===============================================================================
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 July 2, 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 August 5, 1999, there were 12,045,544 shares of common stock outstanding.
<PAGE>
PSC Inc. AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I: FINANCIAL INFORMATION
Item 1 -Financial Statements
Consolidated Balance Sheets as of
July 2, 1999 (Unaudited) and
December 31, 1998.................................................3-4
Consolidated Statements of Income and
Retained Earnings for the three and six months ended:
July 2, 1999 (Unaudited) and
July 3, 1998 (Unaudited) .........................................5-6
Consolidated Statements of Cash Flows for the six months ended:
July 2, 1999 (Unaudited) and
July 3, 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 .................................19
Item 3 -Defaults upon Senior Securities ........................19
Item 4 -Submission of Matters to a Vote of Security Holders.....19
Item 5 -Other Information ....................................19
Item 6 -Exhibits and Reports on Form 8-K ......................20
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
<TABLE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except per share data)
<CAPTION>
July 2, 1999 Dec. 31, 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................. $ 5,464 $ 6,180
Accounts receivable, net of allowance
for doubtful accounts of $1,554
and $1,492, respectively ................ 38,308 37,121
Inventories ................................ 21,761 17,250
Prepaid expenses and other ................. 3,097 2,946
----------- ----------
TOTAL CURRENT ASSETS ........................ 68,630 63,497
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation of $20,605
and $18,639, respectively .................. 27,101 35,397
DEFERRED TAX ASSETS ................................ 20,201 21,244
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $24,079 and $20,419, respectively 52,541 51,125
---------- ----------
TOTAL ASSETS ....................................... $168,473 $171,263
========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except per share data)
(Continued)
<CAPTION>
July 2, 1999 December 31, 1998
------------ -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ................... $ 15,340 $ 14,402
Accounts payable .................................... 20,402 18,190
Accrued expenses .................................... 9,411 8,035
Accrued payroll and related employee benefits ....... 5,754 5,628
Accrued acquisition related restructuring costs ..... 132 415
--------- -------
TOTAL CURRENT LIABILITIES ............................. 51,039 46,670
LONG-TERM DEBT, less current maturities .................... 65,686 78,806
OTHER LONG-TERM LIABILITIES ................................ 1,915 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 12,047 and 11,869
shares issued and outstanding ....................... 120 119
Additional paid-in capital .......................... 71,432 70,068
Retained earnings/(Accumulated deficit) ............. (20,448) (26,027)
Accumulated other comprehensive income/(loss) ....... (963) 275
Less treasury stock repurchased at cost,
46 and 39 shares .................................... (309) (237)
----- -----
TOTAL SHAREHOLDERS' EQUITY .......................... 49,833 44,199
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ................................................ $168,473 $171,263
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(All amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
------------------------
July 2, July 3,
1999 1998
--- ---
NET SALES ........................................... $58,001 $51,877
COST OF SALES ....................................... 33,979 30,011
--------- ---------
Gross profit ............................... 24,022 21,866
OPERATING EXPENSES:
Engineering, research and development ...... 4,419 3,856
Selling, general and administrative ........ 10,798 9,540
Amortization of intangibles resulting
from business acquisitions ............ 1,513 1,718
----- -----
Income from operations ..................... 7,292 6,752
INTEREST AND OTHER INCOME /(EXPENSE):
Interest expense ........................... (1,908) (2,682)
Interest income ............................ 48 55
Other income/(expense) ..................... (73) 152
--------- --------
(1,933) (2,475)
--------- -------
Income before income tax provision ......... 5,359 4,277
Income tax provision ....................... 1,871 1,582
-------- ------
Net income ................................. $3,488 $2,695
====== ======
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic ...................................... $0.29 $0.23
Diluted .................................... $0.25 $0.19
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic ...................................... 11,928 11,735
Diluted .................................... 13,894 14,069
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit)
beginning of period ...................... ($23,936) ($34,313)
Net income ................................. 3,488 2,695
----------- -----
Retained earnings/(Accumulated deficit),
end of period ............................ ($20,448) ($31,618)
========= ========
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)
Six Months Ended
----------------------
July 2, July 3,
1999 1998
---- ----
NET SALES ............................................ $117,146 $105,505
COST OF SALES ........................................ 67,519 61,954
--------- ---------
Gross profit ................................ 49,627 43,551
OPERATING EXPENSES:
Engineering, research and development ....... 8,547 7,740
Selling, general and administrative ......... 23,158 19,278
Severance and other costs ................... 2,103 --
Amortization of intangibles resulting
from business acquisitions ............. 3,212 3,425
---- ----
Income from operations ...................... 12,607 13,108
INTEREST AND OTHER INCOME /(EXPENSE):
Interest expense ............................ (4,082) (5,558)
Interest income ............................. 139 120
Other income/(expense) ...................... (88) 147
----------- --------
(4,031) (5,291)
--------- -------
Income before income tax provision .......... 8,576 7,817
Income tax provision ........................ 2,997 2,892
-------- ------
Net income .................................. $5,579 $4,925
====== ======
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic ....................................... $0.47 $0.42
Diluted ..................................... $0.41 $0.35
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic ....................................... 11,912 11,608
Diluted ..................................... 13,774 13,940
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit)
beginning of period ....................... ($26,027) ($36,543)
Net income .................................. 5,579 4,925
----------- -----
Retained earnings/(Accumulated deficit),
end of period ............................. ($20,448) ($31,618)
========= ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
PSC Inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
----------------
July 2, July 3,
1999 1998
---- ----
<S> <C> <C>
Net income .................................................... $5,579 $4,925
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 6,649 6,505
Deferred tax assets ...................................... 1,043 603
(Increase) decrease in assets:
Accounts receivable .................................. (1,196) (1,841)
Inventories .......................................... (4,511) (1,292)
Prepaid expenses and other ........................... (151) (228)
Increase (decrease) in liabilities:
Accounts payable ..................................... 2,212 (4,578)
Accrued expenses ..................................... 1,376 1,901
Accrued payroll and related employee benefits ........ 30 (254)
Accrued acquisition related restructuring costs ...... (283) (412)
------ ------
Net cash provided by operating activities ......... 10,748 5,329
------ ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ..................................... (2,213) (2,664)
Additions to intangible and other assets ...................... (5,283) (1,215)
Proceeds from sale and leaseback transaction .................. 8,043 --
Repayment of notes for stock option activity .................. -- 325
---------- ----------
Net cash provided by (used in) investing activities 547 (3,554)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Addition to long-term debt .................................... 7,000 6,500
Payment of long-term debt .................................... (19,182) (9,672)
Addition to (payment of) other long-term liabilities, net ..... 39 (138)
Purchase of treasury stock .................................... (72) --
Exercise of options and issuance of common shares ............. 1,253 2,678
Tax benefit from exercise or early disposition of stock options 27 464
---- ---
Net cash used in financing activities ...... (10,935) (168)
-------- -----
FOREIGN CURRENCY TRANSLATION ...................................... (1,076) (189)
------- -----
NET (DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS .............................................. (716) 1,418
CASH AND CASH EQUIVALENTS:
Beginning of period ...................................... 6,180 2,271
------- -------
End of period ............................................ $5,464 $3,689
====== ======
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED July 2, 1999 and July 3, 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 July 2, 1999, the results of operations
for the three and six months ended July 2, 1999 and July 3, 1998 and its
cash flows for the six months ended July 2, 1999 and July 3, 1998. The
results of operations for the three and six months ended July 2, 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:
July 2, 1999 December 31, 1998
---------------- -----------------------
Raw materials .............. $14,427 $11,231
Work-in-process ............ 3,688 2,888
Finished goods ............. 3,646 3,131
=========== ===========
$21,761 $17,250
=========== ===========
(2) LONG-TERM DEBT
Long-term debt consists of the following:
July 2, 1999 December 31, 1998
---------------- -----------------------
Senior term loan A ......... $28,004 $37,000
Senior term loan B ......... 20,496 23,000
Subordinated term loan ..... 29,577 29,547
Subordinated promissory note 2,813 3,438
Other ...................... 136 223
----------- -----------
81,026 93,208
Less: current maturities .. 15,340 14,402
----------- -----------
$65,686 $78,806
=========== ===========
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED July 2, 1999 and July 3, 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 July 2, 1999, the
amount of the severance and other accruals was approximately $1.8 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, of which, $8.0 million was
utilized to reduce the senior credit facilities.
(5) SHAREHOLDERS' EQUITY
During 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 gain/loss on securities,
was $3,414 and $2,903 for the three months ended July 2, 1999 and July 3,
1998, respectively, and $4,340 and $4,929 for the six months ended July 2,
1999 and July 3, 1998, respectively.
During the six month period ended July 2, 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>
<TABLE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED July 2, 1999 and July 3, 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:
<CAPTION>
January 1, 1999 Weighted January 1, 1998 Weighted
to Average to Average
July 2, 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 ................ (42) 6.85 (310) 6.42
Options forfeited/canceled ....... (45) 8.01 (100) 7.28
======== ======== ======== ========
Options outstanding at
end of period ................. 3,024 $8.03 3,027 $7.98
======== ======== ======== ========
Number of options at end
of period:
Exercisable ................... 1,884 1,820
Available for grant ........... 948 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 six month period ended July 2, 1999, 16 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 July 2, 1999 and July 3, 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 147 common shares at an average
price of $10.49 and $10.06 per share were outstanding for the three months
ended July 2, 1999 and July 3, 1998, respectively. Options to purchase 551
and 182 common shares at an average price of $10.08 and $7.64 per share
were outstanding for the six months ended July 2, 1999 and July 3, 1998,
respectively.
