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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 1, 1999
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 5, 1999, there were 12,080,550 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 1, 1999 (Unaudited) and
December 31, 1998...............................................3-4
Consolidated Statements of Income and
Retained Earnings for the three and nine months ended:
October 1, 1999 (Unaudited) and
October 2, 1998 (Unaudited) ....................................5-6
Consolidated Statements of Cash Flows for the nine months ended:
October 1, 1999 (Unaudited) and
October 2, 1998 (Unaudited) ......................................7
Notes to Consolidated Financial
Statements (Unaudited) ........................................8-12
Item 2 -Management's Discussion and Analysis of
Financial Condition and Results of
Operations ...............................................13-17
PART II: OTHER INFORMATION
Item 1 -Legal Proceedings ...............................................18
Item 2 -Changes in Securities ..........................................18
Item 3 -Defaults upon Senior Securities .................................18
Item 4 -Submission of Matters to a Vote of Security Holders ............18
Item 5 -Other Information................................................18
Item 6 -Exhibits and Reports on Form 8-K ...............................18
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except per share data)
Oct. 1, Dec.31,
1999 1998
---------- -------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 5,924 $ 6,180
Accounts receivable, net of allowance
for doubtful accounts of $1,558
and $1,492, respectively ..................... 36,857 37,121
Inventories .................................... 23,970 17,250
Prepaid expenses and other ..................... 2,876 2,946
-------- --------
TOTAL CURRENT ASSETS ............................ 69,627 63,497
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation of $22,144
and $18,639, respectively ...................... 26,454 35,397
DEFERRED TAX ASSETS .................................... 18,738 21,244
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $25,890 and $20,419, respectively .... 50,449 51,125
-------- --------
TOTAL ASSETS ........................................... $165,268 $171,263
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except per share data)
(Continued)
<CAPTION>
Oct. 1, Dec. 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .................. $ 15,804 $ 14,402
Accounts payable ................................... 18,883 18,190
Accrued expenses ................................... 6,752 8,035
Accrued payroll and related employee benefits ...... 5,651 5,628
Accrued acquisition related restructuring costs .... 125 415
--------- ---------
TOTAL CURRENT LIABILITIES ............................ 47,215 46,670
LONG-TERM DEBT, less current maturities ................... 61,632 78,806
OTHER LONG-TERM LIABILITIES ............................... 1,957 1,588
SHAREHOLDERS' EQUITY:
Series A convertible preferred shares, par value $.01; 1 1
110 shares authorized, issued and outstanding
($11,000 aggregate liquidation value)
Series B preferred shares, par value $.01; 175
authorized, 0 shares issued and outstanding ........ -- --
Undesignated preferred shares, par value $.01;
9,715 authorized, 0 shares issued and outstanding .. -- --
Common shares, par value $.01;
40,000 authorized 12,080 and 11,869
shares issued and outstanding ................... 121 119
Additional paid-in capital ......................... 71,766 70,068
Retained earnings/(Accumulated deficit) ............ (16,606) (26,027)
Accumulated other comprehensive income/(loss) ...... (509) 275
Less treasury stock repurchased at cost,
46 and 39 shares ................................... (309) (237)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ......................... 54,464 44,199
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ............................................... $ 165,268 $ 171,263
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(All amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
---------------------
Oct. 1, Oct. 2,
1999 1998
---- ----
NET SALES ....................................... $ 59,031 $ 52,807
COST OF SALES ................................... 34,130 30,339
-------- --------
Gross profit ........................... 24,901 22,468
OPERATING EXPENSES:
Engineering, research and development .. 4,622 3,877
Selling, general and administrative .... 11,435 10,180
Amortization of intangibles resulting
from business acquisitions ........ 1,603 1,683
-------- --------
Income from operations ................. 7,241 6,728
INTEREST AND OTHER INCOME:
Interest expense ....................... (1,826) (2,479)
Interest income ........................ 70 65
Other income ........................... 425 14
-------- --------
(1,331) (2,400)
-------- --------
Income before income tax provision ..... 5,910 4,328
Income tax provision ................... 2,068 1,601
-------- --------
Net income ............................. $ 3,842 $ 2,727
======== ========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic .................................. $ 0.32 $ 0.23
Diluted ................................ $ 0.27 $ 0.20
