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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
675 Basket Road, Webster, New York 14580
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(Address of principal executive offices) (Zip Code)
(716) 265-1600
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(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 10, 2000, there were 12,301,801 shares of common stock
outstanding.
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<PAGE>
PSC INC. AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements Page Number
-----------
Consolidated Balance Sheets as of
June 30, 2000 (Unaudited) and December 31, 1999....................3-4
Consolidated Statements of Operations
and Retained Earnings for the
three and six months ended:
June 30, 2000 (Unaudited) and July 2, 1999 (Unaudited) ............5-6
Consolidated Statements of Cash Flows
for the six months ended:
June 30, 2000 (Unaudited) and July 2, 1999 (Unaudited) ..............7
Notes to Consolidated Financial Statements (Unaudited) ...........8-13
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................14-16
PART II: OTHER INFORMATION
Item 1 Legal Proceedings ..................................................17
Item 2 Changes in Securities .............................................17
Item 3 Defaults upon Senior Securities ....................................17
Item 4 Submission of Matters to a Vote of Security Holders ...............17
Item 5 Other Information ................................................17
Item 6 Exhibits and Reports on Form 8-K ..................................17
<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>
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 6,318 $ 1,402
Accounts receivable, net of allowance for doubtful
accounts of $727 and $685, respectively.......... 44,217 38,396
Inventories ....................................... 26,165 23,343
Prepaid expenses and other ........................ 3,041 3,514
---------------- ----------------
TOTAL CURRENT ASSETS .............................. 79,741 66,655
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $26,773 and $23,614,
respectively...................................... 27,538 25,994
DEFERRED TAX ASSETS .................................. 21,502 20,762
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $33,551 and $27,476, respectively.. 97,342 53,330
---------------- ----------------
TOTAL ASSETS ......................................... $226,123 $166,741
================ ================
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
<PAGE>
<TABLE>
PSC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except per share data)
(Continued)
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ................. $ 13,871 $16,281
Accounts payable .................................. 24,456 20,685
Accrued expenses .................................. 9,738 7,086
Accrued payroll and related employee benefits ..... 4,720 5,758
----------------- ----------------
TOTAL CURRENT LIABILITIES ......................... 52,785 49,810
LONG-TERM DEBT, less current maturities .............. 114,900 57,585
ACCRUED PROVISION FOR DISPUTED ROYALTIES ............. 7,834 6,400
OTHER LONG-TERM LIABILITIES .......................... 1,957 1,613
SHAREHOLDERS' EQUITY:
Series A convertible preferred shares,
par value $.01; 110 shares authorized,
issued and outstanding ($11,000 aggregate
liquidation value) .............................. 1 1
Series B preferred shares, par value $.01;
175 authorized, no shares issued and outstanding.. -- --
Undesignated preferred shares, par value $.01;
9,715 authorized, no shares issued and outstanding. -- --
Common shares, par value $.01; 40,000 authorized
12,215 and 12,080 shares issued and outstanding... 122 121
Additional paid-in capital ........................ 73,296 71,843
Retained earnings/(Accumulated deficit) ........... (21,214) (18,065)
Accumulated other comprehensive income/(loss) ..... (2,201) (1,210)
Less treasury stock repurchased at cost, 180 shares (1,357) (1,357)
----------------- ----------------
TOTAL SHAREHOLDERS' EQUITY ........................... 48,647 51,333
----------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........... $226,123 $166,741
================= ================
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
<PAGE>
<TABLE>
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(All amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended
--------------------------------------------
June 30, 2000 July 2, 1999
------------- ------------
<S> <C> <C>
NET SALES ......................................... $67,418 $58,001
COST OF SALES ..................................... 41,675 33,979
------------------ ---------------
Gross profit ................................... 25,743 24,022
OPERATING EXPENSES:
Engineering, research and development .......... 5,415 4,419
Selling, general and administrative ............ 13,103 10,798
Severance and other costs ...................... (300) --
Merger related costs ........................... 959 --
Amortization of intangibles resulting from
business acquisitions ....................... 2,887 1,513
------------------ ---------------
Income from operations ......................... 3,679 7,292
INTEREST AND OTHER INCOME/(EXPENSE):
Interest expense ............................... (3,120) (1,908)