<PAGE>
<TABLE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED July 2, 1999 and July 3, 1998
(All amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------
July 2, 1999 July 3, 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 ................ $3,488 11,928 $0.29 $2,695 11,735 $0.23
===== =====
Effect of dilutive securities:
Options ..................... -- 425 -- 651
Warrants .................... -- 166 -- 308
Preferred Shares ............ -- 1,375 -- 1,375
-------------- ------------------ -------------- ------------------
Diluted EPS:
Income available to common
shareholders and assumed
conversions ................. $3,488 13,894 $0.25 $2,695 14,069 $0.19
====== ====== ===== ====== ====== =====
</TABLE>
<TABLE>
Six Months Ended
---------------------------------------------------------------------------------------------
July 2, 1999 July 3, 1998
--------------------------------------------- --------------------------------------------
<CAPTION>
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 ................ $5,579 11,912 $0.47 $4,925 11,608 $0.42
===== =====
Effect of dilutive securities:
Options ..................... -- 361 -- 655
Warrants .................... -- 126 -- 302
Preferred Shares ............ -- 1,375 -- 1,375
------------- ------------------ -------------- ------------------
Diluted EPS:
Income available to common
shareholders and assumed
conversions ................. $5,579 13,774 $0.41 $4,925 13,940 $0.35
====== ====== ===== ====== ====== =====
</TABLE>
<PAGE>
PSC Inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED July 2, 1999 and July 3, 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 July 2, 1999 and July 3, 1998
- ------------------------------------------------------------------------
Net Sales. Consolidated net sales during the three months ended July 2, 1999
increased $6.1 million or 12% compared with the same period in 1998.
International net sales increased 35% and represented approximately 60% of net
sales in the second quarter of 1999 versus 49% of net sales in the second
quarter of 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. The increase in international sales is
primarily due to new products and the continued growth in the European and Asian
Pacific customer sales.
Gross Profit. Consolidated gross profit during the three months ended July 2,
1999 increased $2.2 million or 10% compared with the same period in 1998. As a
percentage of sales, gross profit decreased from 42.1% to 41.4%. The decrease in
gross profit percentage is primarily due to product mix, negative foreign
currency impact and costs incurred to transition manufacturing activities from
Webster, NY to Eugene, OR.
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $0.6 million or 15%, as compared to the same period in
1998. As a percentage of sales, ER&D was 7.6% in the second quarter of 1999
versus 7.4% of net sales in the second quarter of 1998.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses increased $1.3 million or 13%, as compared to the same period in 1998.
As a percentage of sales, SG&A was 18.6% in 1999 versus 18.4% in 1998. The
dollar increase is primarily due to a significant increase in the international
sales infrastructure and additional investments in the Company's marketing
organization and marketing programs.
Interest Expense. Interest expense decreased $0.8 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 Foreign Sales Corporation benefits.
Results of Operations: Six Months ended July 2, 1999 and July 3, 1998
- ----------------------------------------------------------------------
Net Sales. Consolidated net sales during the six months ended July 2, 1999
increased $11.6 million or 11% compared with the same period in 1998.
International net sales increased 25% and represented approximately 57% of net
sales in the first half of 1999 versus 51% of net sales in the first half of
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. 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.
<PAGE>
Gross Profit. Consolidated gross profit during the six months ended July 2, 1999
increased $6.1 million or 14% compared with the same period in 1998. As a
percentage of sales, gross profit increased from 41.3% to 42.4%. The increase in
gross profit percentage is primarily due to improved product mix and higher
manufacturing volume.
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $0.8 million or 10%, as compared to the same period in
1998. As a percentage of sales, ER&D was 7.3% in the first half of both 1999 and
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 $3.9 million or 20%, as compared to the same period in 1998.
As a percentage of sales, SG&A was 19.8% in 1999 versus 18.3% in 1998. The
dollar increase is primarily due to a significant 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 July 2, 1999, the amount of the
severance and other accruals was approximately $1.8 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 $1.5 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 Foreign Sales
Corporation benefits.
Liquidity and Capital Resources:
Current assets increased $5.1 million from December 31, 1998 primarily due to an
increase in accounts receivable and inventory resulting from newly introduced
products. Current liabilities increased $4.4 million primarily due to an
increase in accounts payable and accrued expenses. As a result, working capital
increased $0.7 million from December 31, 1998.
Property, plant and equipment expenditures totaled $2.2 million for the six
months ended July 2, 1999 compared with $2.7 million for the six months ended
July 3, 1998. The 1999 expenditures primarily related to new product tooling,
manufacturing equipment and computer hardware.
<PAGE>
The long-term debt to capital percentage was 56.9% at July 2, 1999 versus 64.1%
at December 31, 1998 primarily due to a reduction in long-term debt by $13.1
million and an increase in retained earnings resultant from net income of $5.6
million in the first half of 1999. At July 2, 1999, liquidity immediately
available to the Company consisted of cash and cash equivalents of $5.5 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
commenced implementation, both domestically and internationally,
and expects this phase to be completed by the end of October
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.
<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, comprehensive testing of all critical systems
is planned to be conducted 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 developing its contingency plans and expects to have them
completed by September 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 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 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 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,
1998 (the "Litigation") are incorporated herein by reference.
On April 28, 1999, the Court denied Symbol's motions for reconsid-
eration and for immediate appeal of the Court's October 199 Order
granting the Company partial summary judgment against Symbol for
patent misuse. The Court also clarified its prior Order by deleting
reference to the 1995 licensing agreement.
The trial for the contract issues has not yet been rescheduled.
On July 21, 1999, the Company and six other leading members of the
Automatic Identification and Data Capture industry jointly initiated
litigation in the U.S. District Court of Nevada in Reno, Nevada against
the Lemelson Medical, Educational, & Research Foundation, Limited
Partnership (the "Lemelson Partnership"). In this suit, entitled Symbol
Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research
Foundation, Limited Partnerships, the Auto ID companies seek, among
other remedies, a declaration that certain patents, which have been
asserted by the Lemelson Partnership against end users of bar code
equipment, are invalid, unenforceable and not infringed. The other
plaintiffs in the lawsuit are Accu-Sort Systems, Inc., Intermec
Technologies Corporation, a wholly-owned subsidiary of UNOVA, Inc.,
Metrologic Instruments, Inc., Symbol Technologies, Inc., Teklogix
Corporation, a wholly-owned U.S. subsidiary of Teklogix International,
Inc. and Zebra Technologies Corporation. Symbol has agreed to bear
approximately half of the legal and related expenses associated with
the litigation, with the remaining portion being borne equally by the
Company and the other five Auto ID companies.
Although no claim is now being asserted by the Lemelson Partnership
directly against the Company or, to our knowledge any other Auto ID
company, the Lemelson Partnership has contacted many of the Auto ID
companies' customers demanding a one-time license fee for certain
so-called "bar code" patents transferred to the Lemelson Partnership by
the late Jerome H. Lemelson. The Company and the other Auto ID
companies have received many requests from their customers asking that
they undertake the defense of these claims using their knowledge of the
technology at issue. Certain of these customers have requested
indemnification against the Lemelson Partnership's claims from the
Company and the other Auto ID companies, individually and/or
collectively with other equipment suppliers. The Company, and we
understand, the other Auto ID companies believe that generally they
have no obligation to indemnify their customers against these claims
and that the patents being asserted by the Lemelson Partnership against
their customers with respect to bar code equipment are invalid,
unenforceable and not infringed. However, the Company and the other
Auto ID companies believe that the Lemelson claims do concern the Auto
ID industry at large and that it is appropriate for them to act jointly
to protect their customers against what they believe to be baseless
claims being asserted by the Lemelson Partnership.
The Company has been informed that on or about July 2, 1999, Interna-
tional Automated Systems ("IAS") filed a complaint in the State of Utah
against the Company and Optimal Robotics Corp. ("Optimal"), alleging
patent infringement. The complaint has not yet been served on the Com-
pany. The Company believes that the lawsuit will not have a material
adverse effect on the Company's business or prospects and intends to
vigorously defend the claim with Optimal. The Company's contract with
Optimal provides for indemnification obligations on the part of
Optimal.
<PAGE>
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:
(a) The Annual Meeting of Shareholders was held on May 12, 1999.
(b) The names of the directors elected at the Annual Meeting for a
three-year term are as follows:
Jay M. Eastman
Thomas J. Morgan
Bert W. Wasserman
The name of each other director whose term of office continued after
the Annual Meeting is as follows:
Robert S. Ehrlich
Donald K. Hess
James C. O'Shea
Jack E. Rosenfeld
Robert C. Strandberg
Justin L. Vigdor
Dr. Romano Volta
(c)(i) At the Annual Meeting, the tabulation of votes with respect to
each nominee for director was as follows:
Votes Authority
Nominee FOR Withheld
Jay M. Eastman ........... 8,830,684 741,982
Thomas J. Morgan ......... 8,802,075 770,591
Bert W. Wasserman ........ 8,860,479 712,187
(c)(ii)At the Annual Meeting, the shareholders voted upon one other
matter. The description of the other matter voted upon and the
tabulation of votes with respect to such matter are as follows:
Votes Votes Votes
FOR AGAINST ABSTAINING
Proposal to approve the 2,641,393 2,291,208 97,022
amendment to the 1994 Stock
Option Plan
Item 5: Other Information: None
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits: Page No.
