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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended October 2, 1998
OR
|_| Transition report pursuant to Section 13 or 15(d) of
the Securities exchange Act of 1934
Commission File No. 0-9919
PSC INC.
(Exact name of Registrant as Specified in Its Charter)
New York 16-0969362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
675 Basket Road, Webster, New York 14580
(Address of principal executive offices) (Zip Code)
(716) 265-1600
(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 November 11, 1998, there were 11,860,679 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
October 2, 1998 (Unaudited) and
December 31, 1997.........................................3-4
Consolidated Statements of Operations and
Retained Earnings for the three and nine
months ended:
October 2, 1998 (Unaudited) and
October 3, 1997 (Unaudited) ..............................5-6
Consolidated Statements of Cash Flows
for the nine months ended:
October 2, 1998 (Unaudited) and
October 3, 1997 (Unaudited) ............................... 7
Notes to Consolidated Financial
Statements (Unaudited) ..................................8-11
Item 2 -Management's Discussion and Analysis of
Financial Condition and Results of
Operations .........................................12-15
PART II: OTHER INFORMATION
Item 1 -Legal Proceedings .........................................16
Item 2 -Changes in Securities ....................................16
Item 3 -Defaults upon Senior Securities ...........................16
Item 4 -Submission of Matters to a Vote of Security Holders ......16
Item 5 -Other Information .......................................16
Item 6 -Exhibits and Reports on Form 8-K .........................16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
<TABLE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
<CAPTION>
October 2, 1998 December 31, 1997
--------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 2,489 $ 2,271
Accounts receivable, net of allowance
for doubtful accounts of $1,337
and $1,169, respectively ....................... 37,981 35,094
Inventories ....................................... 21,036 17,723
Prepaid expenses and other ........................ 2,165 1,569
----------- ----------
TOTAL CURRENT ASSETS ............................... 63,671 56,657
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation of $17,126
and $13,024, respectively ......................... 35,185 35,469
DEFERRED TAX ASSETS ....................................... 23,048 23,576
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $18,554 and $13,006, respectively ....... 52,449 57,096
---------- ----------
TOTAL ASSETS .............................................. $174,353 $172,798
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
(Continued)
<CAPTION>
October 2, 1998 December 31, 1997
--------------- -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ................... $ 13,908 $ 12,406
Accounts payable .................................... 17,050 18,000
Accrued expenses .................................... 9,087 7,405
Accrued payroll and related employee benefits ....... 5,538 5,559
Accrued acquisition related restructuring costs ..... 726 1,175
--------- ---------
TOTAL CURRENT LIABILITIES ......................... 46,309 44,545
LONG-TERM DEBT, less current maturities .................... 85,387 96,148
OTHER LONG-TERM LIABILITIES ................................ 1,815 2,775
SHAREHOLDERS' EQUITY:
Preferred shares, par value $.01;
10,000 authorized, 110 shares issued
and outstanding.
($11,000 aggregate liquidation value) ............. 1 1
Common shares, par value $.01;
40,000 authorized 11,855 and 11,390
shares issued and outstanding .................... 120 114
Additional paid-in capital .......................... 69,918 66,734
Retained earnings/(Accumulated deficit) ............. (28,891) (36,543)
Accumulated other comprehensive income/(loss)........ (69) (739)
Less treasury stock, 39 shares
repurchased, at cost ............................... (237) (237)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY ........................ 40,842 29,330
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ................................................ $174,353 $172,798
======== ========
</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>
Three Months Ended
------------------
October 2, October 3,
1998 1997
---- ----
<S> <C> <C>
NET SALES ............................................... $52,807 $53,191
COST OF SALES ........................................... 30,339 31,024
--------- ---------
Gross profit ................................... 22,468 22,167
OPERATING EXPENSES:
Engineering, research and development .......... 3,877 3,215
Selling, general and administrative ............ 10,180 10,270
Amortization of intangibles resulting
from business acquisitions ................ 1,683 1,674
----- -----
Income from operations ......................... 6,728 7,008
INTEREST AND OTHER INCOME /(EXPENSE):
Interest expense ............................... (2,479) (3,039)
Interest income ................................ 65 91
Other income/(expense) ......................... 14 (25)
--------- ---------
(2,400) (2,973)
--------- ----------
Income from continuing operations before
income tax provision ...................... 4,328 4,035
Income tax provision ........................... 1,601 1,493
-------- ---------
Net Income...................................... $2,727 $2,542
====== ======
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic .......................................... $0.23 $0.23
Diluted ........................................ $0.20 $0.22
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic .......................................... 11,817 11,207
Diluted ........................................ 13,331 11,793
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit)