Interest income ................................ 76 48
Other income/(expense) ......................... 14 (73)
------------------ ---------------
(3,030) (1,933)
------------------ ---------------
Income before income tax provision ............. 649 5,359
Income tax provision ........................... 648 1,871
------------------ ---------------
Net income ..................................... $ 1 $3,488
================== ===============
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic ....................................... $0.00 $0.29
Diluted ..................................... $0.00 $0.25
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Basic ....................................... 12,027 11,928
Diluted ..................................... 13,448 13,894
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit),
beginning of period ....................... ($21,215) ($23,936)
Net income ..................................... 1 3,488
------------------ ---------------
Retained earnings/(Accumulated deficit),
end of period ............................. ($21,214) ($20,448)
================== ===============
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
<PAGE>
<TABLE>
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(All amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Six Months Ended
--------------------------------------------
June 30, 2000 July 2, 1999
------------- ------------
<S> <C> <C>
NET SALES ............................................ $128,857 $117,146
COST OF SALES ........................................ 79,544 67,519
------------------ ---------------
Gross profit ...................................... 49,313 49,627
OPERATING EXPENSES:
Engineering, research and development ............. 11,237 8,547
Selling, general and administrative ............... 27,517 23,158
Severance and other costs ......................... 1,674 2,103
Merger related costs .............................. 959 --
Amortization of intangibles resulting from
business acquisitions .......................... 5,468 3,212
------------------ ---------------
Income from operations ............................ 2,458 12,607
INTEREST AND OTHER INCOME/(EXPENSE):
Interest expense .................................. (6,543) (4,082)
Interest income ................................... 222 139
Other income/(expense) ............................ 23 (88)
------------------ ---------------
(6,298) (4,031)
------------------ ---------------
Income/(loss) before income tax provision/(benefit) (3,840) 8,576
Income tax provision/(benefit) .................... (691) 2,997
------------------ ---------------
Net income/(loss) ................................. ($ 3,149) $ 5,579
================== ===============
NET INCOME/(LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic .......................................... ($0.26) $0.47
Diluted ........................................ ($0.26) $0.41
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Basic .......................................... 12,028 11,912
Diluted ........................................ 12,028 13,774
RETAINED EARNINGS/(ACCUMULATED DEFICIT):
Retained earnings/(Accumulated deficit),
beginning of period .......................... ($18,065) ($26,027)
Net income/(loss) ................................. (3,149) 5,579
------------------ ---------------
Retained earnings/(Accumulated deficit),
end of period ............................... ($21,214) ($20,448)
================== ===============
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
<PAGE>
<TABLE>
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
--------------------------------------------
June 30, 2000 July 2, 1999
------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) ................................................ ($3,149) $5,579
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization .................................... 9,238 6,649
Deferred tax assets .............................................. (718) 1,043
(Increase) decrease in assets:
Accounts receivable ........................................... 613 (1,196)
Inventories ................................................... 1,198 (4,511)
Prepaid expenses and other .................................... 527 (151)
Increase (decrease) in liabilities:
Accounts payable .............................................. 1,217 2,212
Accrued expenses .............................................. (430) 1,376
Accrued provision for disputed royalties ...................... 1,434 --
Accrued payroll and related employee benefits ................. (1,111) 30
Accrued acquisition related restructuring costs ............... -- (283)
------------------ ---------------
Net cash provided by operating activities ..................... 8,819 10,748
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net ........................................ (2,151) (2,213)
Net cash paid for business ....................................... (53,486) --
Additions to intangible and other assets ......................... (2,771) (5,283)
Proceeds from sale and leaseback transaction ..................... -- 8,043
------------------ ---------------
Net cash (used in) provided by investing activities ........... (58,408) 547
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt ...................................... 112,000 7,000