10.1 Amendment Five and Consent and Waiver dated as of March 1,
1999 to the Credit Agreement dated as of July 12, 1996 among
PSC Scanning Inc., as Borrower, PSC Inc., as Guarantor, the
financial institutions party thereto and Fleet Bank as
initial Issuing Bank and administrative agent .............22
10.2 Amendment No. 4, Consent and Waiver dated March 1, 1999 to
Securities Purchase Agreements and Warrants among PSC Inc.,
PSC Scanning Inc., and the Purchasers named in the Securities
Purchase Agreements .......................................25
10.3 Amendment Six dated as of May 1, 1999 to the Credit Agreement
dated as of July 12, 1996 among PSC Scanning Inc., as
Borrower, PSC Inc., as Guarantor, the financial institutions
party thereto and Fleet Bank as initial Issuing Bank and
administrative agent ......................................33
10.4 Consent and Waiver dated as of June 30, 1999 to the Credit
Agreement dated as of July 12, 1996 among PSC Scanning Inc.,
as Borrower, PSC Inc., as Guarantor, the financial
institutions party thereto and Fleet Bank as initial Issuing
Bank and administrative agent .............................36
10.5* Second Amendment to Employment Agreement between the Company
and Robert C. Strandberg dated as of July 13, 1999 ........38
10.6* Second Amendment to Agreement between the Company and Robert
S. Ehrlich dated as of July 13, 1999 ......................47
(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: August 9, 1999 By: /s/ Robert C. Strandberg
--------------------
Robert C. Strandberg
President & Chief Executive Officer
DATE: August 9, 1999 By: /s/ William J. Woodard
William J. Woodard
Vice President & Chief Financial Officer
DATE: August 9, 1999 By: /s/ Michael J. Stachura
-------------------
Michael J. Stachura
Vice President of Finance
(Principal Accounting Officer)
Exhibit 10.1
Amendment Five and Consent and Waiver
To
Credit Agreement
THIS AMENDMENT FIVE AND CONSENT AND WAIVER is dated as of March 1, 1999
and is made in respect of the Credit Agreement dated as of July 12, 1996 and as
amended and in effect immediately prior to the date hereof (the "Credit
Agreement") by and among PSC SCANNING, INC., a Delaware corporation formerly
known as SpectraScan, Inc., which is the successor by merger to PSC Acquisition,
Inc., (the "Borrower"), PSC INC. ("PSC"), the financial institutions party to
the Credit Agreement (the "Lender Parties"), FLEET NATIONAL BANK (formerly known
as Fleet Bank) as the "Initial Issuing Bank", and FLEET NATIONAL BANK, as
administrative agent (the "Administrative Agent") under the Credit Agreement.
Statement of the Premises
The Borrower, PSC, the Lender Parties, the Initial Issuing Bank and the
Administrative Agent previously entered into the Credit Agreement, First
Amendment to Credit Agreement dated as of September 27, 1996, Amendment Two and
Waiver to Credit Agreement dated as of July 4, 1997, Amendment Three to Credit
Agreement (With Consent) dated as of August 13, 1997 and Amendment Four to
Credit Agreement dated as of April 8, 1998. The Borrower has requested that the
Lender Parties amend a certain provision in the Credit Agreement and consent to
a certain transaction and waive the application of certain covenants to that
transaction, and the Lender Parties are willing to do so upon certain
conditions.
Statement of Consideration
Accordingly, in consideration of the premises, and under the authority
of Section 5-1103 of the New York General Obligations Law, the parties hereto
agree as follows.
Agreement
1. Defined Terms. The terms "this Agreement", "hereunder" and similar references
in the Credit Agreement shall be deemed to refer to the Credit Agreement as
amended hereby. Capitalized terms used and not otherwise defined herein shall
have the meanings ascribed to such terms in the Credit Agreement.
2. Amendment. Effective as of March 1, 1999, clause (vii) of Subsection (f) of
Section 5.02 of the Credit Agreement is hereby amended by substituting the
amount "$6,500,000" for the amount "$3,000,000" where the latter amount appears
in such clause.
3. Consent and Waiver. The undersigned Lender Parties hereby consent to the
proposed sale and leaseback transaction whereby certain of the facilities of the
Borrower located in Eugene, Oregon shall be sold to Carey Diversified LLC or one
of its affiliates or assigns and leased back to the Borrower on substantially
the terms set forth in the letter dated February 12, 1999 issued by Carey
Diversified LLC to the Borrower (the "Transaction"). The Lender Parties hereby
<PAGE>
waive the right to deem the Transaction to be a violation of Section 5.02 of the
Credit Agreement or a Default or Event of Default under the Credit Agreement.
Provided, however, that this consent and waiver is granted on the conditions
subsequent that: (i) at least $5,000,000 of the Net Cash Proceeds from the
Transaction will be applied immediately upon consummation of the Transaction to
the payment of the Facilities as provided in Section 2.06(b)(ii) of the Credit
Agreement; and (ii) the balance of the Net Cash Proceeds shall be used only for
(1) working capital purposes, or (2) in partial payment of the investment by the
Borrower or PSC in the capital stock of Eldat Communication Ltd.
4. Amendment Fees. As a condition precedent to the effectiveness of this
Amendment Five and Consent and Waiver, PSC or the Borrower shall pay to each
Lender Party a fee equal to the product of: a factor of .000625 multiplied by
the sum of (i) the amount (if any) of the Working Capital Commitment of such
Lender Party, (ii) the amount (if any) of the Letter of Credit Commitment of
such Lender Party, plus (iii) the amount (if any) of the outstanding principal
amount of each Term A Note and each Term B Note held by such Lender Party.
5. Effect on the Credit Agreement. Except as specifically amended above, the
Credit Agreement shall remain in full force and effect and is hereby ratified
and confirmed. The Borrower and PSC each acknowledge and agree that the Credit
Agreement (as amended by this Amendment) and each other Loan Document to which
each is a party is in full force and effect, that its Obligations thereunder and
under this Amendment are its legal, valid and binding obligations enforceable
against it in accordance with the terms thereof and hereof, and it has no
defense, whether legal or equitable, setoff or counterclaim to the payment and
performance of such Obligations.
6. Expenses. The Borrower shall pay promptly when billed all reasonable
out-of-pocket expenses of each of the Lender Parties and the Agent (including,
but not limited to, reasonable fees, charges and disbursements of counsel to
each of the Lender Parties and the Agent) incident to the preparation,
negotiation, execution, administration and enforcement of the this Amendment
Five and Consent and Waiver and all documents and transactions required in
connection with this Amendment Five and Consent and Waiver.
7. Execution in Counterparts and Effectiveness. This Amendment Five and Consent
and Waiver may be executed in any number of counterparts and by the different
parties hereto on separate counterparts, each of which shall be deemed to be an
original, and all of which taken together shall constitute one and the same
Amendment Five and Consent and Waiver, regardless of whether or not the
execution by all parties shall appear on any single counterpart. Delivery of an
executed counterpart of a signature page to this Amendment Five and Consent and
Waiver by telecopier shall be effective as delivery of a manually executed
counterpart of this Amendment Five and Consent and Waiver. This Amendment Five
and Consent and Waiver will become effective (subject to the terms of Sections 3
and 4 above) when the Administrative Agent shall have received counterparts of
this Amendment Five and Consent and Waiver which, when taken together, bear the
signatures of the Borrower, PSC, the Administrative Agent and all of the
Lenders.
8. Applicable Law. Pursuant to Section 5-1401 of the New York General
Obligations Law, the laws of the State of New York shall govern the validity,
construction, enforcement and interpretation of this Amendment Five and Consent
and Waiver in whole without regard to any rules of conflicts-of-laws that would
require the application of the laws of any jurisdiction other than the State of
New York.
<PAGE>
9. Headings. The headings of this Amendment Five and Consent and Waiver are for
the purposes of reference only and shall not limit or otherwise affect the
meanings hereof.
IN WITNESS WHEREOF, the parties hereto have caused a counterpart of
this Amendment Five and Consent and Waiver to be executed and delivered by their
respective representatives thereunto duly authorized, as of the date first above
written.
PSC INC. PSC SCANNING, INC.
By: By:
Title: Vice President, Chief Financial Title: Vice President and Chief
Officer & Treasurer Financial Officer
FLEET NATIONAL BANK, as Initial FLEET NATIONAL BANK, as
Issuing Bank Administrative Agent
By: By:
Title: Title:
FLEET NATIONAL BANK FIRST UNION NATIONAL BANK
By: By:
Title: Title:
MANUFACTURERS & TRADERS KEY BANK NATIONAL
TRUST COMPANY ASSOCIATION
By: By:
Title: Title:
THE CHASE MANHATTAN BANK
By:
Title:
PSC INC.
PSC SCANNING, INC.
675 Basket Road
Webster, New York 14580
March 1, 1999
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY
200 Clarendon Street
Boston, Massachusetts 02117
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN NATIONAL INCOME FUND, INC.
c/o Lincoln Investment Management, Inc.
200 East Berry Street
Renaissance Square
Ft. Wayne, Indiana 46802
SECURITY-CONNECTICUT LIFE INSURANCE COMPANY
c/o ReliaStar Investment Research, Inc.
100 Washington Avenue South
Suite 800
Minneapolis, Minnesota 55401
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
c/o Alliance Capital Management L.P.
1345 Avenue of the Americas, 37th Floor
New York, New York 10105
Re: Amendment No. 4, Consent and Waiver Under Securities Purchase Agreements
Ladies and Gentlemen:
PSC INC., a New York corporation (the "Holding Company"), and PSC
SCANNING, INC., a Delaware corporation (formerly named SpectraScan, Inc.) and a
Wholly-Owned Subsidiary of the Holding Company (the "Operating Company") (the
Holding Company and the Operating Company are sometimes collectively referred to
<PAGE>
herein as the "Companies" and each as a "Company"), jointly and severally agree
with you as follows:
1. Definitions. Reference is hereby made to those certain Securities
Purchase Agreements dated July 12, 1996, as amended by Amendment No. 1 to
Securities Purchase Agreements dated October 10, 1996, Amendment No. 2 and
Waivers Under Securities Purchase Agreements dated as of July 4, 1997 and
Amendment No. 3 to Securities Purchase Agreements and Warrants dated August 18,
1997 and as supplemented by the Consent and Waiver Under Securities Purchase
Agreements and Warrants dated December 29, 1997 (as the same may be amended,
modified or supplemented from time to time, the "Securities Purchase
Agreements"), among the Holding Company, the Operating Company and each of you.
