Information: None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits: Page
10.1 Severance Agreement between the Company and
L. Michael Hone,dated April 30, 1997 ........................ 14
(b) Reports on Form 8-K: None
<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: May 14, 1997 By: /s/ Robert C. Strandberg
Robert C. Strandberg, President,
Chief Executive Officer
DATE: May 14, 1997 By: /s/ William J. Woodard
William J. Woodard
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
DATE: May 14, 1997 By: /s/ Scott D. Deverell
Scott D. Deverell
Controller, Principal Accounting
Officer
PSC INC.
675 Basket Road
Webster, New York 14580
April 30, 1997
By Hand Delivery
Mr. L. Michael Hone
4 Fawn Road
Pittsford, New York 14534
Dear Mr. Hone:
This letter will confirm the agreement (the "Severance Agreement") between
you and PSC Inc. ("PSC") concerning your employment by PSC and its termination.
For good and valuable consideration, receipt and sufficiency of which is hereby
acknowledged, you and PSC agree as follows:
1. You hereby resign your employment with PSC and all of its subsidiaries
and other affiliates (collectively with PSC, the "Companies") and your 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, effective as of the close of business
on April 29, 1997 (the "Termination Date"). In connection herewith, you shall
execute a letter of resignation in the form attached hereto as Exhibit A. It is
understood and agreed that the Companies will take actions in reliance on these
resignations and that they are irrevocable.
2. PSC agrees to pay you severance pay in the aggregate amount of
$1,251,250 plus a portion of the performance bonus referred to in Section 4(c)
of the Employment Agreement if earned, equal to one-third of such bonus and up
to two weeks accumulated vacation pay, which shall be in lieu of all amounts in
the nature of continued salary, bonus or severance provided for in the Amended
and Restated Employment Agreement dated as of September 14, 1995 between you and
PSC (the "Employment Agreement"). This severance pay, less federal and state
income taxes and other deductions that PSC is legally required to
-1-
<PAGE>
withhold, will be payable to you as follows beginning on the Delivery Date (as
defined below) in accordance with the regular payroll practices:
Period Aggregate Annual Amount From the Delivery Date until the first $385,000,
anniversary of the Delivery Date ("Year 1") After Year 1 and until the third
anniver$385,000, of the Delivery Date ("Years 2 and 3");
provided, however, that during Years 2 and 3, 50% of all compensation paid,
directly or indirectly, by any source other than PSC in respect of your services
shall be offset against the payments due from PSC under this Agreement and you
shall provide to PSC a monthly report of any and all such compensation. You
shall also be paid at the end of Year 1 a lump-sum payment of $96,250. PSC
acknowledges that you shall be entitled to receive your regular payroll check on
Thursday, May 15, 1997 without deduction for repayment of the Notes.
3. In addition, you agree that you shall remain liable, on a non-recourse
basis, for the indebtedness to PSC evidenced by each of the promissory notes
dated April 3, 1995 and April 17, 1995 (the "1995 Notes") in accordance with the
terms and provisions of such 1995 Notes and the indebtedness evidenced by the
promissory note dated September 3, 1996 and December 24, 1996 (the "1996 Notes",
and together with the 1995 Notes, the "Notes") except that interest shall accrue
thereon but only be payable upon maturity of the Notes; and that such Notes
shall be secured by all shares of the Common Stock of PSC, options to purchase
shares of Common Stock of PSC and shares issued upon the exercise of such
options held by you. In connection therewith, you shall execute a pledge
agreement in the form attached hereto as Exhibit B (the "Pledge Agreement") and
deliver all certificates or other documents evidencing, representing or
otherwise relating to such shares and options to PSC on or prior to May 2, 1997
(the date such delivery occurs being referred to as the "Delivery Date").
Notwithstanding the foregoing, you may, at any time prior to the Delivery Date,
elect that in lieu of the Notes becoming payable on a non-recourse basis such
that PSC's only remedy in the event of a default thereunder is to exercise its
rights under the Pledge Agreement;
(a) the indebtedness evidenced by the 1995 Notes shall be forgiven
and extinguished over time ratably beginning on the Delivery Date and
ending on the third anniversary of the Delivery Date and PSC shall pay or
reimburse to you the amount of taxes incurred by you in connection with
such forgiveness of indebtedness upon your providing evidence reasonably
satisfactory to PSC of the payment of such taxes; and
(b) you shall remain liable on a recourse basis for the indebtedness
evidenced by the 1996 Notes, in accordance with the terms and provisions
of such 1996 Notes,
-2-
<PAGE>
except that interest shall accrue thereon but only be payable upon
maturity or accelerated maturity of such 1996 Notes.