Payments of long-term debt ....................................... (57,693) (19,182)
Additions to other long-term liabilities, net .................... 339 39
Purchase of treasury stock -- (72)
Exercise of options and issuance of common shares ................ 822 1,253
Tax benefit from exercise or disposition of stock options ........ 28 27
------------------ ---------------
Net cash provided by (used in) financing activities ........... 55,496 (10,935)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS ............................................. (991) (1,076)
------------------ ---------------
NET INCREASE/(DECREASE) IN CASH AND ................................. 4,916 (716)
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS:
Beginning of period ........................................... 1,402 6,180
------------------ ---------------
End of period ................................................. $ 6,318 $5,464
================== ===============
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
<PAGE>
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
(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 June 30, 2000, the results of
operations for the three and six months ended June 30, 2000 and July 2,
1999 and its cash flows for the six months ended June 30, 2000 and July 2,
1999. The results of operations for the three and six months ended June
30, 2000 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, 1999 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:
June 30, 2000 December 31, 1999
------------------- ------------------------
Raw materials $15,907 $14,358
Work-in-process 5,342 5,238
Finished goods 4,916 3,747
------------ ------------
$26,165 $23,343
============ ============
(2) LONG-TERM DEBT
Long-term debt consists of the following:
June 30, 2000 December 31, 1999
------------------- ----------------------
Senior term loan $70,000 $42,000
Revolving line of credit 27,000 --
Subordinated term loan 29,637 29,607
Subordinated promissory note 1,563 2,188
Other 571 71
------------ ------------
128,771 73,866
Less: current maturities 13,871 16,281
------------ ------------
$114,900 $57,585
============ ============
<PAGE>
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
(All amounts in thousands, except per share data)
(Unaudited)
The Company borrowed an additional $58.0 million under its amended senior
term loan and revolving credit facilities to finance the acquisition of
Percon Incorporated (Percon). See Note 3 "Acquisition". The amended
revolving credit facilities provide for borrowings up to $50.0 million, of
which, $27.0 million was utilized toward the acquisition.
(3) ACQUISITION
On January 19, 2000, the Company acquired all of the outstanding shares of
Percon, a manufacturer of wireless and batch portable data terminals,
decoders, input devices and data management software, for approximately
$57.0 million. The acquisition was accounted for under the purchase method
of accounting and accordingly, the results of Percon's operations are
included in the 2000 consolidated statements of operations since the date
of acquisition. The excess purchase price over the fair value of net
assets acquired was approximately $46.0 million and is being amortized on
a straight-line basis over 10 years.
The following unaudited pro forma condensed results of operations combine
the operations of the Company with those of Percon as if the acquisition
was consummated on January 1, 1999. The pro forma information is presented
after giving effect to certain adjustments for amortization of goodwill,
incremental interest expense on acquisition financing and the related
income tax effects. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the
results that would have been achieved during the periods indicated and are
not intended to be indicative of future results.
Pro Forma Six Months Ended
-----------------------------------
June 30, 2000 July 2, 1999
----------------- -------------
Net sales ........................... $129,616 $133,589
Income from operations .............. 151 12,515
Net income/(loss) ................... (4,433) 3,375
Net income/(loss) per common and
common equivalent share:
Basic .......................... ($0.37) $0.28
Diluted ........................ ($0.37) $0.24
Weighted average number of common and
common equivalent shares outstanding:
Basic .......................... 12,028 11,912
Diluted ........................ 12,028 13,774
<PAGE>
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
(All amounts in thousands, except per share data)
(Unaudited)
(4) SEVERANCE AND OTHER COSTS
During the first quarter of 2000, the Company recorded a pretax charge of
$2.0 million for employee severance and benefit costs for the elimination
of approximately 35 positions resulting from integration activities
associated with the Percon acquisition and reorganization actions in
connection with the Company's sales force. Excluding $0.3 million reversed
in the second quarter of 2000, the Company utilized $1.0 million of the
accrual in 2000. As of June 30, 2000, the amount of the severance accruals
was approximately $0.7 million, which relates to current contractual
obligations. Including $0.3 million reversed in the second quarter, these
costs reduced 2000 income/(loss) before income tax provision/(benefit),
net income/(loss), basic EPS and diluted EPS by $1.7 million, $1.1
million, $0.09 and $0.09, respectively.