Capitalized terms used herein without definition have the meanings ascribed to
them in the Securities Purchase Agreements.
2. Amendment to the Securities Purchase Agreements. Section 14.8(g) of
the Securities Purchase Agreements is hereby amended by deleting the figure
"$3,000,000" appearing therein and inserting the figure "$6,500,000" in place
thereof.
3. Consent and Waiver.
(a) Reference is hereby made to the letter dated February 16,
1999 from Carey Diversified LLC concerning the proposed sale and
leaseback transaction of certain facilities of the Operating Company
located in Eugene, Oregon (the "Transaction"), a true, correct and
complete copy of which is attached hereto as Exhibit A (the "Carey
Letter Agreement).
(b) Each of you hereby (i) consents to the consummation of the
Transaction upon substantially the terms set forth in the Carey Letter
Agreement and (ii) waives any breach of section 14.11 or 14.15 of the
Securities Purchase Agreements arising solely on account thereof;
provided that the net cash proceeds from the Transaction are used to
repay indebtedness outstanding under the Bank Credit Agreement upon
receipt thereof.
4. No Default, Representations and Warranties, etc.
(a) The Companies represent and warrant that, except as
otherwise modified by (i) the documents referred to in section 5(a)(i)
of Amendment No. 3 to Securities Purchase Agreements and Warrants dated
August 18, 1997, (ii) the projections referred to on Exhibit B attached
to Amendment No. 2 and Waivers under Securities Purchase Agreements
dated as of July 4, 1997, (iii) the information delivered to the
Purchasers on June 11, 1997, which is attached to Amendment No. 2 and
Waivers Under Securities Purchase Agreements dated as of July 4, 1997
as Exhibit C, (iv) the documents referred to in Section 3(a)(iv) of
<PAGE>
Consent and Waiver Under Securities Purchase Agreements and Warrants
dated December 29, 1997 and (v) the following documents filed by the
Holding Company with the Commission under the Exchange Act: (A) Form
10-K for the year ended December 31, 1997, (B) Form 10-Q for the
quarters ended April 3, 1998, July 3, 1998 and October 2, 1998, (C)
Form 10-Q/A for the quarter ended July 4, 1997, (D) Form 10-Q/A for the
quarter ended October 3, 1997 and (E) Form 8-K filed on January 15,
1998, the representations and warranties contained in the Securities
Purchase Agreements and the other Operative Documents are in all
material respects correct on and as of the date hereof as if made on
such date (except to the extent affected by the consummation of
transactions permitted by the Securities Purchase Agreements). The
Companies further represent and warrant that, after giving effect to
the provisions of this Letter Agreement, no Default or Event of Default
exists.
(b) The Companies each ratify and confirm the Securities
Purchase Agreements and each of the other Operative Documents to which
each is a party and agree that each such agreement, document and
instrument is in full force and effect, that its obligations thereunder
and under this Letter Agreement are its legal, valid and binding
obligations enforceable against it in accordance with the terms thereof
and hereof and that it has no defense, whether legal or equitable,
setoff or counterclaim to the payment and performance of such
obligations.
(c) The Companies agree that (i) if any default shall be made
in the performance or observance of any covenant, agreement or
condition contained in this Letter Agreement or in any agreement,
document or instrument executed in connection herewith or pursuant
hereto or (ii) if any representation or warranty made by the Companies
herein or therein shall prove to have been false or incorrect on the
date as of which made, the same shall constitute an Event of Default
under the Securities Purchase Agreements and the other Operative
Documents and, in such event, you and each other holder of any of the
Notes shall have all rights and remedies provided by law and/or
provided or referred to in the Securities Purchase Agreements and the
other Operative Documents. The Companies further agree that this Letter
Agreement is an Operative Document and all references thereto in the
Securities Purchase Agreements and in any other of the other Operative
Documents shall include this Letter Agreement.
(d) On December 31, 1997, each of Laserdata Holdings, Inc.,
PSC S.A., Inc. and PSC Scanning Systems, Inc. was merged into the
Holding Company.
5. Payment of Transaction Costs. The Companies shall pay all reasonable
fees and disbursements incurred by you in connection herewith, including,
without limitation, the reasonable fees, expenses and disbursements of your
special counsel.
6. Governing Law. This Letter Agreement, including the validity hereof
and the rights and obligations of the parties hereunder, shall be construed in
accordance with and governed by the domestic substantive laws of the State of
New York without giving effect to any choice of law or conflicts of law
provision or rule that would cause the application of the domestic substantive
laws of any other jurisdiction.
<PAGE>
7. Miscellaneous. The headings in this Letter Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof. This Letter Agreement embodies the entire agreement and understanding
among the parties hereto and supersedes all prior agreements and understandings
relating to the subject matter hereof. In case any provision in this Letter
Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby. This Letter Agreement may be executed in any number of
counterparts and by the parties hereto on separate counterparts but all such
counterparts shall together constitute but one and the same instrument.
[The remainder of this page is intentionally left blank.]
<PAGE>
If you are in agreement with the foregoing, please sign the form of
agreement on the accompanying counterpart hereof, whereupon this Letter
Agreement shall become a binding agreement under seal among the parties hereto.
Please then return one of such counterparts to the Companies.
Very truly yours,
PSC INC.
By: _____________________________
(Title)
PSC SCANNING, INC.
By: _____________________________
(Title)
Each of the undersigned (a) acknowledges and assents to the terms and
provisions of the foregoing Letter Agreement and (b) ratifies and confirms each
of the Operative Documents to which it is a party and agrees that each such
Operative Document is in full force and effect, that its obligations thereunder
are its legal, valid and binding obligations enforceable against it in
accordance with the terms thereof and that it has no defense, whether legal or
equitable, setoff or counterclaim, to the payment and performance of such
obligations.
INSTAREAD CORPORATION
By: _____________________________
(Title)
PSC AUTOMATION, INC.
(formerly named Laserdata Corporation)
By: _____________________________
(Title)
<PAGE>
The foregoing is hereby accepted and agreed to:
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By: _____________________________
(Title)
JOHN HANCOCK VARIABLE LIFE
INSURANCE COMPANY
By: _______________________________
(Title)
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By: Lincoln Investment Management, Inc.
Its Attorney-in-Fact
By: ___________________________
(Title)
LINCOLN NATIONAL INCOME FUND, INC.
By: _______________________________
(Title)
<PAGE>
SECURITY-CONNECTICUT LIFE
INSURANCE COMPANY
By: _______________________________
(Title)
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
By: _______________________________
(Title)
<PAGE>
Exhibit A
Carey Letter Agreement
See attached.
Amendment Six To Credit Agreement
THIS AMENDMENT SIX is dated as of May 1, 1999 and is made in respect of
the Credit Agreement dated as of July 12, 1996 and as amended and in effect
immediately prior to the date hereof (the "Credit Agreement") by and among PSC
SCANNING, INC., a Delaware corporation formerly known as SpectraScan, Inc.,
which is the successor by merger to PSC Acquisition, Inc., (the "Borrower"), PSC
INC. ("PSC"), the financial institutions party to the Credit Agreement (the
"Lender Parties"), FLEET NATIONAL BANK (formerly known as Fleet Bank) as the
"Initial Issuing Bank", and FLEET NATIONAL BANK, as administrative agent (the
"Administrative Agent") under the Credit Agreement.
Statement of the Premises
The Borrower, PSC, the Lender Parties, the Initial Issuing Bank and the
Administrative Agent previously entered into the Credit Agreement, First
Amendment to Credit Agreement dated as of September 27, 1996, Amendment Two and
Waiver to Credit Agreement dated as of July 4, 1997, Amendment Three to Credit
Agreement (With Consent) dated as of August 13, 1997, Amendment Four to Credit
Agreement dated as of April 8, 1998, and Amendment Five and Consent and Waiver
to Credit Agreement dated as of March 1, 1999 ("Amendment Five"). The Borrower
has requested that the Lender Parties amend certain provisions in the Credit
Agreement to reflect the accounting treatment of the sale and leaseback
transaction which was consented to by the Lender Parties under Amendment Five,
and the Lender Parties are willing to do so.
Statement of Consideration
Accordingly, in consideration of the premises, and under the authority
of Section 5-1103 of the New York General Obligations Law, the parties hereto
agree as follows.
Agreement
1. Defined Terms. The terms "this Agreement", "hereunder" and similar references
in the Credit Agreement shall be deemed to refer to the Credit Agreement as
amended hereby. Capitalized terms used and not otherwise defined herein shall
have the meanings ascribed to such terms in the Credit Agreement.
2. Amendment. Effective as of May 1, 1999, the Credit Agreement is hereby
amended as follows:
2.1 Section 1.01 of the Credit Agreement is amended by adding the
definitions of "Excluded Leaseback Gain", "1999 Sale Leaseback Prepayment" and
"1999 Sale Leaseback Transaction", as follows:
<PAGE>
"Excluded Leaseback Gain" means all gain (gross -
before tax) resulting from the 1999 Sale Leaseback Transaction
or any termination of the lease thereunder if (and only if)
such gain is more than $50,000 during any period comprised of
four, full, consecutive quarter-annual fiscal periods taken
together as one accounting period.