4. Options for 957,226 shares of Common Stock granted you in connection
with your employment with PSC (the "Options") which are outstanding and vested
as of the Termination Date shall be exercisable in accordance with the terms of
the Options and any applicable related agreements until their stated expiration
date, notwithstanding any term thereof to the contrary. You agree that while any
Option is outstanding, you will not effect any short-sales in PSC's Common
Stock.
5. Provided that you exercise your right to continue your participation in
PSC's medical and dental insurance plans (the "Plans") under the applicable
federal law ("COBRA"), then until the earlier of the third anniversary of the
Termination Date or the date you cease to be eligible for participation under
COBRA, PSC will contribute to the premium cost of your coverage and that of your
eligible dependents under the Plans at the same rate that it contributes to the
premium cost of coverage of active employees and their eligible dependents, as
that rate may change from time to time, provided you pay the remainder of the
premium cost by payroll deduction. In addition, PSC shall continue its
obligations under Sections 5(b) and (d) of the Employment Agreement until the
earlier of the third anniversary of the Termination Date or the date on which
you accept employment from any other person or entity. PSC's obligations under
this Section 5 shall terminate on the date, if any, that you accept employment
from any other person or entity. PSC shall also continue the monthly net auto
allowance of $1,000.00 and annual tax return allowance and enhanced long term
disability to the same extent as offered to the other members of PSC's senior
management team.
6. From and after the Termination Date, you shall remain available to
provide services to PSC as a consultant, for no additional consideration, as the
Board of Directors of PSC may reasonably request from time to time for a period
expiring on the third anniversary of the Termination Date; provided that during
Years 2 and 3 you shall not be required to provide more than 20 hours of such
consulting hours per month. Upon request PSC shall reimburse you for reasonable
out of pocket expenses incurred by you in connection with the provision of such
services.
7. It is our understanding that you will not be eligible for unemployment
compensation while you are receiving payments from PSC under this Severance
Agreement. After that time, however, PSC will not oppose your application for
unemployment compensation benefits, provided that your application is consistent
with applicable law (for example, that you are still unemployed).
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<PAGE>
8. You covenant that you will, within 10 days of the Termination Date,
return to PSC any and all records and other property belonging to the Companies
or any customers of the Companies, including but not limited to any and all
documents, materials and information related to the business of the Companies,
present or otherwise, all books, documents, effects, monies, and securities
belonging to the Companies or for which the Companies may be liable to others
and all keys, equipment and any other property of the Companies, which are in
your possession, charge, custody or control. As of the Delivery Date, PSC
transfers to your ownership of the cellular phone and laptop computer provided
by PSC for your business use during your employment.
9. You covenant that you will within 30 days of the Termination Date
submit requests for reimbursement for all legitimate, business-related expenses
incurred by you prior to the Termination Date, along with supporting
documentation, and that no further reimbursement will be due you from any of the
Companies upon reimbursement by PSC to you of such expenses (to the extent not
previously advanced). At the time of the first payment of the severance pay
described in paragraph 2 above, PSC shall also reimburse you for attorney fees
in connection with the negotiation of this Severance Agreement, upon receipt of
copies of invoices therefor in an amount not to exceed $7,500.
10. You agree and acknowledge that as of the Termination Date you do not
have the authority, and will not endeavor, to act or to make representations or
commitments for PSC or any of the other Companies, or to obligate PSC or any of
the other Companies to any contracts or to pledge their credit. You also agree
that, without the prior written consent of the Chairman of PSC, you will not
enter onto any premises owned or leased by any of the Companies.
11. You agree that payment to you in accordance with the terms of this
Severance Agreement shall constitute payment in full of any and all sums that
are now or might hereafter become owing to you from PSC or any of the Companies,
whether for services performed during your employment with PSC or any of the
Companies or otherwise.
12. You agree that you will continue to use your best efforts to support
and promote the interests and reputation of PSC in the community (without any
obligation to devote time or financial resources in connection therewith); you
will not do or say anything that might be detrimental to PSC's business or
reputation of PSC or the Companies; or that might disparage PSC or any of their
past or present directors, officers, employees, agents, or stockholders or any
other persons, corporations and other entities connected with it; and that you
will not otherwise do or say anything that could disrupt the good morale of the
employees of PSC or otherwise harm its interests or reputation. PSC agrees that
it will not do or say anything that might be detrimental to you or that might
disparage you. You further agree that you will not, directly or indirectly,
reveal or discuss any information or express any opinion whatsoever
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<PAGE>
concerning PSC or its business publicly, including but not limited to making any
statement regarding PSC, either directly or by implication, to any
representative of the print or electronic media. Without limiting the generality
of the foregoing, you acknowledge and agree that you have no disagreement of the
type referred to in Item 6 of Form 8-K under the Securities Exchange Act of
1934, as amended, and that you will not submit a letter of the type referred to
in such Item.