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic .................................. 12,019 11,817
Diluted ................................ 14,021 13,331
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit)
beginning of period .................. ($20,448) ($31,618)
Net income ............................. 3,842 2,727
-------- --------
Retained earnings/(Accumulated deficit),
end of period ........................ ($16,606) ($28,891)
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(All amounts in thousands, except per share data)
(Unaudited)
Nine Months Ended
-----------------------
Oct. 1, Oct. 2,
1999 1998
---- ----
NET SALES ....................................... $ 176,177 $ 158,312
COST OF SALES ................................... 101,649 92,293
--------- ---------
Gross profit ........................... 74,528 66,019
OPERATING EXPENSES:
Engineering, research and development .. 13,169 11,617
Selling, general and administrative .... 34,593 29,458
Severance and other costs .............. 2,103 --
Amortization of intangibles resulting
from business acquisitions ........ 4,815 5,108
--------- ---------
Income from operations ................. 19,848 19,836
INTEREST AND OTHER INCOME /(EXPENSE):
Interest expense ....................... (5,908) (8,037)
Interest income ........................ 209 185
Other income/(expense) ................. 337 161
--------- ---------
(5,362) (7,691)
--------- ---------
Income before income tax provision ..... 14,486 12,145
Income tax provision ................... 5,065 4,493
--------- ---------
Net income ............................. $ 9,421 $ 7,652
========= =========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic .................................. $ 0.79 $ 0.66
Diluted ................................ $ 0.68 $ 0.55
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic .................................. 11,948 11,677
Diluted ................................ 13,873 14,026
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit)
beginning of period .................. ($ 26,027) ($ 36,543)
Net income ............................. 9,421 7,652
--------- ---------
Retained earnings/(Accumulated deficit),
end of period ........................ ($ 16,606) ($ 28,891)
========= =========
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
-----------------
Oct. 1, Oct. 2,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 9,421 $ 7,652
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................. 10,056 9,890
Loss on disposition of assets .................................. -- 9
Deferred tax assets ............................................ 2,506 528
(Increase) decrease in assets:
Accounts receivable ........................................ 255 (2,867)
Inventories ................................................ (6,720) (3,313)
Prepaid expenses and other ................................. 70 (596)
Increase (decrease) in liabilities:
Accounts payable ........................................... 693 (950)
Accrued expenses ........................................... (1,283) 1,682
Accrued payroll and related employee benefits .............. (46) (731)
Accrued acquisition related restructuring costs ............ (290) (508)
-------- --------
Net cash provided by operating activities ............... 14,662 10,796
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ........................................... (3,682) (4,067)
Additions to intangible and other assets ............................ (4,842) (1,440)
Proceeds from sale/leaseback and land sale .......................... 8,620 --
Repayment of notes for stock option activity ........................ -- 325
-------- --------
Net cash provided by (used in) investing activities 96 (5,182)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Addition to long-term debt .......................................... 7,000 6,500
Payment of long-term debt .......................................... (22,772) (15,759)
Addition to (payment of) other long-term liabilities, net ........... 81 (110)
Purchase of treasury stock .......................................... (72) --
Exercise of options and issuance of common shares ................... 1,515 2,727
Tax benefit from exercise or early disposition of stock options ..... 43 464
-------- --------
Net cash used in financing activities ............ (14,205) (6,178)
-------- --------
FOREIGN CURRENCY TRANSLATION ............................................ (809) 782
-------- --------
NET (DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS .................................................... (256) 218
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................ 6,180 2,271
-------- --------
End of period .................................................. $ 5,924 $ 2,489
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED October 1, 1999 and October 2, 1998
(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 1, 1999, the results of
operations for the three and nine months ended October 1, 1999 and October
2, 1998 and its cash flows for the nine months ended October 1, 1999 and
October 2, 1998. The results of operations for the three and nine months
ended October 1, 1999 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, 1998 annual report on
Form 10-K.
INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Inventory costs include material, direct labor and
overhead and consist of the following:
Oct. 1, 1999 Dec. 31, 1998
------------------ ---------------
Raw materials $14,863 $11,231
Work-in-process 4,604 2,888
Finished goods 4,503 3,131
============ ===========
$23,970 $17,250
============ ===========
(2) LONG-TERM DEBT
Long-term debt consists of the following:
Oct. 1, 1999 Dec. 31, 1998
------------------ ---------------
Senior term loan A $25,004 $37,000
Senior term loan B 20,246 23,000
Subordinated term loan 29,592 29,547
Subordinated promissory note 2,500 3,438
Other 94 223
------------ -----------
77,436 93,208
Less: current maturities 15,804 14,402
------------ -----------
$61,632 $78,806
============ ===========
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED October 1, 1999 and October 2, 1998
(All amounts in thousands, except per share data)
(Unaudited)
(3) SEVERANCE AND OTHER COSTS
During the first quarter of 1999, the Company recorded a pretax charge of
$2.1 million for severance and other costs. Of the total charge, $1.4
million was for employee severance and benefit costs for the elimination
of approximately 140 positions primarily at the Webster, New York
manufacturing facility resultant from the consolidation of all high volume
handheld scanner manufacturing at the Company's Eugene, Oregon facility.
The remaining $0.7 is for early termination of the lease on the Company's
Webster offsite storage and repair facility. As of October 1, 1999, the
amount of the severance and other accruals was approximately $0.5 million,
which relates to current contractual obligations. These costs reduced 1999
income before income tax provision, net income, basic EPS and diluted EPS
by $2.1 million, $1.4 million, $0.11 and $0.10, respectively.
(4) SALE LEASEBACK
During May 1999, the Company sold its facilities and property located in
Eugene, Oregon and simultaneously entered into a lease agreement for the
facilities for a fifteen year period. The lease is being accounted for as
an operating lease, and the resulting gain of $0.5 million is being
amortized over the life of the lease. The annual rental expense will be
$0.8 million, which will be paid in quarterly installments. The net
proceeds from the sale totaled $8.0 million which were utilized to reduce
the senior credit facilities.
(5) SHAREHOLDERS' EQUITY
Comprehensive income, which includes net income, foreign currency
translation adjustments and unrealized gain/loss on securities, was $3,960
and $3,392 for the three months ended October 1, 1999 and October 2, 1998,
respectively, and $8,300 and $8,321 for the nine months ended October 1,
1999 and October 2, 1998, respectively.
During the nine month period ended October 1, 1999, employees purchased
approximately 129 shares at an average price of $7.49 per share under the
provisions of the Company's Employee Stock Purchase Plan.
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED October 1, 1999 and October 2, 1998
(All amounts in thousands, except per share data)
(Unaudited)
Changes in the status of options under the Company's stock option plans
are summarized as follows:
<TABLE>
January 1, 1999 Weighted January 1, 1998 Weighted
To Average To Average
October 1, 1999 Price December 31, 1998 Price
-------------------- ------------ ----------------------- -------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of period 3,027 $7.98 3,046 $7.76
Options granted 84 9.23 391 8.92
Options exercised (75) 7.32 (310) 6.42
Options forfeited/canceled (58) 7.80 (100) 7.28
======== ======== ======== ========
Options outstanding at
end of period 2,978 $8.03 3,027 $7.98
======== ======== ======== ========
Number of options at end
of period:
Exercisable 1,984 1,820
Available for grant 953 4
</TABLE>
On May 12, 1999, the shareholders approved an increase in the number of
common shares available for the issuance of stock options and restricted
stock awards under the 1994 Stock Option Plan by 1,000 shares.
During the nine month period ended October 1, 1999, 25 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.
(6) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Basic EPS was computed by dividing reported earnings available to common
shareholders by weighted average shares outstanding during the year.