beginning of period .......................... ($31,618) ($41,893)
Net income ..................................... 2,727 2,542
--------- ---------
Retained earnings/(Accumulated deficit),
end of period ................................ ($28,891) ($39,351)
========= ========
</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>
Nine Months Ended
-----------------
October 2, October 3,
1998 1997
---- ----
<S> <C> <C>
NET SALES ............................................... $158,312 $154,728
COST OF SALES ........................................... 92,293 91,947
--------- ---------
Gross profit ................................... 66,019 62,781
OPERATING EXPENSES:
Engineering, research and development .......... 11,617 10,296
Selling, general and administrative ............ 29,458 33,617
Severance and other costs ...................... - 4,191
Amortization of intangibles resulting
from business acquisitions ................ 5,108 5,022
--------- --------
Income from operations ......................... 19,836 9,655
INTEREST AND OTHER INCOME /(EXPENSE):
Interest expense ............................... (8,037) (9,793)
Interest income ................................ 185 342
Other income ................................... 161 83
---------- -------
(7,691) (9,368)
--------- ----------
Income from continuing operations before
income tax provision ...................... 12,145 287
Income tax provision ........................... 4,493 105
-------- -------
Income from continuing operations .............. 7,652 182
Discontinued operations:
Gain from discontinued operations, net of tax .. - 164
Loss on sale of discontinued operations,
net of tax ............................... - (265)
------------ ----------
Total loss from discontinued operations, net of tax - (101)
Net income ..................................... $7,652 $ 81
====== ====
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic:
Continuing operations ........................ $0.66 $0.02
Discontinued operations ...................... - (0.01)
------------ --------
Net income ................................... $0.66 $0.01
======== =====
Diluted:
Continuing operations ........................ $0.55 $0.02
Discontinued operations ...................... - (0.01)
--------- -----
Net income ................................... $0.55 $0.01
========= =====
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic .......................................... 11,677 11,162
Diluted ........................................ 14,026 11,454
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit)
beginning of period .......................... ($36,543) ($39,432)
Net income ..................................... 7,652 81
--------------- ------------
Retained earnings/(Accumulated deficit),
end of period ................................ ($28,891) ($39,351)
========= ========
</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>
Nine Months Ended
-----------------
October 2, October 3,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $7,652 $81
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization ........................... 9,890 10,466
Loss on disposition of assets ........................... 9 109
Loss on disposition of discontinued operations .......... - 265
Deferred tax assets ..................................... 528 1,077
Decrease (increase) in assets:
Accounts receivable ................................. (2,867) (3,918)
Inventories ......................................... (3,313) (366)
Prepaid expenses and other .......................... (596) (218)
Increase (decrease) in liabilities:
Accounts payable .................................... (950) 2,094
Accrued expenses .................................... 1,682 (2,973)
Accrued payroll and related employee benefits ....... (731) (2,983)
Accrued acquisition related restructuring costs ..... (508) (3,090)
------ --------
Net cash provided by operating activities ........ 10,796 544
----------- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net .................................... (4,067) (5,887)
Additions to intangible and other assets ..................... (1,440) (63)
Repayment of notes for stock option activity ................. 325 -
--------- -----------
Net cash used in investing activities ...... (5,182) (5,950)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt, net .............................. (9,259) (12,784)
(Payment of) additions to other long-term liabilities ........ (110) 1,482
Issuance of preferred shares and warrants, net .............. - 10,212
Exercise of options and issuance of common shares and warrants 2,727 664
Tax benefit from exercise or early disposition of stock options 464 -
---- ------------
Net cash used in financing activities ..... (6,178) (426)
---------- -----
FOREIGN CURRENCY TRANSLATION ..................................... 782 (1,163)
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................. 218 (6,995)
CASH AND CASH EQUIVALENTS:
Beginning of period ..................................... 2,271 10,838
------- --------
End of period ........................................... $2,489 $3,843
====== ======
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED October 2, 1998 and October 3, 1997
(All amounts in thousands, except per share data)
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared by
the Company without audit. In the opinion of management, these financial
statements include all adjustments necessary to present fairly the
Company's financial position as of October 2, 1998, the results of
operations for the three and nine months ended October 2, 1998 and October
3, 1997 and its cash flows for the nine months ended October 2, 1998 and
October 3, 1997. The results of operations for the three and nine months
ended October 2, 1998 are not necessarily indicative of the results to be
expected for the full year.
Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1997 annual report on
Form 10-K.
INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Elements of cost include materials, labor and overhead
and consist of the following:
October 2, 1998 December 31, 1997
Raw materials $12,012 $10,979
Work-in-process 4,132 3,727
Finished goods 4,892 3,017
--------- ---------
$21,036 $17,723
======= =======
(2) LONG-TERM DEBT
Long-term debt consists of the following:
October 2, 1998 December 31, 1997
--------------- -----------------
Senior Term Loan A $39,500 $47,000
Senior Term Loan B 23,250 24,000
Senior revolving credit 3,000 3,000
Subordinated term loan 29,532 29,488
Subordinated promissory note 3,750 4,688
Other 263 378
-------- -----------
99,295 108,554
Less: current maturities 13,908 12,406
--------- ---------
$85,387 $96,148
======= =======
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED October 2, 1998 and October 3, 1997
(All amounts in thousands, except per share data)
(Unaudited)
(3) SHAREHOLDERS' EQUITY
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income", which requires comprehensive
income and its components to be presented in the financial statements.
Comprehensive income, which includes net income, foreign currency
translation adjustments and unrealized losses on securities, was $3,393
and $2,301 for the three months ended October 2, 1998 and October 3, 1997,
respectively, and $8,322 and ($1,082) for the nine months ended October 2,
1998 and October 3, 1997, respectively.
During the nine month period ended October 2, 1998, employees purchased
approximately 107 shares at an average price of $6.92 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, 1998 Weighted January 1, 1997 Weighted
to Average to Average
October 2, 1998 Price Dec. 31, 1997 Price
--------------- ----- ------------- -----
<S> <C> <C> <C> <C>
Options outstanding
at beginning of period ..... 3,046 $7.76 2,818 $8.33
Options granted ............... 461 9.19 1,094 6.98
Options exercised ............. (359) 7.19 (162) 7.51
Options forfeited/canceled .... (102) 7.26 (704) 9.00
------- -----
Options outstanding at
end of period .............. 3,046 7.97 3,046 7.76
Number of options at end
of period:
Exercisable ................ 1,727 1,884
Available for grant ........ 1 394
</TABLE>
During the nine month period ended October 2, 1998, 31 forfeited
options were cancelled due to the expiration of the 1987 Stock Option
Plan in December 1997. These options are not available for future grants.
(4) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Basic EPS was computed by dividing reported earnings available to common
shareholders by weighted average shares outstanding during the year.
Diluted EPS for the three and nine months ended October 2, 1998 and
October 3, 1997 was determined on the following assumptions:
1) Warrants issued in connection with the private placement of equity were
converted upon issuance on January 1, 1998,
2) Warrants issued in connection with the acquisition of Spectra were converted
on January 1, 1998 and
3) Preferred Shares were converted on September 10, 1997 and January 1, 1998.
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED October 2, 1998 and October 3, 1997
(All amounts in thousands, except per share data)
(Unaudited)
The following options and warrants were not included in the computation of
diluted EPS since the exercise prices were greater than the average market
price of Common Shares. Options to purchase 1,524 and 1,299 common shares
at an average price of $7.87 and $9.30 per share were outstanding for the
three months ended October 2, 1998 and October 3, 1997, respectively.
