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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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(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, 2001
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.)
4800 SW Meadows Rd. Suite 300, Lake Oswego, Oregon 97035
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(Address of principal executive offices) (Zip Code)
503-534-3550
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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 No
As of August 6, 2001, there were 12,487,274 shares of common stock outstanding.
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PSC INC. AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements Page Number
-----------
Consolidated Balance Sheets as of
June 30, 2001 (Unaudited) and December 31, 2000 ............ 3
Consolidated Statements of Operations and
Accumulated Deficit for the three and six months ended:
June 30, 2001 (Unaudited) and June 30, 2000 (Unaudited) .... 4
Consolidated Statements of Cash Flows
for the six months ended:
June 30, 2001 (Unaudited) and June 30, 2000 (Unaudited) .... 5
Notes to Consolidated Financial Statements (Unaudited) .. 6-12
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 13-16
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
PART II: OTHER INFORMATION
Item 1 Legal Proceedings ....................................... 18
Item 2 Changes in Securities.................................... 18
Item 3 Defaults upon Senior Securities.......................... 18
Item 4 Submission of Matters to a Vote of Security Holders...... 18
Item 5 Other Information........................................ 19
Item 6 Exhibits and Reports on Form 8-K......................... 19
2
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
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PSC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except per share data)
June 30, December 31,
2001 2000
------------- --------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,969 $ 5,461
Accounts receivable, net of allowance for doubtful accounts of $1,167 and $793,
respectively 40,241 39,404
Inventories 21,349 22,286
Prepaid expenses and other 2,695 4,489
---------------- ---------------
TOTAL CURRENT ASSETS 67,254 71,640
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $28,009 and
$28,692, respectively 9,027 15,809
INTANGIBLE AND OTHER ASSETS, net of accumulated amortization of $45,464 and
$39,443, respectively 79,402 87,430
---------------- ---------------
TOTAL ASSETS $155,683 $174,879
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 93,853 $ 7,580
Accounts payable 23,220 25,729
Accrued expenses 16,587 11,128
Accrued payroll and related employee benefits 6,456 6,899
---------------- ---------------
TOTAL CURRENT LIABILITIES 140,116 51,336
LONG-TERM DEBT, less current maturities 28,979 124,501
OTHER LONG-TERM LIABILITIES 2,188 2,013
WARRANTS 742 254
SHAREHOLDERS' EQUITY/(DEFICIT):
Series A convertible preferred shares, par value $.01; 110 shares authorized, 1 1
issued and outstanding ($11,000 aggregate liquidation value)
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 12,461 and 12,313 shares issued 126 123
and outstanding
Additional paid-in capital 72,804 73,655
Accumulated deficit (84,017) (73,127)
Accumulated other comprehensive loss (3,899) (2,520)
Less treasury stock repurchased at cost, 180 shares (1,357) (1,357)
---------------- ---------------
TOTAL SHAREHOLDERS' EQUITY/(DEFICIT) (16,342) (3,225)
---------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) $155,683 $174,879
================ ===============
See accompanying notes to the Consolidated Financial Statements.