Diluted EPS for the three months ended October 1, 1999 and October 2, 1998
was determined on the following assumptions: (1) Preferred Shares and
related warrants issued in connection with the private placement of equity
were converted upon issuance on January 1, 1998 and (2) warrants issued in
connection with the acquisition of Spectra were converted on January 1,
1998.
The following options 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 497 and 1,524 common shares at an
average price of $10.76 and $7.87 per share were outstanding for the three
months ended October 1, 1999 and October 2, 1998, respectively. Options to
purchase 512 and 469 common shares at an average price of $10.25 and $9.65
per share were outstanding for the nine months ended October 1, 1999 and
October 2, 1998, respectively.
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED October 1, 1999 and October 2, 1998
(All amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------
October 1, 1999 October 2, 1998
--------------------------------------------- --------------------------------------------
Per Per
Income Shares Share Income Shares Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common
shareholders $3,842 12,019 $0.32 $2,727 11,817 $0.23
===== =====
Effect of dilutive securities:
Options -- 448 -- 139
Warrants -- 179 -- --
Preferred Shares -- 1,375 -- 1,375
------------ ------------------ -------------- ------------------
Diluted EPS:
Income available to common
shareholders and assumed
conversions $3,842 14,021 $0.27 $2,727 13,331 $0.20
====== ====== ===== ====== ====== =====
Nine Months Ended
-------------------------------------------------------------------------------------------
October 1, 1999 October 2, 1998
------------------------------------------- --------------------------------------------
Per Per
Income Shares Share Income Shares Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
Basic EPS:
Income available to common
shareholders $9,421 11,948 $0.79 $7,652 11,677 $0.66
===== =====
Effect of dilutive securities:
Options -- 406 -- 767
Warrants -- 144 -- 207
Preferred Shares -- 1,375 -- 1,375
------------ ------------------ -------------- ------------------
Diluted EPS:
Income available to common
shareholders and assumed
conversions $9,421 13,873 $0.68 $7,652 14,026 $0.55
====== ====== ===== ====== ====== =====
</TABLE>
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED October 1, 1999 and October 2, 1998
(All amounts in thousands, except per share data)
(Unaudited)
(7) 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. As amended by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133", SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 and cannot be applied retroactively. 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. Cash flows from interest rate swap agreements and foreign
currency forward exchange contracts are classified in the same category as
the item being hedged.
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 Income.
Foreign Currency Exchange Rate Risk:
The Company's exposure to foreign currency relates primarily to its
international subsidiaries. Sales to certain countries are denominated in
their local currency. The Company enters into foreign currency forward
exchange contracts to minimize the effect of foreign currency fluctuations
relating to these transactions and commitments denominated in foreign
currencies. The foreign exchange contracts generally have maturities of
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 Income.
<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, 1998 annual report on Form 10-K.
Results of Operations: Three Months ended October 1, 1999 and October 2, 1998
- ------------------------------------------------------------------------------
Net Sales. Consolidated net sales during the three months ended October 1, 1999
increased $6.2 million or 12% compared with the same period in 1998.
International net sales increased 6% and represented approximately 47% of net
sales in the third quarter of 1999 versus 50% of net sales in the third quarter
of 1998. The overall increase in consolidated net sales is attributed primarily
to increased sales in the handheld product lines and U-Scan(R) Express
Self-Checkout Systems. The increase in international sales is primarily due to
new products and the continued growth in European customer sales.
Gross Profit. Consolidated gross profit during the three months ended October 1,
1999 increased $2.4 million or 11% compared with the same period in 1998. As a
percentage of sales, gross profit decreased slightly from 42.5% to 42.2%. The
decrease in gross profit percentage is primarily due to negative foreign
currency impact and costs incurred to transition manufacturing activities from
Webster, New York to Eugene, Oregon.
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $0.7 million or 19%, as compared to the same period in
1998. As a percentage of sales, ER&D was 7.8% in the third quarter of 1999
versus 7.3% of net sales in the third quarter of 1998.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses increased $1.3 million or 12%, as compared to the same period in 1998.