Options to purchase 469 and 1,314 common shares at an average price of
$9.65 and $9.27 per share were outstanding for the nine months ended
October 2, 1998 and October 3, 1997, respectively. Warrants to purchase
1,155 common shares at $8.00 per share were outstanding for the three
months ended October 2, 1998 and October 3, 1997. Warrants to purchase
1,155 common shares were outstanding for the nine months ended October 3,
1997.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------------
October 2, 1998 October 3, 1997
--------------- ---------------
Income Shares Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income available to
common shareholders $2,727 11,817 $0.23 $2,542 11,207 $0.23
===== =====
Effect of dilutive securities:
Options - 139 - 238
Preferred Shares - 1,375 - 348
---------- ----- ----------- -------
Diluted EPS
Income available to
common shareholders
and assumed conversions $2,727 13,331 $0.20 $2,542 11,793 $0.22
====== ====== ===== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------------------------------------------------------
October 2, 1998 October 3, 1997
--------------- ---------------
Income Shares Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common shareholders $7,652 11,677 $0.66 $81 11,162 $0.01
===== =====
Effect of dilutive securities:
Options - 767 - 178
Warrants - 207 - -
Preferred Shares - 1,375 - 114
--- ------ --- -----
Diluted EPS
Income available to
common shareholders
and assumed conversions $7,652 14,026 $0.55 $81 11,454 $0.01
====== ====== ===== === ====== =====
</TABLE>
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED October 2, 1998 and October 3, 1997
(All amounts in thousands, except per share data)
(Unaudited)
(5) DERIVATIVES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999 and cannot be applied
retroactively. SFAS No. 133 must be applied to derivative instruments that were
issued, acquired or substantively modified after December 31, 1997. The Company
has not yet quantified the impacts of adopting SFAS No. 133 on the financial
statements and has not determined the timing of or method of adopting SFAS No.
133.
The Company monitors its exposure to interest rate and foreign currency exchange
risk. The Company has limited involvement with derivative financial instruments
and does not use them for trading purposes. The Company uses derivative
instruments solely to reduce the financial impact of these risks.
Interest Rate Risk:
The Company's exposure to interest rate changes relates to its long-term debt.
The Company has entered into interest rate swap agreements with its senior
lending banks in accordance with the terms of the senior credit agreement. The
Company uses these interest rate swap agreements to reduce its exposure to
interest rate changes. The differentials to be received or paid under these
interest rate swap agreements are recognized as a component of interest expense
in the Consolidated Statements of Operations.
Foreign Currency Exchange Rate Risk:
The Company's exposure to foreign currency exchange changes relates primarily to
its international subsidiaries. The Company may occasionally enter into forward
foreign exchange contracts as a hedge against currency fluctuations relating to
these foreign transactions and commitments denominated in foreign currencies.
The foreign exchange contracts generally have maturities of approximately 30
days and require the Company to exchange foreign currencies for U.S. dollars at
maturity, at rates agreed to at the inception of the contracts. Gains and losses
on forward contracts are offset against the foreign exchange gains and losses on
the underlying hedged items and are recorded in the Consolidated Statements of
Operations.
<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, 1997 annual report on Form 10-K.
Results of Operations: Three Months ended October 2, 1998 and October 3, 1997
- ------------------------------------------------------------------------------
Net Sales. Consolidated net sales during the three months ended October 2, 1998
decreased $0.4 million or 1% compared with the same period in 1997.
International net sales increased 19% and represented approximately 54% of net
sales in the third quarter of 1998 versus 45% of net sales in the third quarter
of 1997. The increase in international sales is primarily due to the
introduction of new products and the continued growth in the Company's European
customer sales.
Gross Profit. Consolidated gross profit during the three months ended October 2,
1998 increased $0.3 million or 1% compared with the same period in 1997. As a
percentage of sales, gross profit increased from 41.7% to 42.5%. The increase in
gross profit percentage is primarily due to the change in product mix of the
Company's handheld and fixed position product lines.
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $0.7 million or 21%, as compared to the same period in
1997. As a percentage of sales, ER&D was 7.3% in the third quarter of 1998
versus 6.0% of net sales in the third quarter of 1997. The dollar increase is
due to additional investments in developing new products and enhancing existing
products.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses decreased $0.1 million or 1%, as compared to the same period in 1997.
As a percentage of sales, SG&A was 19.3% in 1998 and 1997.