13. You acknowledge your continuing obligations under Sections 6 (with
respect to Inventions (as defined in the Employment Agreement) made during the
term of your employment or based upon any PSC proprietary technology), 7, 8 and
9 of the Employment Agreement and agree to continue to meet all of your
obligations thereunder in accordance with the terms of said Sections 6, 7, 8 and
9. You further agree that, until the expiration of three years from the
Termination Date, you shall give PSC notice of each new job or other business
activity (to the extent permitted by applicable law) you plan to undertake prior
to beginning any such activity and shall provide PSC with such other pertinent
information concerning such activities as PSC may reasonably request in order to
determine your continued compliance with your obligations under Section 9 of the
Employment Agreement.
14. You agree to execute and deliver to PSC any and all agreements,
instruments and other documents necessary or desirable to accomplish or to carry
out the provisions of this Severance Agreement, including without limitation,
the assignment and transfer, to perfect the title, and/or to obtain and promote
the right to PSC's exclusive enjoyment of any improvements, inventions, ideas,
suggestions and discoveries made or developed by you while in the employ of PSC.
You agree, when reasonably requested by PSC, to testify in any legal proceedings
on behalf of PSC and to sign all lawful papers and execute and sign any
original, additional, provisional or reissue applications for letters patent
with respect to such improvements, inventions, ideas, suggestions and
discoveries which may be necessary or desirable to accomplish the foregoing, and
to do all lawful acts to aid PSC to obtain and enforce protection of their
improvements, inventions, ideas, suggestions and discoveries in any and all
countries. If requested to do so, you will be provided reasonable out of pocket
expenses incurred in providing such testimony or assistance.
15. You agree that restraints contained in Sections 6, 7 and 9 of the
Employment Agreement and Section 13 hereof are necessary for the reasonable and
proper protection of PSC and the other Companies and that each and every one of
the restraints is reasonable in respect to subject matter, length of time and
geographical area. You further agree that any violation of any of the covenants
contained in Sections 6, 7 or 9 of the Employment Agreement or Section 13 hereof
will cause PSC and the other Companies irreparable injury and agree that PSC and
each of the other Companies, in addition to any other remedies available to it,
shall be entitled to preliminary and permanent injunctive relief against any
breach or threatened breach without having to post bond. In the event that any
provision of
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<PAGE>
Section 6, 7 or 9 of the Employment Agreement or Section 13 hereof is determined
by any court of competent jurisdiction to be unenforceable by reason of its
being extended over too great a time, too large a geographic area or too great a
range of activities, such provision shall be deemed to be modified to permit its
enforcement to the maximum extent permitted by law. You agree that no immaterial
breach of, or failure to perform under, this Severance Agreement or any other
agreement with you on the part of PSC or any of the other Companies shall
relieve you of any of your obligations under Section 6, 7 or 9 of the Employment
Agreement or Section 13 hereof (it being understood that failure to make the
payments required under Section 2 hereof is not an immaterial breach).
16. If any covenant or provision or part thereof contained in this
Severance Agreement is determined to be void or unenforceable in whole or in
part, it shall not be deemed to affect or impair the validity of any other
covenant or part thereof or provision of this Severance Agreement. Each of the
provisions contained is hereby declared to be a separate and distinct covenant,
severable one from the other and the most restrictive of such covenants shall
apply unless such covenant is determined to be invalid or unenforceable, in
which case the next most restrictive shall apply, and so on, and PSC shall be
entitled to enforce each such covenant to the fullest extent permitted by law,
in equity or otherwise, notwithstanding that any other or others of such
covenants may not be enforceable.
17. You agree to cooperate with PSC with respect to matters that arose
during or related to your employment, including but not limited to, cooperation
in connection with any litigation or governmental investigation or regulatory or
other proceeding which may have arisen or which may arise following the
execution of this Severance Agreement. As part of the cooperation agreed to
herein, you shall provide complete and truthful information to PSC and their
attorneys with respect to any matter arising during or related to your
employment. Specifically, you shall make yourself reasonably available to meet
with PSC's personnel and attorneys and shall provide to PSC and their attorneys
any and all documentary or other physical evidence pertinent to any such matter.
If requested to do so, you will be provided reasonable out of pocket expenses
incurred in connection therewith. Finally, you shall promptly notify PSC, within
three business days, of your receipt from any third party or governmental entity
of a request for testimony and/or documents, whether by legal process or
otherwise, relating to any matter arising during or relating to your employment.
You agree that your cooperation hereunder is an integral part of this Severance
Agreement.