As a percentage of sales, SG&A was 19.4% in 1999 versus 19.3% in 1998. The
dollar increase is primarily due to an increase in the international sales
infrastructure and additional investments in the Company's marketing
organization and marketing programs.
Interest Expense. Interest expense decreased $0.7 million versus the comparable
period in 1998. The decrease is due to lower principal balances outstanding and
a reduction in the Company's interest rates on its senior term loans as the
Company achieved key milestones under certain financial covenants contained in
the bank credit agreements.
Provision for Income Taxes. The Company's effective tax rate was 35% in 1999
versus 37% in 1998 due to larger anticipated Foreign Sales Corporation benefits.
<PAGE>
Results of Operations: Nine Months ended October 1, 1999 and October 2, 1998
- -----------------------------------------------------------------------------
Net Sales. Consolidated net sales during the nine months ended October 1, 1999
increased $17.9 million or 11% compared with the same period in 1998.
International net sales increased 9% and represented approximately 49% of net
sales in 1999 versus 50% of net sales in 1998. The overall increase in
consolidated net sales is attributed primarily to increased sales in the fixed
position retail product lines and U-Scan(R) Express Self-Checkout Systems. In
1995, the Company entered into a contract with Optimal Robotics Corp. to manu-
facture and sell the U-Scan(R) Express Self-Checkout System. During October
1999, the Company received notification that the relationship would terminate on
December 31, 2000. The Company anticipates manufacturing and selling its own
self-checkout product commencing on January 1, 2001. The increase in
international sales is primarily due to new products and the continued growth in
the Company's European and Asian Pacific customer sales.
Gross Profit. Consolidated gross profit during the nine months ended October 1,
1999 increased $8.5 million or 13% compared with the same period in 1998. As a
percentage of sales, gross profit increased from 41.7% to 42.3%. The increase in
gross profit percentage is primarily due to improved product mix and higher
manufacturing volume offset by negative foreign currency impact and costs
incurred to transition certain manufacturing activities from Webster, New York
to Eugene, Oregon.
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $1.6 million or 13%, as compared to the same period in
1998. As a percentage of sales, ER&D was 7.5% in 1999 and 7.3% in 1998. The
dollar increase is due to additional investments in developing new products.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses increased $5.1 million or 17%, as compared to the same period in 1998.
As a percentage of sales, SG&A was 19.6% in 1999 versus 18.6% in 1998. The
dollar increase is primarily due to an increase in the international sales
infrastructure and additional investments in the Company's marketing
organization and marketing programs.
Severance and Other Costs. During the first quarter of 1999, the Company
recorded a pretax charge of $2.1 million for severance and other costs. Of the
total charge, $1.4 million was for employee severance and benefit costs for the
elimination of approximately 140 positions primarily at the Webster, New York
manufacturing facility resultant from the consolidation of all high volume
handheld scanner manufacturing at the Company's Eugene, Oregon facility. The
remaining $0.7 is for early termination of the lease on the Company's Webster
offsite storage and repair facility. As of October 1, 1999, the amount of the
severance and other accruals was approximately $0.5 million, which relates to
current contractual obligations. These costs reduced 1999 income before income
tax provision, net income, basic EPS and diluted EPS by $2.1 million, $1.4
million, $0.11 and $0.10, respectively.
Interest Expense. Interest expense decreased $2.1 million versus the comparable
period in 1998. The decrease is due to lower principal balances outstanding and
a reduction in the Company's interest rates on its senior term loans as the
Company achieved key milestones under certain financial covenants contained in
the bank credit agreements.
Provision for Income Taxes. The Company's effective tax rate was 35% in 1999
versus 37% in 1998 due to larger anticipated Foreign Sales Corporation benefits.
Liquidity and Capital Resources:
Current assets increased $6.1 million from December 31, 1998 primarily due to an
increase in inventory resulting from newly introduced products. Current
liabilities increased $0.5 million primarily due to an increase in current
portion of long-term debt and accounts payable offset by a decrease in accrued
expenses. As a result, working capital increased $5.6 million from December 31,
1998.