Acquisition Related Restructuring and Other Matters. 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
October 2, 1998, all positions targeted in the restructuring program have been
eliminated. Restructuring actions are expected to be completed by the end of
1998. The amount of the restructuring accrual at October 2, 1998 was
approximately $0.7 million, which relates to current contractual obligations.
There have been no reallocations or reestimates to date.
Interest Expense. Interest expense decreased $0.6 million versus the comparable
period in 1997. The decrease is due to lower principal balances outstanding and
a reduction in the Company's interest rates on its senior term loans and
revolving line of credit, which resulted from an amendment to the bank credit
agreements in April 1998.
Provision for Income Taxes. The Company recorded a $1.6 million tax provision in
1998 primarily due to an increase in pretax income. The Company's effective tax
rate was 37% in both 1998 and 1997. The Company expects to record income tax
expense at or about the combined federal and state statutory tax rate in 1998.
<PAGE>
Results of Operations: Nine Months ended October 2, 1998 and October 3, 1997
- -----------------------------------------------------------------------------
Net Sales. Consolidated net sales during the nine months ended October 2, 1998
increased $3.6 million or 2% compared with the same period in 1997.
International net sales increased 20% and represented approximately 52% of net
sales in the first nine months of 1998 versus 45% of net sales in the first nine
months of 1997. The increases are primarily due to the introduction of new
products and the continued growth in the Company's European customer sales
offset by the effects of the stronger U.S. dollar. The translation of sales
denominated in foreign currencies was negatively impacted by $2.2 million in
1998 versus 1997.
Gross Profit. Consolidated gross profit during the nine months ended October 2,
1998 increased $3.2 million or 5% compared with the same period in 1997. As a
percentage of sales, gross profit increased from 40.6% to 41.7%. The increase in
gross profit percentage is primarily due to the change in product mix of the
Company's handheld and fixed position product lines and a $1.0 million inventory
write-off which was recorded in 1997 for the discontinuation of certain
products.
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $1.3 million or 13%, as compared to the same period in
1997. As a percentage of sales, ER&D was 7.3% in the first nine months of 1998
versus 6.7% of net sales in the first nine months of 1997. The dollar and
percentage of sales increases are due to additional investments in developing
new products and enhancing existing products.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses decreased $4.2 million or 12%, as compared to the same period in 1997.
As a percentage of sales, SG&A was 18.6% in 1998 versus 21.7% in 1997. As a
result of efficiencies developed due to the integration of Spectra, the Company
has continued to reduce its general and administrative expenses as a percentage
of sales.
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.
Acquisition Related Restructuring and Other Matters. 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
October 2, 1998, all positions targeted in the restructuring program have been
eliminated. Restructuring actions are expected to be completed by the end of
1998. The amount of the restructuring accrual at October 2, 1998 was
approximately $0.7 million, which relates to current contractual obligations.
There have been no reallocations or reestimates to date. During the second
quarter of 1998, the Company sold its 10% ownership interest in an industrial
partner for approximately $2.0 million and incurred a charge for the release
from a manufacturing rights and software licensing agreement for $1.9 million.
Interest Expense. Interest expense decreased $1.8 million versus the comparable
period in 1997. The decrease is primarily due to lower principal balances
outstanding and reduced interest rates, which resulted from an amendment to the
bank credit agreements in April 1998.
Provision for Income Taxes. The Company recorded a $4.5 million tax provision in
1998 primarily due to an increase in pretax income. The Company's effective tax
rate was 37% in both 1998 and 1997. The Company expects to record income tax
expense at or about the combined federal and state statutory tax rate in 1998.
Discontinued Operations. During the second quarter of 1997, the Company
completed the sale of TxCOM, which was acquired as part of the Spectra
acquisition, for approximately $1.0 million. A loss of approximately $0.3
million, net of tax, was recorded.
<PAGE>
Liquidity and Capital Resources:
Current assets increased $7.0 million from December 31, 1997 primarily due to an
increase in accounts receivable and inventory. Current liabilities increased
$1.8 million primarily due to an increase in current portion of long-term debt
and accrued expenses offset in part by a reduction in accounts payable. As a
result, working capital increased $5.2 million from December 31, 1997.