(5) MERGER RELATED COSTS
On June 5, 2000, the Company, Mohawk Corp. (Parent) and Mohawk Acquisition
Corp., a wholly owned subsidiary of Parent (Purchaser), entered into an
Agreement and Plan of Merger. Pursuant to the agreement, Purchaser
commenced a cash tender offer to purchase all outstanding shares of common
stock, all outstanding shares of Series A Convertible Preferred Stock and
all outstanding warrants, in each case, net to the seller in cash, upon
the terms and subject to the conditions set forth in the Offer to Purchase
dated June 19, 2000 and in the related Letters of Transmittal.
On July 24, 2000, Parent, Purchaser and the Company executed a Termination
Agreement whereby the parties agreed to terminate the offer effective on
such date. The Company recorded a pre-tax charge of approximately $1.0
million during the second quarter of 2000 for expenses related to the
merger activities.
(6) SHAREHOLDERS' EQUITY
Comprehensive income, which includes net income/(loss), foreign currency
translation adjustments and unrealized gain/(loss) on securities, was
($256) and $3,414 for the three months ended June 30, 2000 and July 2,
1999, respectively, and ($4,140) and $4,340 for the six months ended June
30, 2000 and July 2, 1999, respectively.
During the six month period ended June 30, 2000, employees purchased
approximately 73 shares at $6.27 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 SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
(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, 2000 Weighted January 1, 1999 Weighted
to Average to Average
June 30, 2000 Price December 31, 1999 Price
-------------------- ------------ ----------------------- -------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of period ............ 3,221 $7.84 3,027 $7.98
Options granted ................... 154 6.73 432 7.28
Options exercised ................. (54) 5.87 (82) 7.24
Options forfeited/canceled ........ (329) 8.17 (156) 9.24
-------- --------
Options outstanding at
end of period .................. 2,992 $7.79 3,221 $7.84
======== ========
Number of options at end of period:
Exercisable .................... 1,922 $8.17 2,058 $8.13
Available for grant ............ 645 693
</TABLE>
During the six month period ended June 30, 2000, 222 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.
(7) NET INCOME/(LOSS) 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 June 30, 2000 and July 2, 1999 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, 1999 and (2) warrants issued in
connection with the acquisition of Spectra were converted on January 1,
1999.
The following options and warrants were not included in the computation of
diluted EPS since the exercise prices were greater than the average market
price of Common Shares. Options to purchase 3,960 and 497 common shares at
an average price of $7.17 and $10.49 per share were outstanding for the
three months ended June 30, 2000 and July 2, 1999, respectively. Options
to purchase 2,914 and 551 common shares at an average price of $7.81 and
$10.08 per share were outstanding for the six months ended June 30, 2000
and July 2, 1999, respectively. Warrants to purchase 180 common shares at
a price of $8.00 per share were outstanding for the three and six months
ended June 30, 2000.