18. Any and all notices, requests, demands and other communications
provided for by this Severance Agreement shall be in writing and shall be
effective when delivered in person or deposited in the United States mail,
postage prepaid, registered or certified and addressed to you as follows:
Mr. L. Michael Hone
-6-
<PAGE>
4 Fawn Run
Pittsford, New York 14534
or, in the case of the Companies, to the Chairman of PSC at the
following address:
PSC Inc.
675 Basket Road
Webster, New York 14580
Attention: Chairman of the Board of Directors
with a copy to:
Winthrop G. Minot, Esquire
Ropes & Gray
One International Place
Boston, MA 02110
19. This letter contains the entire agreement between you and PSC, and
replaces all prior and contemporaneous agreements and understandings, whether
written or oral, with respect to your employment, its termination and all
related matters, excluding only your obligations under Sections 6, 7, 8 and 9 of
the Employment Agreement, the Pledge Agreement and your rights and obligations
with respect to securities of PSC, including without limitation, the Options and
any related agreements, all of which shall remain in full force and effect in
accordance with their terms. This Severance Agreement may not be modified or
amended, and no breach shall be deemed to be waived, unless agreed to in writing
by you and an expressly authorized representative of PSC. This Severance
Agreement shall be governed by and interpreted in accordance with the laws of
the State of New York, without regard to the conflict of laws principles thereof
which would result in the application of the domestic substantive laws of any
other jurisdiction.
20. We want to be certain that this Severance Agreement will resolve any
concerns that you might have and so ask that you carefully consider its terms,
including the release of claims contained in the following two Paragraphs and,
in that regard, PSC encourages you to seek the advice of an attorney before
signing this Severance Agreement.
21. You agree that this Severance Agreement shall be in complete and final
settlement of, and releases PSC the Companies and all of their respective past
and present directors, shareholders, officers, employees, advisors, attorneys,
agents, successors and assigns, or any of them, both individually and in their
official capacities, and all other persons, corporations and other entities
connected with any of them (hereinafter collectively the "Releasees"), from any
and all causes of action, rights or claims in any way related to,
-7-
<PAGE>
connected with, or arising out of your employment by PSC and its termination, or
pursuant to any federal, state or local employment law, regulation or other
requirement, including without limitation Title VII of the Civil Rights Act of
1964, and applicable state fair employment practices statutes, each as may be
amended from time to time. You hereby release and forever discharge the
Releasees from any and all such causes of action, rights or claims.
22. PSC agrees that this Severance Agreement shall be in complete and
final settlement of and releases you, your heirs, executors, administrators and
assigns and all others connected with you, from, any and all causes of action,
rights or claims which PSC or the Companies have had in the past or now have
against you in any way related to or arising out of your employment and its
termination; provided, however, that PSC does not release you from any claim
arising out of any conduct by you that was not undertaken both in good faith and
in the reasonable belief that it was in the best interests of PSC to the extent
PSC or the Companies incur costs or expenses in connection with third party
claims or settlements initiated after the date hereof.
23. This Severance Agreement may be executed in one or more counterparts,
each of which shall constitute an original and all of which together shall
constitute one and the same document. This Severance Agreement shall be binding
upon, and shall inure to the benefit of the successors and assigns of the
parties hereto.
24. In addition to any and all remedies that may be available at law, in
the event of a breach of this Severance Agreement, PSC shall be entitled to
specific performance of the agreements and obligations of you hereunder and to
such other injunctive or other equitable relief as may be granted by a court of
competent jurisdiction.
In signing this agreement, you give PSC assurance that you have signed it
voluntarily and with a full understanding of its terms and that you have had
sufficient opportunity to consider this agreement and to consult with anyone of
your choosing before signing it and this
[The rest of this page has been intentionally left blank]
-8-
<PAGE>
letter shall take effect as a legally-binding agreement among you and PSC on the
basis set forth above. The enclosed copy of this letter, which you should also
sign and date, is for your records.
Sincerely,
PSC INC.
By:___________________________
Title:
Accepted and agreed:
- --------------------------
L. Michael Hone
Date:______________________
-9-
<PAGE>
Exhibit A
L. Michael Hone
4 Fawn Run
Pittsford, New York 14534
April __, 1997
Board of Directors
PSC, Inc.
675 Basket Road
Webster, New York 14580
To the Board of Directors:
I hereby resign from the employ of PSC, Inc. and from the employ of all of
PSC's subsidiaries and/or other affiliates (collectively with PSC, the
"Companies") and my 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, effective
immediately. I recognize and acknowledge that the Companies will take actions in
reliance upon this notice of resignation, and I acknowledge that it is
irrevocable.
Sincerely,
L. Michael Hone
-10-
3208
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