Property, plant and equipment expenditures totaled $4.1 million for the nine
months ended October 2, 1998 compared with $5.9 million for the nine months
ended October 3, 1997. The 1998 expenditures primarily related to manufacturing
equipment and new product tooling.
The long-term debt to capital percentage was 67.6% at October 2, 1998 versus
76.6% at December 31, 1997 primarily due to increased equity from the results of
operations and quarterly payments on the Company's senior term loans and
subordinated promissory note. At October 2, 1998, liquidity immediately
available to the Company consisted of cash and cash equivalents of $2.5 million.
The Company has credit facilities totaling $116.5 million, of which, $17.0
million is 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.
Year 2000
The Year 2000 problem is the result of many existing computer programs written
in two digits, rather than four, to define the applicable year. Accordingly,
date-sensitive software or hardware may not be able to distinguish between the
year 1900 and year 2000, and programs that perform arithmetic operations,
comparisons or sorting of date fields may begin yielding incorrect results. This
could potentially cause a system failure or miscalculations that could disrupt
operations, including, among other things, an inability to process transactions,
send invoices, or engage in normal business activities. These Year 2000 issues
affect virtually all companies and organizations.
The Company has developed plans to address the potential risks it faces as a
result of Year 2000 issues. These risks include, among other things, the
possible failure or malfunction of the Company's internal information systems,
possible problems with the products and services the Company has provided its
customers, and possible problems arising from the failure of the Company's
supplier systems.
<PAGE>
The Company has developed a three-phase plan to address its Year 2000 issues:
(1) Identification of software and hardware. This includes the
following:
(a) Applications and information technology (IT) equipment,
which includes all mainframe, network and desktop software
and hardware, custom and packaged applications, and IT
embedded systems;
(b) Non-information technology (non-IT) embedded systems. This
includes non-IT equipment and machinery. Non-IT embedded
systems, such as security, fire prevention and climate
control systems typically include embedded technology; and
(c) Vendor relationships. This includes significant third-party
vendors and supplier interfaces.
Both domestically and internationally, the Company has
substantially completed the identification stage and expects this
phase to be fully completed by the end of December 1998.
(2) Assessment of the software and hardware identified. This phase
includes the evaluation of the software and hardware identified
for Year 2000 compliance, the determination of the remediation
method and resources required, and the development of an
implementation plan. A significant portion of the assessment
stage has been completed. The Company expects this phase to be
fully completed by the end of January 1999.
(3) Implementation of a remediation plan. This phase includes testing
some modifications/upgrades in a Year 2000 simulated environment
and vendor interface testing, if necessary. The Company has
commenced implementation, both domestically and internationally,
and expects this phase to be completed by the end of August 1999.
The Company's remediation plan for its Year 2000 issue is an
ongoing process and the estimated completion dates above are
subject to change.
Overall, at this time the Company believes that its systems will be Year 2000
compliant in a timely manner for several reasons. Several significant operating
systems are already compliant. Internationally, the Company is currently
implementing new computer systems that were developed in the United States and
are currently Year 2000 compliant. To the extent that current systems that will
not be replaced have been determined to be non-compliant, the Company is working
with the suppliers of such systems to obtain upgrades and/or enhancements to
ensure Year 2000 compliance. Also, comprehensive testing of all critical systems
is planned to be conducted in a simulated Year 2000 environment.
<PAGE>
The Company believes that it will not be required to modify or replace
significant portions of the products it presently develops and provides to
customers as such products are not date dependent and, accordingly, will
function properly with respect to dates in the Year 2000. Any products that are
date dependent will be made Year 2000 complaint. All new products will be Year
2000 ready when released.
At this stage in the process, the Company has not identified any significant
risks. However, the Company believes that the area of the greatest potential
risk relates to significant suppliers' failing to remediate their Year 2000
issues in a timely manner. The Company is conducting formal communications with
its significant suppliers to determine the extent to which it may be affected by
those parties' plans to remediate their own Year 2000 issue in a timely manner.
If a number of significant suppliers are not Year 2000 compliant, this could
have a material adverse effect on the Company's results of operations, financial
position or cash flow. At this point, the Company has not been advised by any
significant supplier that it is not Year 2000 compliant.