"1999 Sale Leaseback Prepayment" means the prepayment
of any Borrowing pursuant to Section 2.06(b)(ii) of the Credit
Agreement by reason of the 1999 Sale Leaseback Transaction.
"1999 Sale Leaseback Transaction" means the sale and
leaseback transaction whereby certain of the facilities of the
Borrower located in Eugene, Oregon shall be sold to Carey
Diversified LLC or one of its affiliates or assigns and leased
back to the Borrower on substantially the terms set forth in
the letter dated February 12, 1999 issued by Carey Diversified
LLC to the Borrower.
2.2 Section 1.01 of the Credit Agreement is amended by changing the
definitions of "Adjusted EBITDA" and "EBITDA" to read in their entirety as
follows:
"Adjusted EBITDA" means, for any period, the sum,
determined on a Consolidated basis, of (a) net income (or net
loss) plus: (i) the Second Quarter `97 Charge, less (ii) for
each fiscal quarter through the fiscal quarter ending December
31, 1998, that portion of the Second Quarter `97 Charge
actually paid during such period, less (iii) any gain arising
from a reversal of the Second Quarter `97 Charge, plus (iv) on
the fiscal quarter end date of December 31, 1998, the cash
balance of the Second Quarter `97 Charge which the Borrower
has not yet paid in cash but which the Borrower expects to
incur, (b) interest expense, (c) income tax expense, (d)
depreciation expense and (e) amortization expense in each case
of PSC and its Subsidiaries, determined in accordance with
GAAP for such period, less, however, the Excluded Leaseback
Gain, if any, accruing during such period.
"EBITDA" means , for any period, the sum, determined
on a Consolidated basis, of (a) net income (or net loss), (b)
interest expense, (c) income tax expense, (d) depreciation
expense and (e) amortization expense in each case of PSC and
its Subsidiaries, determined in accordance with GAAP for such
period, excluding (i) in the case of the Fiscal Quarter in
which the consummation of the Acquisition occurs, any
restructuring charge taken by PSC and its Subsidiaries, in
respect of the Acquisition, and (ii) the Excluded Leaseback
Gain, if any, accruing during such period.
2.3 Subclause (y) of clause (ii) of Subsection (a) of Section 5.04 of
the Credit Agreement, is amended to read in its entirety as follows:
(y) principal amounts of all Funded Debt payable, in each
case, by PSC and its Subsidiaries during such period,
excluding the 1999 Sale Leaseback Prepayment and excluding all
payments or prepayments of any Borrowing with the Stock Sale
Proceeds other than (and not excluding) payments scheduled to
be due and payable during such period, if any (without the
application of Section 2.06(b)(ii)),
<PAGE>
3. Effect on the Credit Agreement. Except as specifically amended above, the
Credit Agreement shall remain in full force and effect and is hereby ratified
and confirmed. The Borrower and PSC each acknowledge and agree that the Credit
Agreement (as amended by this Amendment) and each other Loan Document to which
each is a party is in full force and effect, that its Obligations thereunder and
under this Amendment are its legal, valid and binding obligations enforceable
against it in accordance with the terms thereof and hereof, and it has no
defense, whether legal or equitable, setoff or counterclaim to the payment and
performance of such Obligations.
4. Execution in Counterparts and Effectiveness. This Amendment Six may be
executed in any number of counterparts and by the different parties hereto on
separate counterparts, each of which shall be deemed to be an original, and all
of which taken together shall constitute one and the same Amendment Six,
regardless of whether or not the execution by all parties shall appear on any
single counterpart. Delivery of an executed counterpart of a signature page to
this Amendment Six by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment Six. This Amendment Six will become
effective when the Administrative Agent shall have received counterparts of this
Amendment Six which, when taken together, bear the signatures of the Borrower,
PSC, the Administrative Agent and the Required Lenders.
5. Applicable Law. Pursuant to Section 5-1401 of the New York General
Obligations Law, the laws of the State of New York shall govern the validity,
construction, enforcement and interpretation of this Amendment Five and Consent
and Waiver in whole without regard to any rules of conflicts-of-laws that would
require the application of the laws of any jurisdiction other than the State of
New York.
6. Headings. The headings of this Amendment Five and Consent and Waiver are for
the purposes of reference only and shall not limit or otherwise affect the
meanings hereof.
IN WITNESS WHEREOF, the parties hereto have caused a counterpart of
this Amendment Five and Consent and Waiver to be executed and delivered by their
respective representatives thereunto duly authorized, as of the date first above
written.
PSC INC. PSC SCANNING, INC.
By: By:
Title: Vice President, Chief Financial Title: Vice President and Chief
Officer & Treasurer Financial Officer
FLEET NATIONAL BANK, as Initial FLEET NATIONAL BANK, as
Issuing Bank Administrative Agent
By: By:
Title: Title:
FLEET NATIONAL BANK FIRST UNION NATIONAL BANK
By: By:
Title: Title:
MANUFACTURERS & TRADERS KEY BANK NATIONAL
TRUST COMPANY ASSOCIATION
By: By:
Title: Title:
THE CHASE MANHATTAN BANK
By:
Title:
Consent and Waiver to Credit Agreement
As of June 30, 1999
Reference is made to the Credit Agreement dated as of July 12, 1996 and
as amended and in effect immediately prior to the date hereof (the "Credit
Agreement") by and among PSC SCANNING, INC., a Delaware corporation formerly
known as SpectraScan, Inc., which is successor by merger to PSC Acquisition,
Inc., (the "Borrower"), PSC INC. ("PSC"), the financial institutions party to
the Credit Agreement (the "Lender Parties"), FLEET BANK as the "Initial Issuing
Bank", and FLEET BANK, as administrative agent (the "Administrative Agent")
under the Credit Agreement.
Reference is also made to the Contract between PSC and William G.
Boulter dated June __, 1999 annexed hereto as Exhibit A (the "Contract")
providing for the sale (the "Sale") of certain real estate partially in
consideration for cash and partially in consideration for termination of a
certain lease agreement (the "Lease Agreement").
All definitions contained in the Credit Agreement are incorporated
herein by reference and all such defined terms are used herein with the same
meanings.
The undersigned Lender Parties hereby: (1) consent to the Sale in
partial consideration for cash and partial consideration for termination of the
Lease Agreement pursuant to the Contract, (2) waive the right to deem the Sale
or the non-cash consideration for the Sale pursuant to the Contract to be a
violation of Section 5.02(e) of the Credit Agreement or a Default or Event of
Default under the Credit Agreement, and (3) waive the right to require that
portion of the consideration for the Sale which is in cash to be applied as a
prepayment pursuant to Section 2.06(b)(ii).
Except as specifically waived above, the Credit Agreement shall remain
in full force and effect.
This Consent and Waiver may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which
shall be deemed to be an original, and all of which taken together shall
constitute one and the same Consent and Waiver, regardless of whether or not the
execution by all parties shall appear on any single counterpart. Delivery of an
executed counterpart of a signature page to this Consent and Waiver by
telecopier shall be effective as delivery of a manually executed counterpart of
this Agreement. This Consent and Waiver will become effective when the
Administrative Agent shall have received counterparts of this Consent and Waiver
which, when taken together, bear the signatures of all of the Lenders.
<PAGE>
IN WITNESS WHEREOF, the Administrative Agent and the undersigned Lender
Parties have caused a counterpart of this Consent and Waiver to be executed and
delivered by their respective representatives thereunto duly authorized, as of
the date first above written.
FLEET NATIONAL BANK, as Initial FLEET NATIONAL BANK, as
Issuing Bank Administrative Agent
By: By:
Title: Title:
FLEET NATIONAL BANK FIRST UNION NATIONAL BANK
By: By:
Title: Title:
MANUFACTURERS & TRADERS KEY BANK NATIONAL
TRUST COMPANY ASSOCIATION
By: By:
Title: Title:
THE CHASE MANHATTAN BANK
By:
Title:
SECOND AMENDMENT
TO
EMPLOYMENT AGREEMENT
This Second Amendment is dated as of July 13, 1999 and is made in
respect of the Employment Agreement dated as of June 2, 1998 and the First
Amendment thereto dated as of December 11, 1998 (as amended and in effect
immediately prior to the date hereof, the "Employment Agreement") by and between
PSC INC., a New York corporation ("PSC" or the "Company"), and ROBERT C.
STRANDBERG ("Executive").
WHEREAS, Section 3A of the Employment Agreement provides that Executive
will receive a salary at the annual rate of not less than $300,000 ("Base
Salary"); and
WHEREAS, after the completion of a performance review and in
recognition of the effective performance of the Company and the Executive during
the past year, the Board of Directors deems it appropriate and desirable to
increase the Base Salary of Executive by 12%; and
WHEREAS, Section 5 of the Employment Agreement provides that Executive
will be awarded 37,500 restricted Common Shares of the Company on each of March
25, 1999 (the "1999 Award") and March 25, 2000; and
WHEREAS, the 1999 Award was not made on March 25, 1999 because of a
lack of a sufficient number of shares in the 1994 Stock Option Plan (the
"Plan"); and
WHEREAS, at the 1999 Annual Meeting held on May 12, 1999, the
shareholders of the Company approved an increase in the number of shares
allocated to the Plan and, accordingly, the 1999 Award can now be made; and
WHEREAS, Executive has requested that the equity portion of his
compensation be in the form of stock options for Common Shares rather than
awards of restricted Common Shares, and the Board of Directors has consented to
the change; and
WHEREAS, the number of stock options that is equivalent to the number
of restricted Common Shares that otherwise would have been awarded to Executive
is 75,000 shares; and
WHEREAS, the Board of Directors has adopted a policy whereby stock
option grants to officers and directors in 1999 will be reduced by 50%; and
<PAGE>
WHEREAS, Executive is willing to accept a 50% reduction in the number
of stock options to be granted to him in 1999.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. All of the terms used in this Second Amendment shall have the
meanings defined in the Employment Agreement.