Property, plant and equipment expenditures totaled $3.7 million for the nine
months ended October 1, 1999 compared with $4.1 million for the nine months
ended October 2, 1998. The 1999 expenditures primarily related to new product
tooling, manufacturing equipment and computer hardware.
<PAGE>
The long-term debt to capital percentage was 53.1% at October 1, 1999 versus
64.1% at December 31, 1998 primarily due to a reduction in long-term debt by
$17.2 million and an increase in retained earnings resultant from net income of
$9.4 million in 1999. At October 1, 1999, liquidity immediately available to the
Company consisted of cash and cash equivalents of $5.9 million. The Company has
a revolving line of credit of $20.0 million, of which, there is no outstanding
balance. 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 12 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
potentially could 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 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.
(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. The Company has substantially completed the
assessment stage.
(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
substantially completed the remediation phase both domestically
and internationally.
<PAGE>
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, the Company successfully completed comprehen-
sive testing of all critical systems in a simulated Year 2000 environment.
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. 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 will not be Year 2000 compliant.
The Company is finalizing its contingency plans and expects to have them
completed by November 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 flows.
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 were incurred
primarily in fiscal 1999 and were 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
address in a timely manner their Year 2000 compliance issues, the effects of
which may be an adverse impact on the Company's results of operations.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing legacy currencies and
the euro. The legacy currencies will remain in effect until July 1, 2002, at
which time, the legacy currencies will no longer be legal tender for any
transactions. The Company believes that the euro conversion will not have a
material adverse impact to results of operations, financial position or cash
flows.
<PAGE>
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 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, 1998 (the "Litigation")
and in Item 1 of Part II of the Company's Quarterly Report on Form 10-Q for the
quarter ended July 2, 1999 are incorporated herein by reference. Pursuant to the
Court's scheduling order dated October 6, 1999, the contract issues in the
Litigation will be presented as cross-motions for summary judgment. The motions
are scheduled to be filed with the Court on November 17, 1999 and oral argument
is scheduled for January 11, 2000.
The description of the Company's legal proceedings with the Lemelson
Partnership set forth in Item 1 of Part II of the Company's Quarterly Report on
Form 10-Q for the quarter ended July 2, 1999 is incorporated herein by
reference. In response to the action commenced by the Company and the other
Plaintiffs on July 21, 1999 in the U.S. District Court of Nevada, the Lemelson
Partnership has moved to dismiss, transfer and/or stay the proceedings.
Plaintiffs' responsive papers to the Lemelson Partnership motion have been filed
and the motion is pending. The litigation is in the early stages of discovery.
The description of the Company's legal proceedings with International
Automated Systems ("IAS") set forth in Item 1 of Part II of the Company's
Quarterly Report on Form 10Q for the quarter ended July 2, 1999 is incorporated
herein by reference. The Company was served with the summons and complaint in
that action on August 23, 1999. An answer and counterclaim on behalf of the
Company and Optimal Robotics Inc. ("Optimal") was served on IAS on or about
October 22, 1999. Optimal has retained counsel to represent both Optimal and the
Company. The Company's contract with Optimal provides for indemnification
obligations on the part of Optimal.
On October 13, 1999, Metrologic Instruments, Inc. commenced suit
against the Company in the United States District Court for the District of New
Jersey alleging patent infringement and seeking damages and injunctive relief.
The complaint was served on the Company on October 21, 1999 and the Company will
be filing its responsive papers shortly. The Company believes that the claims
against it are without merit and intends to vigorously defend the action.
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 8, 1999 By: /s/ Robert C. Strandberg
Robert C. Strandberg
President and Chief Executive Officer
DATE: November 8, 1999 By: /s/ William J. Woodard
William J. Woodard
Vice President & Chief Financial Officer
DATE: November 8, 1999 By /s/ Michael J. Stachura
Michael J. Stachura
Vice President of Finance
(Principal Accounting Officer)
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Financial Data Schedule Q3 1999
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