<PAGE>
<TABLE>
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
(All amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------
June 30, 2000 July 2, 1999
----------------------------------------- -------------------------------------------
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 $ 1 12,027 $0.00 $3,488 11,928 $0.29
Effect of dilutive securities: ===== =====
Options -- 2 -- 425
Warrants -- 44 -- 166
Preferred Shares -- 1,375 -- 1,375
------------ --------------- --------- ------------
Diluted EPS:
Income available to
common shareholders and
assumed conversions $ 1 13,448 $0.00 $3,488 13,894 $0.25
=== ====== ===== ====== ====== =====
Six Months Ended
---------------------------------------------------------------------------------------
June 30, 2000 July 2, 1999
------------------------------------------------ -----------------------------------
Per Per
Income Shares Share Income Shares Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS:
Income available to
common shareholders ($3,149) 12,208 ($0.26) $5,579 11,912 $0.47
Effect of dilutive securities:
Options -- -- -- 361
Warrants -- -- -- 126
Preferred Shares -- -- -- 1,375
------------ ------------- ---------- ----------
Diluted EPS:
Income available to common
shareholders and assumed
conversions ($3,149) 12,028 ($0.26) $5,579 13,774 $0.41
======== ====== ======= ====== ====== =====
</TABLE>
<PAGE>
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
(All amounts in thousands, except per share data)
(Unaudited)
(8) 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 will adopt SFAS No. 133 on January 1, 2001.
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
operations.
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 operations.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
of the Company's December 31, 1999 annual report on Form 10-K.
Overview
On December 21, 1999, the Company acquired substantially all of the assets of
GAP Technologies, Inc. and GEO Labs, Inc. (GAP) for approximately $4.8 million.
GAP is a technology and research group that designs and manufactures miniature
laser scan engines and pen-based scanners. The Company recently introduced an
innovative consumer home shopping appliance, incorporating the miniature scan
engine technology developed by GAP. The home shopping system enables consumers
to create a shopping list by scanning product bar codes and then transmitting
the list online to the retailer.
On January 19, 2000, the Company acquired all of the outstanding shares of
Percon Incorporated (Percon), a manufacturer of wireless and batch portable data
terminals (PDTs), decoders, input devices and data management software, for
approximately $57.0 million. The acquisition of Percon significantly increased
the scope of the Company's product line, enhancing the Company's ability to
provide systems type solutions and to expand the Company into the PDT and
software/services categories of the AIDC market, which are growing rapidly.
On June 5, 2000, the Company, Mohawk Corp. (Parent) and Mohawk Acquisition
Corp., a wholly owned subsidiary of Parent (Purchaser), entered into an
Agreement and Plan of Merger. Pursuant to the agreement, Purchaser commenced a
cash tender offer to purchase all outstanding shares of common stock, all
outstanding shares of Series A Convertible Preferred Stock and all outstanding
warrants, in each case net to the seller in cash, upon the terms and subject to
the conditions set forth in the Offer to Purchase dated June 19, 2000 and in the
related Letters of Transmittal.
On July 24, 2000, Parent, Purchaser and the Company executed a Termination
Agreement whereby the parties agreed to terminate the offer effective on such
date. The Company recorded a pre-tax charge of approximately $1.0 million during
the second quarter of 2000 for expenses related to the merger activities.
<PAGE>
Results of Operations: Three Months ended June 30, 2000 and July 2, 1999
Net Sales. Net sales during the three months ended June 30, 2000 increased $9.4
million or 16% compared with the same period in 1999. The increase in net sales
is attributed primarily to increased sales in U-Scan(R) Express Self-Checkout
Systems and inclusion of Percon product sales offset by a decline in sales of
retail fixed position products and a significant impact of unfavorable foreign
currency exchange rates.
Gross Profit. Gross profit during the three months ended June 30, 2000 increased
$1.7 million or 7% compared with the same period in 1999. As a percentage of
sales, gross profit decreased from 41.4% to 38.2%. The decrease in gross profit
percentage is primarily due to a change in the Company's product mix and the
impact of unfavorable foreign currency exchange rates.