2. Effective as of June 2, 1999, the Base Salary of Executive set forth
in Section 3A of the Employment Agreement is changed from $300,000 to $336,000.
3. Effective as of March 25, 1999, Section 5 of the Employment
Agreement is deleted in its entity and replaced by a new Section 5, which will
read as follows:
"5. Restricted Stock/Stock Options. Pursuant to the
Company's 1994 Stock Option Plan, on March 25, 1998 PSC
awarded Executive 37,500 restricted Common Shares of the
Company, upon the terms and conditions and subject to the
restrictions set forth in the Restricted Stock Award Agreement
attached to the Employment Agreement as Exhibit A. Effective
as of March 25, 1999, the Company has granted Executive,
pursuant to the Company's 1994 Stock Option Plan, a stock
option for 37,500 Common Shares of the Company at an exercise
price of $8.625 per share, upon the terms and conditions set
forth in the Stock Option Agreement attached hereto as Exhibit
A. If Executive is an officer of the Company on March 25,
2000, PSC will grant Executive a stock option for 75,000
Common Shares pursuant to a Stock Option Agreement similar in
form to Exhibit A, as modified to reflect appropriate changes
in grant, vesting and expiration dates and in purchase and
stock performance prices. Notwithstanding the foregoing
sentence, if there is a Change in Control (as hereinafter
defined), and if Executive becomes entitled to receive
Severance Benefits (as hereinafter defined), Executive will be
immediately entitled to receive the stock option which
otherwise would have been granted to him on March 25, 2000,
fully vested and exercisable and at a purchase price equal to
the Fair Market Value of the Company's Common Shares on the
date preceding the date of the Change in Control."
4. Except as modified by this Second Amendment, the Employment
Agreement shall remain in full force and effect and is hereby ratified and
confirmed.
IN WITNESS WHEREOF, the parties have caused this Second Amendment to be
executed as of the day and year first above written.
PSC Inc.
By: /s/ Robert S. Ehrlich
Robert S. Ehrlich
Chairman of the Board
/s/ Robert C. Strandberg
Robert C. Strandberg
<PAGE>
EXHIBIT A
PSC INC.
OPTION AGREEMENT PURSUANT TO
1994 STOCK OPTION PLAN
OPTION AGREEMENT, executed in duplicate as of the 13th day of July,
1999, between PSC INC., a New York corporation (the "Company"), and ROBERT C.
STRANDBERG, an employee of the Company (the "Optionee").
RECITALS
Optionee entered into an employment agreement with the Company on June
2, 1998, the First Amendment to the employment agreement on December 11, 1998
and the Second Amendment to the employment agreement on July 13, 1999 (as so
amended, the "Employment Agreement").
In accordance with the provisions of the Employment Agreement and the
1994 Stock Option Plan of the Company (the "Plan"), the Compensation Committee
of the Board of Directors of the Company has authorized the execution and
delivery of this Agreement on the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and for other good and valuable consideration, the parties hereto
agree as follows:
1. Grant of Option. Subject to all the terms and conditions of the Plan
and this Agreement, the Company hereby grants to the Optionee as of March 25,
1999 (the "Date of Grant") a stock option ("Option") to purchase 37,500 common
shares of the Company (such number being subject to adjustment as provided in
Section 9), $.01 par value, on the terms and conditions herein set forth.
2. Purchase Price. The purchase price per common share covered by this
Option shall be $8.625.
3. Type of Option. In accordance with the terms of Section 422 of the
Internal Revenue Code of 1986, as amended, the Option granted under this
Agreement shall be an Incentive Stock Option ("ISO") to the extent that the
aggregate fair market value of the shares which Optionee may purchase hereunder
for the first time in any calendar year (and under all such plans of the
Company) does not exceed $100,000.
<PAGE>
4. Vesting and Exercise. This Option shall vest and be
exercisable as follows:
(a) with respect to 18,750 shares:
4,688 on March 25, 2000
4,687 on March 25, 2001
4,688 on March 25, 2002
4,687 on March 25, 2003
(b) with respect to 18,750 shares:
6,250 shares at such time as the Fair Market
Value (as defined in the Plan) of the
Company's common shares equals or exceeds
$11.47 per share for 7 consecutive days at
any time subsequent to the Date of Grant
6,250 shares at such time as the Fair Market
Value of the Company's common shares equals
or exceeds $13.53 per share for 7
consecutive days at any time subsequent to
the Date of Grant
6,250 shares at such time as the Fair Market
Value of the Company's common shares equals
or exceeds $15.70 per share for 7
consecutive days at any time subsequent to
the Date of Grant
(c) Notwithstanding that the Fair Market Value of the
Company's common shares does not reach the specified
performance goals in (b) above, this Option will be
fully exercisable after December 1, 2003.
(d) This Option may not be exercised after five (5) years
from the Date of Grant (March 25, 2004 ).
5. Method of Exercising Option. The Optionee may exercise the Option
granted to Optionee by giving written notice to the Company which shall state
the election to exercise the Option and the number of shares with respect to
which the Option is being exercised. The written notice shall be signed by the
person exercising the Option, shall be delivered to the Company at its principal
executive office, and shall be accompanied by payment equal to the full purchase
price for the shares which are exercised. The purchase price of each share
purchased upon exercise of the Option shall be paid in full (a) in cash at the
time of exercise, (b) with common shares of the Company owned by the Optionee,
(c) by delivering to the Company (i) irrevocable instructions to deliver the
stock certificates representing the shares for which the Option is being
exercised, directly to a broker, and (ii) instructions to the broker to sell
such shares and promptly deliver to the Company the portion of the proceeds
equal to the total purchase price, or (d) in any combination thereof. For
purposes of making payment in common shares of the Company, such shares shall be
valued at their Fair Market Value (as defined in the Plan) on the date of
exercise of the Option and shall have been held by the Optionee for a period of
at least six (6) months. Such notice shall be given on the form attached hereto
and designated as Exhibit A. In the event the Option shall be exercised pursuant
to Section 7(b) hereof by any person or persons other than the Optionee, such
notice shall be accompanied by appropriate proof of the right of such person or
persons to exercise the Option.
<PAGE>
6. Non-Transferability of Option Rights. This Option shall not be
transferable by the Optionee except by will or by the laws of descent and
distribution. During the life of the Optionee, the Option shall be exercisable
only by Optionee. More particularly (but without limiting the generality of the
foregoing), the Option may not be assigned, transferred (except as provided
above), pledged, or hypothecated in any way, shall not be assignable by
operation of law, and shall not be subject to execution, attachment or similar
process. Any attempted assignment, transfer, pledge, hypothecation, or other
disposition of the Option contrary to the provisions hereof, and the levy of any
execution, attachment, or similar process upon the Option, shall be null and
void and without effect.
7. Termination of Employment or Death
(a) If the employment of Optionee shall terminate for Cause
(as defined in the Employment Agreement), this Option shall cease to be
exercisable on the date of such termination.
(b) If Optionee's employment shall terminate because of death
or Disability (as defined in the Plan), or if Optionee shall die after
termination of employment but while Optionee could have exercised this Option,
this Option may be exercised, to the extent that the Optionee was entitled to do
so at the date of termination of employment, at any time, or from time to time,
within one year after the date of death or termination of employment because of
Disability, but in no event later than the expiration date specified pursuant to
Section 4. In the case of death, exercise may be made by the Optionee's
Designated Beneficiary (as defined in the Plan).
(c) If Optionee's employment shall terminate for any reason
other than Cause, death, Disability, Change in Control (as defined in the
Employment Agreement), or Good Reason (as defined in the Employment Agreement),
Optionee must exercise this Option, to the extent Optionee was entitled to do so
at the date of termination of employment, at any time, or from time to time,
within three months after the date of termination of employment, but in no event
later than the expiration date specified pursuant to Section 4.
<PAGE>
8. General Restriction. This Option shall be subject to the requirement
that if at any time the Board of Directors in its discretion shall determine
that the listing, registration or qualification of the shares subject to such
Option on any securities exchange or under any state or federal law, or the
consent or approval of any government regulatory body, is necessary or desirable
as a condition of, or in connection with, the granting of such Option or the
issuance or purchase of shares thereunder, such Option may not be exercised in
whole or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Board of Directors.
9. Option Adjustments. In the event of a stock dividend, stock split or
other change in corporate structure or capitalization affecting the common
shares or any other transaction (including, without limitation, an extraordinary
cash dividend) which, in the determination of the Compensation Committee (the
"Committee") of the Board of Directors, affects the common shares such that an
adjustment is required in order to preserve the benefits or potential benefits
intended to be made available under the Plan, then the Committee shall equitably
adjust any or all of (i) the number and kind of shares subject to this Option,
and (ii) the purchase price with respect to the foregoing, provided that the
number of shares subject to this Option shall always be a whole number. In the
event of any tender offer or exchange offer (other than an offer by the Company)
for the Company's common shares, or a dissolution or liquidation of the Company,
or a merger or consolidation or similar transaction in which the Company is not
the surviving company, or a sale, exchange or other disposition of all or
substantially all of the Company assets, or a "Change in Control" of the Company
(as defined in the Employment Agreement), or the termination of employment for
Good Reason (as defined in the Employment Agreement), Optionee shall
automatically become fully vested in this Option and this Option shall become
fully exercisable.