The Company is developing its contingency plans and expects to have them
completed by June 1999. To mitigate the effects of the Company's or significant
suppliers' potential failure to remediate the Year 2000 issue in a timely
manner, the Company will take appropriate actions. Such actions may include
having arrangements for alternate suppliers, using manual intervention to ensure
the continuation of operations where necessary and scheduling activity in
December 1999 that would normally occur at the beginning of January 2000. If it
becomes necessary for the Company to take these corrective actions, it is
uncertain, until the contingency plans are finalized, whether this would result
in significant delays in business operations or have a material adverse effect
on the Company's results of operations, financial position or cash flow.
Based upon the Company's current estimates, incremental out-of-pocket costs of
its Year 2000 program are expected not to be material. These costs are expected
to be incurred primarily in fiscal 1999 and will be associated primarily with
the remediation of existing computer software and hardware. Such costs are
estimated to be approximately $0.5 million. Such costs do not include internal
management time, which the Company does not separately track, nor the deferral
of other projects, the effects of which are not expected to be material to the
Company's results of operations or financial condition. The Company's total Year
2000 project costs include the estimated costs and time associated with the
impact of third-party Year 2000 issues based on presently available information.
However, there can be no guarantee that other companies upon which the Company
relies will be able to timely address their Year 2000 compliance issues, the
effects of which may be an adverse impact on the Company's results of
operations.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
Certain statements contained in this Management's Discussion and Analysis may be
forward-looking in nature, or "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Management cautions that these
statements are estimates of future performance and are highly dependent upon a
variety of important factors, which could cause actual results to differ
materially from the estimate. These factors include the market acceptance of
products, competitive product offerings, the disposition of legal issues, the
ability of the Company to identify and address successfully the Year 2000 issues
in a timely manner and at costs that are reasonably in line with projections,
and the ability of the Company's vendors to identify and address successfully
their own Year 2000 issues in a timely manner. Profits also will be affected by
the Company's ability to control manufacturing and operating costs. Reference
should be made to filings with the Securities and Exchange Commission for
further discussion of factors that could affect the Company's future results.
<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,
1997 (the "Litigation") are incorporated herein by reference.
On September 11, 1998, the Company made a motion for partial summary
judgment on the issue of patent misuse on the part of Symbol. By
letter, dated September 17, 1998, the Court advised the parties that
the trial date for the contract issues, scheduled for October 13,
1998, was canceled and that the partial summary judgment motion would
be heard on October 7, 1998. Thereafter, Symbol cross moved for
partial summary judgment that it had not engaged in patent misuse.
Oral argument of the motions took place before the Court on October 7,
1998.
On October 22, 1998, the Court granted the Company's motion and denied
Symbol's cross motion. The Court stated that "Because Symbol has
engaged in patent misuse with respect to the '297 and '186 patents by
attempting to collect double royalties on the same product under those
patents, I hereby grant plaintiff's partial motion for summary
judgment, deny defendant's motion for summary judgment, and find that
the '297 and '186 patents are unenforceable as against PSC from April
1, 1996, the day on which Symbol was notified of the misuse, through
the present, and until such misuse is purged. Accordingly, PSC is not
obligated to pay royalties to Symbol under those patents pursuant to
either its 1991 or 1996 licensing agreements for products manufactured
or sold on or after April 1, 1996."
Symbol has moved for reconsideration of the Court's Decision, and has
also moved for permission to appeal immediately, rather than wait
until the end of the case. These motions are scheduled to be heard on
December 16, 1998.
The trial of the contract issues has not yet been rescheduled.
Item 2: Changes in Securities: None
Item 3: Defaults upon Senior Securities: None
Item 4: Submission of Matters of Shareholders to a Vote of
Security Holders: None
Item 5: Other Information: None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits: None
(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: November 16, 1998..........By: /s/ Robert C. Strandberg
Robert C. Strandberg
President and Chief Executive Officer
DATE: November 16, 1998..........By: /s/ William J. Woodard
William J. Woodard
Vice President and Chief Financial Officer
DATE: November 16, 1998..........By: /s/ Michael J. Stachura
Michael J. Stachura
Vice President of Finance
(Principal Accounting Officer)
<TABLE> <S> <C>
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Financial Data Schedule - Q3 1998
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