3
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(All amounts in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- -------------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 50,453 $ 67,418 $ 100,927 $ 128,857
Cost of Sales 30,692 41,675 61,714 79,544
-------------------------------- -------------------------------
Gross Profit 19,761 25,743 39,213 49,313
Operating Expenses:
Engineering, Research & Development 4,321 5,415 9,210 11,237
Sales & Marketing 7,729 8,254 15,525 16,997
General & Administrative 4,172 4,849 10,536 10,520
Severance & Other Costs 169 (300) 682 1,674
Merger Related Costs - 959 - 959
Amortization Of Intangibles 2,758 2,887 5,522 5,468
-------------------------------- -------------------------------
Operating Expenses 19,149 22,064 41,475 46,855
Operating Profit/(Loss) 612 3,679 (2,262) 2,458
Interest and Other (Income) Expense:
Interest Expense, Net 4,331 3,044 8,601 6,321
(Gain)/Loss from asset sale 2,883 - (281) -
Other (Income) Expense, Net 359 (14) 309 (23)
-------------------------------- -------------------------------
7,573 3,030 8,629 6,298
Income/(Loss) Before Taxes (6,961) 649 (10,891) (3,840)
Tax Provision/(Benefit) 328 648 837 (691)
-------------------------------- -------------------------------
Net Income/(Loss) Before Cumulative Effect of (7,289) 1 (11,728) (3,149)
Accounting Change
Cumulative Effect of Accounting Change 838 - 838 -
-------------------------------- -------------------------------
Net Income/(Loss) ($6,451) $ 1 ($10,890) ($3,149)
================================ ===============================
Net Income/(Loss) Per Share Before Cumulative Effect of Accounting Change:
Basic and Diluted ($0.59) $0.00 ($0.96) ($0.26)
Net Income Per Share of Cumulative Effect of Accounting Change:
Basic and Diluted $0.06 $0.00 $0.07 $0.00
Net Income/(Loss) Per Share After Cumulative Effect of Accounting Change:
Basic and Diluted ($0.53) $0.00 ($0.89) ($0.26)
Weighted Average Number Of Common and Common Equivalent Shares Outstanding:
Basic 12,280 12,027 12,280 12,028
Diluted 12,280 13,448 12,280 12,028
Accumulated Deficit:
Accumulated deficit, beginning of period ($77,566) ($21,215) ($73,127) ($18,065)
Net income/(loss) (6,451) 1 (10,890) (3,149)
Accumulated deficit, end of period ($84,017) ($21,214) ($84,017) ($21,214)
================================ ===============================
See accompanying notes to the Consolidated Financial Statements.
4
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
Six Months Ended
----------------
June 30, 2001 June 30, 2000
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(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net loss ($10,890) ($3,149)
Adjustments to reconcile net loss to net cash (used in)/provided by
operating activities
Depreciation and amortization 8,330 9,238
Gain on disposition of assets (281) -
Loss on royalty settlement - 1,434
Cumulative effect of accounting change (838) -
Deferred tax assets - (718)
Change in fair value of warrants 380 -
(Increase)/decrease in assets:
Accounts receivable (837) 613
Inventories 637 1,198
Prepaid expenses and other 1,481 527
Increase/(decrease) in liabilities:
Accounts payable (2,587) 1,217
Accrued expenses 1,770 (430)
Accrued payroll and related employee benefits (482) (1,111)
------------------ ------------------
Net cash (used in)/provided by operating activities (3,317) 8,819
Cash Flows From Investing Activities:
Capital expenditures, net (533) (2,151)
Net cash paid for business - (53,486)
Proceeds from sale of assets 9,283 -
Additions to intangible and other assets (1,217) (2,771)
------------------ ------------------
Net cash provided by/(used in) investing activities 7,533 (58,408)
Cash Flows From Financing Activities:
Additions to long-term debt - 112,000
Payments of long-term debt (5,602) (57,693)
Additions to other long-term liabilities, net 175 339
Exercise of options and issuance of common shares 98 822
Tax benefit from exercise or disposition of stock options - 28
------------------ ------------------
Net cash (used in)/provided by financing activities (5,329) 55,496
Effect Of Exchange Rate Changes On Cash and Cash Equivalents (1,379) (991)
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Net (Decrease)/ Increase In Cash and Cash Equivalents (2,492) 4,916
Cash and Cash Equivalents:
Beginning of period 5,461 1,402
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End of period $ 2,969 $ 6,318
================== ==================
Supplemental Cash Flow Information:
Noncash financing activities:
Increase in debt discount and accrued expenses related to debt
modification $ 3,656 -
See accompanying notes to the Consolidated Financial Statements.
5
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(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, 2001, the results of operations for the
three and six months ended June 30, 2001 and June 30, 2000 and its cash flows
for the six months ended June 30, 2001 and June 30, 2000. The results of
operations for the three and six months ended June 30, 2001 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, 2000 annual report on Form 10-K.
2. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
Effective April 13, 2001, the Company adopted Emerging Issues Task Force
Issue 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" ("EITF 00-19"), which dictates
how freestanding contracts that are indexed to, and potentially settled in, a
company's own stock should be classified and measured by the company. The
most recent debt modification agreements reached with the Company's senior
and subordinate lenders contain embedded put warrants that the Company may
have to directly settle. The effect of this adoption is to classify the
outstanding warrant for 975 Common Shares as well as the variable fee payable
to the subordinated debt holders as derivative instruments with adjustments
flowing through results of operations. The recorded value of these warrants
at June 30, 2001, after effecting this accounting change, was $742. In
addition, the Company has recorded a cumulative effect of change in
accounting of $838 effective June 30, 2001 to reflect the adoption of EITF
00-19 and made a reclassification of $254 for warrants in the December 31,
2000 balance sheet.
These warrants and fee option are accounted for under SFAS 133 as derivative
instruments. These derivatives do not qualify for hedge accounting, in
accordance with SFAS 133, because they relate to the Company's stock price
and not to the underlying debt with which they were issued. A mark to market
loss of $380 on the warrants is recorded as other gains/losses in current
earnings for the three-month period ended June 30, 2001.
3. NEW ACCOUNTING PRONOUNCEMENT
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." The provisions of Statement No. 141 became effective July 1, 2001.
The provisions of Statement No. 142 will become effective on January 1, 2002.
Because of the recent issuance dates of these standards, we are still
evaluating their impact on our results of operations and financial position.
Our previous acquisitions have been accounted for on the purchase method of
accounting, which is continued in the new standard. Statement No. 142
requires us to annually assess our acquired goodwill for impairment. We will
complete that initial assessment in accordance with the standard. We will
stop amortization of goodwill effective January 1, 2002. Through June 30,
2001, amortization of goodwill that will no longer be required to be
amortized totaled $5.5 million, pretax or $0.45 cents per diluted share.
6
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(All amounts in thousands, except per share data)
(Unaudited)
4. 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, 2001 December 31, 2000
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Raw materials $10,457 $12,078
Work-in-process 4,880 4,699
Finished goods 6,012 5,509
$21,349 $22,286
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5. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, 2001 December 31, 2000
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Term loan $ 62,333 $ 67,500
Senior revolving credit facility 34,000 34,000
Discount on Senior debt (3,418) -
Subordinated term loan 30,000 30,000
Discount on Subordinated term loan (1,021) (861)
Subordinated promissory note 938 938
Other - 504
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122,832 132,081
Less: current maturities 93,853 7,580
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$ 28,979 $124,501
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On April 13, 2001, the Company obtained an agreement from its senior
lenders extending the maturity date of the credit facility to April 1,
2002. The agreement modifies certain provisions of the amended credit
facilities including financial covenants and is subject to certain terms
and conditions. Among other provisions, the commitment for its working
capital facility was reduced from $45.0 million to $42.0 million, and the
interest rate for the senior credit facilities was increased to prime +
2.25% from April 1, 2001 to September 30, 2001, prime + 2.50% from October
1, 2001 to December 31, 2001 and prime + 3.50% from January 1, 2002 to
April 1, 2002. As of the current date, the Company has $34.0 million
outstanding under its working capital facility excluding foreign exchange
contracts and is restricted from borrowing additional amounts as working
capital advances except that prior to September 30, 2001, the Company will
be permitted to borrow an amount not to exceed $2.0 million to bridge the
closings on certain non-core asset sales. The Company is required to use at
least 50% of the net cash proceeds of the sale of the non-core assets to
repay amounts borrowed under its senior credit facilities. The Company will
be required to pay from $1.5 million to $4.5 million in bank modification
fees subject to certain terms and conditions. The term loan and senior
revolving credit facilities are due and payable on April 1, 2002.