10. Amendment to this Option Agreement. The Committee may modify or
amend this Option if it determines, in its sole discretion, that amendment is
necessary or advisable in the light of any addition to or change in the Internal
Revenue Code or in the regulations issued thereunder, or any federal or state
securities laws or other law or regulation, which change occurs after the Date
of Grant of this Option and by its terms applies to this Option. No amendment of
this Option, however, may, without the consent of the Optionee, make any changes
which would adversely effect the rights of such Optionee.
11. Disqualifying Disposition. In the event that Optionee shall sell or
transfer any common shares acquired upon the exercise of the ISO portion of this
Option prior to the later of (a) two (2) years from the Date of Grant or (b) one
(1) year from the date of exercise of the Option, Optionee agrees to so advise
the Company immediately and to promptly pay to the Company the amount of any
Federal, State or Local taxes that may be required.
<PAGE>
12. Right of Employment. Nothing contained herein shall confer upon the
Optionee any right to be continued in the employment of the Company or interfere
in any way with the right of the Company to terminate Optionee's employment at
any time for any cause.
13. Definitions. Any terms or provisions used herein which are defined
in Sections 421, 422 or 425 of the Internal Revenue Code of 1986, as amended, or
the regulations thereunder or corresponding provisions of subsequent laws and
regulations in effect at the time this Option is granted shall have the meanings
as therein defined.
14. Notices. Notices hereunder shall be in writing and if to the
Company shall be delivered personally to the Secretary of the Company or mailed
to its principal office, 675 Basket Road, P.O. Box 448, Webster, New York 14580,
addressed to the attention of the Secretary and, if to the Optionee, shall be
delivered personally or mailed to the Optionee at Optionee's address as the same
appears on the records of the Company.
15. Interpretations of this Agreement. All decisions and
interpretations made by the Committee with regard to any question arising
hereunder or under the Plan shall be binding and conclusive on the Company and
the Optionee. The Option granted hereunder, and the common shares which may be
issued upon exercise thereof, are subject to the provisions of the Plan. In the
event there is any inconsistency between the provisions of this Agreement and
those of the Plan, the provisions of the Plan shall govern.
16. Successors and Assigns. This Agreement shall bind and inure to the
benefit of the parties hereto and the successors and assigns of the Company and,
to the extent provided in Section 7, to the personal representatives, legatees
and heirs of the Optionee.
IN WITNESS WHEREOF, the Company has caused this Option Agreement to be
executed on the day and year first above written.
PSC INC.
By /s/ Robert S. Ehrlich
Robert S. Ehrlich, Chairman of the Board
ATTEST:
/s/ Martin S. Weingarten
Martin S. Weingarten, Secretary
<PAGE>
ACCEPTANCE
I, ROBERT C. STRANDBERG, hereby certify that I have read and fully
understand the foregoing Stock Option Agreement. I acknowledge that I have been
apprised that it is the intent of the Company that Optionees obtain and retain
an equity interest in the Company. I hereby execute this Agreement to indicate
my acceptance of this Option and my intent to comply with the terms thereof.
---------------------------------------
Optionee
---------------------------------------
Street Address
--------------------------------------
City State Zip
<PAGE>
EXHIBIT A
_________________, 19__
PSC Inc.
675 Basket Road
P.O. Box 448
Webster, New York 14580
Attention: Secretary
Dear Sir:
This is to notify you that I hereby elect to exercise my option rights
to common shares of PSC Inc. (the "Company") granted under the Option Agreement
(the "Agreement"), dated , 19__, issued to me pursuant to the 1994 Stock Option
Plan (the "Plan"). The purchase price pursuant to such Agreement, as adjusted,
is $____________ per share or $__________ in the aggregate.
In payment of the full purchase price, I enclose (please complete as
appropriate):
(a) my check in the sum of $__________
(b) __________ common shares of the Company owned by me free of
any liens or encumbrances and having a fair market value of
$_________
(c) an authorization letter which gives irrevocable instructions
to the Company to deliver the stock certificates representing
the shares for which the option is being exercised directly to
_____________ (name and address of broker) together with a
copy of the instructions to _______________ (name of broker)
to sell such shares and promptly deliver to the Company the
portion of the proceeds equal to the total purchase price and
withholding taxes due, if any.
Very truly yours,
Optionee's Signature
SECOND AMENDMENT
TO
AGREEMENT
This Second Amendment is dated as of July 13, 1999 and is made in
respect of the Agreement dated as of June 2, 1998 and the First Amendment
thereto dated as of December 11, 1998 (as amended and in effect immediately
prior to the date hereof, the "Agreement") by and between PSC INC., a New York
corporation ("PSC" or the "Company"), and ROBERT S. EHRLICH ("Ehrlich").
WHEREAS, Section 4 of the Agreement provides that Ehrlich will be
awarded 17,500 restricted Common Shares of the Company on each of March 25, 1999
(the "1999 Award") and March 25, 2000; and
WHEREAS, the 1999 Award was not made on March 25, 1999 because of a
lack of a sufficient number of shares in the 1994 Stock Option Plan (the
"Plan"); and
WHEREAS, at the 1999 Annual Meeting held on May 12, 1999, the
shareholders of the Company approved an increase in the number of shares
allocated to the Plan and, accordingly, the 1999 Award can now be made; and
WHEREAS, Ehrlich has requested that equity portion of his compensation
be in the form stock options for Common Shares rather than awards of restricted
Common Shares and the Board of Directors has consented to the change; and
WHEREAS, the number of stock options that is equivalent to the number
of restricted Common Shares that otherwise would have been awarded to Ehrlich is
35,000 shares; and
WHEREAS, the Board of Directors has adopted a policy whereby stock
option grants to officers and directors in 1999 will be reduced by 50%; and
<PAGE>
WHEREAS, Ehrlich is willing to accept a 50% reduction in the number of
stock options to be granted to him in 1999.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows
1. All of the terms used in this Second Amendment shall have the
meanings defined in the Agreement.
2. Effective as of March 25, 1999, Section 4 of the Agreement is
deleted in its entity and replaced by a new Section 4, which will read as
follows:
"4. Restricted Stock/Stock Options. Pursuant to the
Company's 1994 Stock Option Plan, on March 25, 1998 PSC
awarded Ehrlich 17,500 restricted Common Shares of the
Company, upon the terms and conditions and subject to the
restrictions set forth in the Restricted Stock Award Agreement
attached to the Agreement as Exhibit A. Effective as of March
25, 1999, the Company has granted Ehrlich, pursuant to the
Company's 1994 Stock Option Plan, a stock option for 17,500
Common Shares of the Company at an exercise price of $8.625
per share, upon the terms and conditions set forth in the
Stock Option Agreement attached hereto as Exhibit A. If
Ehrlich is Chairman of the Board of Directors of the Company
on March 25, 2000, PSC will grant Ehrlich a stock option for
35,000 Common Shares pursuant to a Stock Option Agreement
similar in form to Exhibit A, as modified to reflect
appropriate changes in grant, vesting and expiration dates and
in purchase and stock performance prices. Notwithstanding the
foregoing sentence, if there is a Change in Control (as
hereinafter defined), and if Ehrlich becomes entitled to
receive Severance Benefits (as hereinafter defined), Ehrlich
will be immediately entitled to receive the stock option which
otherwise would have been granted to him on March 25, 2000,
fully vested and exercisable and at a purchase price equal to
the Fair Market Value of the Company's Common Shares on the
date preceding the date of the Change in Control."
3. Except as modified by this Second Amendment, the Agreement shall
remain in full force and effect and is hereby ratified and confirmed.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Second Amendment to be
executed as of the day and year first above written.
PSC Inc.
By: /s/ Robert C. Strandberg
Robert C. Strandberg
President and
Chief Executive Officer
Robert S. Ehrlich
<PAGE>
EXHIBIT A
PSC INC.
OPTION AGREEMENT PURSUANT TO
1994 STOCK OPTION PLAN
OPTION AGREEMENT, executed in duplicate as of the 13th day of July,
1999, between PSC INC., a New York corporation (the "Company"), and ROBERT S.
EHRLICH, Chairman of the Board of Directors of the Company (the "Optionee").
RECITALS
Optionee entered into a compensation agreement with the Company on June
2, 1998, the First Amendment to the compensation agreement on December 11, 1998
and the Second Amendment to the compensation agreement on July 13, 1999 (as so
amended, the "Compensation Agreement").
In accordance with the provisions of the Compensation Agreement and the
1994 Stock Option Plan of the Company (the "Plan"), the Compensation Committee
of the Board of Directors of the Company has authorized the execution and
delivery of this Agreement as partial compensation for the performance of
Optionee's duties as Chairman of the Board on the terms and conditions herein
set forth.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and for other good and valuable consideration, the parties hereto
agree as follows:
1. Grant of Option. Subject to all the terms and conditions of the Plan
and this Agreement, the Company hereby grants to the Optionee as of March 25,
1999 (the "Date of Grant") a nonstatutory stock option ("Option") to purchase
17,500 common shares of the Company (such number being subject to adjustment as
provided in Section 8), $.01 par value, on the terms and conditions herein set
forth.
2. Purchase Price. The purchase price per common share covered
by this Option shall be $8.625.