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $1.0 million or 23%, as compared to the same period in
1999. As a percentage of sales, ER&D was 8.0% in the second quarter of 2000
versus 7.6% of net sales in the second quarter of 1999. The increase in ER&D is
primarily attributable to additional investments in developing new products and
enhancing existing products, and the inclusion of GAP Technologies and Percon,
which were acquired in December 1999 and January 2000, respectively.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses increased $2.3 million or 21%, as compared to the second quarter of
1999. As a percentage of sales, SG&A was 19.4% in 2000 versus 18.6% in 1999. The
dollar and percentage increases are primarily due to the inclusion of Percon and
higher royalty expense recorded in connection with the February 8, 2000 decision
related to the Company's licensing agreements with Symbol Technologies, Inc. See
"Legal Proceedings."
Interest Expense. Interest expense increased $1.2 million versus the comparable
period in 1999. The increase is primarily due to additional borrowings of $58.0
million in January 2000 to finance the acquisition of Percon.
Income Tax Provision. Excluding nondeductible goodwill amortization recorded in
connection with the Percon acquisition, the Company's effective tax rate was 36%
in 2000 versus 35% in 1999.
<PAGE>
Results of Operations: Six Months ended June 30, 2000 and July 2, 1999
Net Sales. Net sales during the six months ended June 30, 2000 increased $11.7
million or 10% compared with the same period in 1999. The increase in net sales
is attributed primarily to increased sales in U-Scan(R) Express Self-Checkout
Systems and inclusion of Percon product sales offset by a decline in sales of
retail fixed position products and a significant impact of unfavorable foreign
currency exchange rates.
Gross Profit. Gross profit during the six months ended June 30, 2000 decreased
$0.3 million or 1% compared with the same period in 1999. As a percentage of
sales, gross profit decreased from 42.4% to 38.3%. The decrease in gross profit
percentage is primarily due to a change in the Company's product mix and the
impact of unfavorable foreign currency exchange rates.
Engineering, Research and Development. Engineering, Research and Development
(ER&D) expenses increased $2.7 million or 32%, as compared to the same period in
1999. As a percentage of sales, ER&D was 8.7% in the second quarter of 2000
versus 7.3% of net sales in the second quarter of 1999. The increase in ER&D is
primarily attributable to additional investments in developing new products and
enhancing existing products, and the inclusion of GAP Technologies and Percon,
which were acquired in December 1999 and January 2000, respectively.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses increased $4.4 million or 19%, as compared to the second quarter of
1999. As a percentage of sales, SG&A was 21.4% in 2000 versus 19.8% in 1999. The
dollar and percentage increases are primarily due to the inclusion of Percon and
higher royalty expense recorded in connection with the February 8, 2000 decision
related to the Company's licensing agreements with Symbol Technologies, Inc. See
"Legal Proceedings."
Severance and Other Costs. During the first quarter of 2000, the Company
recorded a pretax charge of $2.0 million for employee severance and benefit
costs for the elimination of approximately 35 positions resulting from
integration activities associated with the acquisition of Percon and
reorganization actions in connection with the Company's sales force. Excluding
$0.3 million reversed in the second quarter of 2000, the Company utilized $1.0
million of the accrual in 2000. As of June 30, 2000, the amount of the severance
accruals was approximately $0.7 million, which relates to current contractual
obligations. Including $0.3 million reversed in the second quarter, these costs
reduced 2000 income/(loss) before income tax provision/(benefit), net
income/(loss), basic EPS and diluted EPS by $1.7 million, $1.1 million, $0.09
and $0.09, respectively.
Interest Expense. Interest expense increased $2.5 million versus the comparable
period in 1999. The increase is primarily due to additional borrowings of $58.0
million in January 2000 to finance the acquisition of Percon, and bank fees
incurred in connection with amendments and waivers obtained for the senior and
subordinated credit agreements.
Income Tax Provision/(Benefit). Excluding nondeductible goodwill amortization
recorded in connection with the Percon acquisition, the Company's effective tax
rate was 36% in 2000 versus 35% in 1999.