<PAGE>
3. Vesting and Exercise. This Option shall vest and be exercisable as
follows:
(a) with respect to 8,750 shares:
2,188 on March 25, 2000
2,187 on March 25, 2001
2,188 on March 25, 2002
2,187 on March 25, 2003
(b) with respect to 8,750 shares:
2,916 shares at such time as the Fair Market
Value (as defined in the Plan) of the
Company's common shares equals or exceeds
$11.47 per share for 7 consecutive days at
any time subsequent to the Date of Grant
2,917 shares at such time as the Fair Market
Value of the Company's common shares equals
or exceeds $13.53 per share for 7
consecutive days at any time subsequent to
the Date of Grant
2,917 shares at such time as the Fair Market
Value of the Company's common shares equals
or exceeds $15.70 per share for 7
consecutive days at any time subsequent to
the Date of Grant
(c) Notwithstanding that the Fair Market Value of the
Company's common shares does not reach the specified
performance goals in (b) above, this Option will be
fully exercisable after December 1, 2003.
(d) This Option may not be exercised after five (5) years
from the Date of Grant (March 25, 2004).
<PAGE>
4. Method of Exercising Option. The Optionee may exercise the Option
granted to Optionee by giving written notice to the Company which shall state
the election to exercise the Option and the number of shares with respect to
which the Option is being exercised. The written notice shall be signed by the
person exercising the Option, shall be delivered to the Company at its principal
executive office, and shall be accompanied by payment equal to the full purchase
price for the shares which are exercised. The purchase price of each share
purchased upon exercise of the Option shall be paid in full (a) in cash at the
time of exercise, (b) with common shares of the Company owned by the Optionee,
(c) by delivering to the Company (i) irrevocable instructions to deliver the
stock certificates representing the shares for which the Option is being
exercised, directly to a broker, and (ii) instructions to the broker to sell
such shares and promptly deliver to the Company the portion of the proceeds
equal to the total purchase price, or (d) in any combination thereof. For
purposes of making payment in common shares of the Company, such shares shall be
valued at their Fair Market Value (as defined in the Plan) on the date of
exercise of the Option and shall have been held by the Optionee for a period of
at least six (6) months. Such notice shall be given on the form attached hereto
and designated as Exhibit A. In the event the Option shall be exercised pursuant
to Section 6(b) hereof by any person or persons other than the Optionee, such
notice shall be accompanied by appropriate proof of the right of such person or
persons to exercise the Option.
5. Non-Transferability of Option Rights. This Option shall not be
transferable by the Optionee except by will or by the laws of descent and
distribution. During the life of the Optionee, the Option shall be exercisable
only by Optionee. More particularly (but without limiting the generality of the
foregoing), the Option may not be assigned, transferred (except as provided
above), pledged, or hypothecated in any way, shall not be assignable by
operation of law, and shall not be subject to execution, attachment or similar
process. Any attempted assignment, transfer, pledge, hypothecation, or other
disposition of the Option contrary to the provisions hereof, and the levy of any
execution, attachment, or similar process upon the Option, shall be null and
void and without effect.
<PAGE>
6. Termination of Chairmanship or Death
(a) If the Optionee's position as Chairman of the Board shall
terminate for cause, this Option shall cease to be exercisable on the date of
such termination.
(b) If Optionee's position as Chairman of the Board shall
terminate because of death or Disability (as defined in the Plan), or if
Optionee shall die after termination of his position as Chairman of the Board
but while Optionee could have exercised this Option, this Option may be
exercised, to the extent that the Optionee was entitled to do so at the date of
termination of his position as Chairman of the Board, at any time, or from time
to time, within one (1) year after the date of death or termination of his
position as Chairman of the Board because of Disability, but in no event later
than the expiration date specified pursuant to Section 3. In the case of death,
exercise may be made by the Optionee's Designated Beneficiary (as defined in the
Plan).
(c) If Optionee's position as Chairman of the Board shall
terminate for any reason other than cause, death, Disability, or Change in
Control (as defined in the Compensation Agreement), Optionee shall be entitled
to exercise this Option to the extent that the Option has vested and become
exercisable pursuant to Section 3 above, at any time, or from time to time so
long as Optionee continues to serve as a director of the Company or within three
months after the date of termination of his directorship, but in no event later
than the expiration date specified pursuant to Section 3.
7. General Restriction. This Option shall be subject to the requirement
that if at any time the Board of Directors in its discretion shall determine
that the listing, registration or qualification of the shares subject to such
Option on any securities exchange or under any state or federal law, or the
consent or approval of any government regulatory body, is necessary or desirable
as a condition of, or in connection with, the granting of such Option or the
issuance or purchase of shares thereunder, such Option may not be exercised in
whole or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Board of Directors.
8. Option Adjustments. In the event of a stock dividend, stock split or
other change in corporate structure or capitalization affecting the common
shares or any other transaction (including, without limitation, an extraordinary
cash dividend) which, in the determination of the Compensation Committee (the
"Committee") of the Board of Directors, affects the common shares such that an
adjustment is required in order to preserve the benefits or potential benefits
intended to be made available under the Plan, then the Committee shall equitably
adjust any or all of (i) the number and kind of shares subject to this Option,
and (ii) the purchase price with respect to the foregoing, provided that the
number of shares subject to this Option shall always be a whole number. In the
event of any tender offer or exchange offer (other than an offer by the Company)
for the Company's common shares, or a dissolution or liquidation of the Company,
or a merger or consolidation or similar transaction in which the Company is not
the surviving company, or a sale, exchange or other disposition of all or
substantially all of the Company assets, or a Change in Control of the Company
(as defined in the Compensation Agreement), Optionee shall automatically become
fully vested in this Option and this Option shall become fully exercisable.
<PAGE>
9. Amendment to this Option Agreement. The Committee may modify or
amend this Option if it determines, in its sole discretion, that amendment is
necessary or advisable in the light of any addition to or change in the Internal
Revenue Code or in the regulations issued thereunder, or any federal or state
securities laws or other law or regulation, which change occurs after the Date
of Grant of this Option and by its terms applies to this Option. No amendment of
this Option, however, may, without the consent of the Optionee, make any changes
which would adversely effect the rights of such Optionee.
10. Notices. Notices hereunder shall be in writing and if to the
Company shall be delivered personally to the Secretary of the Company or mailed
to its principal office, 675 Basket Road, P.O. Box 448, Webster, New York 14580,
addressed to the attention of the Secretary and, if to the Optionee, shall be
delivered personally or mailed to the Optionee at Optionee's address as the same
appears on the records of the Company.
11. Interpretations of this Agreement. All decisions and
interpretations made by the Committee with regard to any question arising
hereunder or under the Plan shall be binding and conclusive on the Company and
the Optionee. The Option granted hereunder, and the common shares which may be
issued upon exercise thereof, are subject to the provisions of the Plan. In the
event there is any inconsistency between the provisions of this Agreement and
those of the Plan, the provisions of the Plan shall govern.
12. Successors and Assigns. This Agreement shall bind and inure to the
benefit of the parties hereto and the successors and assigns of the Company and,
to the extent provided in Section 6, to the personal representatives, legatees
and heirs of the Optionee.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Option Agreement to be
executed on the day and year first above written.
PSC INC.
By /s/ Robert C. Strandberg
Robert C. Strandberg
President and Chief Executive Officer
ATTEST:
/s/ Martin S. Weingarten
Martin S. Weingarten, Secretary
<PAGE>
ACCEPTANCE
I, ROBERT S. EHRLICH, hereby certify that I have read and fully
understand the foregoing Stock Option Agreement. I acknowledge that I have been
apprised that it is the intent of the Company that Optionees obtain and retain
an equity interest in the Company. I hereby execute this Agreement to indicate
my acceptance of this Option and my intent to comply with the terms thereof.
-------------------------------------
Optionee
------------------------------------
Street Address
------------------------------------
City State Zip
<PAGE>
EXHIBIT A
_________________, 19__
PSC Inc.
675 Basket Road
P.O. Box 448
Webster, New York 14580
Attention: Secretary
Dear Sir:
This is to notify you that I hereby elect to exercise my option rights
to common shares of PSC Inc. (the "Company") granted under the Option Agreement
(the "Agreement"), dated , 19__, issued to me pursuant to the 1994 Stock Option
Plan (the "Plan"). The purchase price pursuant to such Agreement, as adjusted,
is $____________ per share or $__________ in the aggregate.
In payment of the full purchase price, I enclose (please complete as
appropriate):
(a) my check in the sum of $__________
(b) __________ common shares of the Company owned by me free of
any liens or encumbrances and having a fair market value of
$_________
(c) an authorization letter which gives irrevocable instructions
to the Company to deliver the stock certificates representing
the shares for which the option is being exercised directly to
_____________ (name and address of broker) together with a
copy of the instructions to _______________ (name of broker)
to sell such shares and promptly deliver to the Company the
portion of the proceeds equal to the total purchase price and
withholding taxes due, if any.
Very truly yours,
------------------------------------
Optionee's Signature
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule Q2 1999
</LEGEND>
<CIK> 319379
<NAME> PSC Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUL-02-1999
<EXCHANGE-RATE> 1
<CASH> 5,464
<SECURITIES> 0
<RECEIVABLES> 38,308
<ALLOWANCES> 1,554
<INVENTORY> 21,761
<CURRENT-ASSETS> 68,630
<PP&E> 27,101
<DEPRECIATION> 20,605
<TOTAL-ASSETS> 168,473
<CURRENT-LIABILITIES> 51,039
<BONDS> 0
0
1
<COMMON> 120
<OTHER-SE> 49,712
<TOTAL-LIABILITY-AND-EQUITY> 168,473
<SALES> 117,146
<TOTAL-REVENUES> 117,146
<CGS> 67,519
<TOTAL-COSTS> 37,020
<OTHER-EXPENSES> 88
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,082
<INCOME-PRETAX> 8,576
<INCOME-TAX> 2,997
<INCOME-CONTINUING> 5,579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,579
<EPS-BASIC> 0.47
<EPS-DILUTED> 0.41
</TABLE>