<PAGE>
Liquidity and Capital Resources
Current assets increased $13.1 million from December 31, 1999 primarily due to
the inclusion of Percon and to the increase in accounts receivable. Current
liabilities increased $3.0 million from December 31, 1999 primarily due to the
increase in accrued expenses in connection with merger related activities and
higher interest charges offset by a decrease in current portion of long-term
debt and accrued payroll and related employee benefits. As a result, working
capital increased $10.1 million from December 31, 1999.
Property, plant and equipment expenditures totaled $2.2 million for the six
months ended June 30, 2000 and July 2, 1999. The 2000 expenditures primarily
related to new product tooling, manufacturing equipment, and computer software
and hardware.
The long-term debt to capital percentage was 70.3% at June 30, 2000 versus 52.9%
at December 31, 1999 primarily due to $58.0 million of additional debt borrowed
to finance the acquisition of Percon. At June 30, 2000, liquidity immediately
available to the Company consisted of cash and cash equivalents of $6.3 million.
The Company has revolving credit facilities totaling $50.0 million, of which,
$27.0 million was outstanding as of June 30, 2000. 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.
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.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
Certain statements contained in this Management's Discussion and Analysis may be
forward-looking in nature, or "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Management cautions that these
statements are estimates of future performance and are highly dependent upon a
variety of important factors, which could cause actual results to differ
materially from the estimate. These factors include the market acceptance of
products, competitive product offerings, the disposition of legal issues, the
ability of the Company to identify and address successfully the Year 2000 issues
in a timely manner and at costs that are reasonably in line with projections,
and the ability of the Company's vendors to identify and address successfully
their own Year 2000 issues in a timely manner. Profits also will be affected by
the Company's ability to control manufacturing and operating costs. Reference
should be made to filings with the Securities and Exchange Commission for
further discussion of factors that could affect the Company's future results.
<PAGE>
PART II: OTHER INFORMATION
Item 1: Legal Proceedings:
-----------------
The description of the Company's legal proceedings set forth in Item 3
of the Company's Annual Report on Form 10-K for the fiscal period ended December
31, 1999 is incorporated herein by reference.
Symbol Technologies, Inc.
The several motions in the litigation with Symbol Technologies, Inc.
("Symbol") pending in the United States District Court for the Western District
of New York were deemed submitted on April 19, 2000 and remain under
consideration by the Court.
With respect to the Eastern District Action commenced by Symbol, a
"Markman" hearing to determine the scope of Symbol's patents is scheduled for
September 28, 2000. The trial is scheduled to commence on December 4, 2000.
Discovery proceedings by both parties are in progress.
Lemelson
On May 15, 2000, the Company, along with the other Auto ID companies,
filed a motion seeking permission to file an interlocutory appeal of the Court's
decision to strike the count of the complaint which alleged that the Lemelson
Partnership's delays in obtaining its patents rendered them unenforceable for
laches. The motion was granted on July 14, 2000, and on August 4, 2000, the
petition for leave to appeal was filed with the United States Court of Appeals
for the Federal Circuit.
On July 24, 2000, the Company, along with the other Auto ID companies,
filed a motion for partial summary judgment, asserting that almost all of the
claims of the Lemelson Partnership's patents are invalid for lack of written
description. This motion is pending.
Metrologic Instruments, Inc.
The suit involving Metrologic Instruments, Inc. has been restored to
the Court's calendar. A discovery deadline has been set for March 2, 2001.
Item 2: Changes in Securities: None
Item 3: Defaults upon Senior Securities: None
Item 4: Submission of Matters of Shareholders to a Vote of Security Holders:
None
Item 5: Other Information: None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
Report on Form 8-K dated June 7, 2000
Report on Form 8-K dated July 25, 2000
<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 14, 2000 By:/s/ Robert C. Strandberg
Robert C. Strandberg
President and Chief Executive Officer
DATE: August 14, 2000 By: /s/ William J. Woodard
William J. Woodard
Vice President & Chief Financial Officer
DATE: August 14, 2000 By: /s/ Michael J. Stachura
Michael J. Stachura
Vice President of Finance
(Principal Accounting Officer)