In connection with the subordinated credit facilities, the agreement
obtained on April 13, 2001 modifies certain provisions of the credit
facilities including financial covenants as well as providing for repricing
of the warrants to purchase 975 Common Shares of the Company held by
subordinated lenders to $1.15 per share. The Company has agreed to pay the
subordinated lenders on a pro rata basis for fees up to a maximum payment
of $1.5 million based upon the average prevailing per share market price of
the Company's Common Shares on the 15 trading days immediately prior to
April 2, 2002, or if the subordinated lenders elect, April 2, 2003. Such
payment will be made in sequential installments of 30, 90 and 150 days
after April 1, 2002 or April 1, 2003, as applicable. The Company also
agreed to pay all interest being accrued from September 30, 2000 until
March 31, 2002 on April 2, 2002.
In connection with the debt modification agreement reached with its lenders
in April 2001, the Company has accrued $4.1 million for debt modification
fees payable and recorded a discount on the debt outstanding of $3.7
million. The debt discount is amortized over the remaining life of the debt
and recorded as interest expense.
The Company is required to meet certain financial covenants related to its
senior and subordinated credit facilities. At June 30, 2001, the Company
was in compliance with these covenants. The term loan and senior revolving
credit agreements expire on April 1, 2002. Accordingly, the Company has
classified the entire term loan and senior revolving credit facility as
current.
The Company intends to engage in negotiations with existing creditors or
refinance the Company with new lenders and/or equity prior to April 1,
2002. While there can be no assurance, management believes that the
Company can sucessfully refinance amounts due under these credit
agreements.
The Company has been advised by its independent public accountants that if
the Company is unable to renegotiate the term loan and senior revolving
credit facility prior to the completion of their audit of the Company's
financial statements for the year ended December 31, 2001, their auditors
report on those financial statements may be modified for that contingency.
7
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(All amounts in thousands, except per share data)
(Unaudited)
6. ASSET SALES
As part of the Company's overall restructuring plans, the Company sold its
verification and imager product lines on February 16, 2001 for $3.8 million.
The gain realized on the sale was approximately $3.2 million.
On May 14, 2001, the Company completed the sale of its Webster, New York
facility for $5.0 million. The gain realized from the sale was $0.1 million.
In November 2000, the Company announced the consolidation of its Webster, New
York headquarters with its operations in Eugene, Oregon. As a result, the
Company recorded an $8.6 million write-down in connection with the
anticipated sale of the Webster, New York facility in accordance with
Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of". SFAS No. 121 requires an impairment loss to be recognized
if the carrying amount of an asset held for disposal exceeds the fair value
of the asset less the cost to sell the asset. The loss recognized in 2000 was
$7.9 million on the facility and related leasehold improvements and $0.7
million on other assets and is included in the consolidated statements of
operations.
On July 13, 2001, the Company announced the completion of the sale of its
LazerData business as part of its plan to divest non-core assets, and
recorded an estimated loss on disposition of that business of $2.9 million
into the second quarter of 2001. Net assets to be disposed of in connection
with the sale totaled $6.4 million.
The Company is required to use 50% of the net cash proceeds from each of
these sales to repay amounts borrowed under its senior credit facilities.
7. SEVERANCE AND OTHER COSTS
During the six-month period ended June 30, 2001, the Company recorded a
pretax charge of $0.7 million for employee severance and benefit costs
associated with the elimination of positions resulting primarily from
continued consolidation of the Webster, New York operations with its Eugene,
Oregon operations.
As of December 31, 2000, the amount of the severance accruals was
approximately $2.7 million. Approximately $2.1 million has been paid out in
severance accruals in the six-month period ended June 30, 2001. It is
anticipated that all current severance accruals should terminate by December
31, 2001. As of June 30, 2001, the amount of the severance accruals was
approximately $1.3 million, which relates to current contractual obligations.
8
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(All amounts in thousands, except per share data)
(Unaudited)
8. SHAREHOLDERS' EQUITY
Other comprehensive loss reports changes in equity that result from
transactions and economic events other than transactions with owners. Other
comprehensive loss is the total of net loss and all other non-owner changes
in equity.
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Net (loss)/income ($6,451) $ 1 ($10,890) ($3,149)
Foreign currency translation adjustment (249) (257) (1,379) (991)
-----------------------------------------------------------
Comprehensive loss ($6,700) ($256) ($12,269) ($4,140)
===========================================================
During the six month period ended June 30, 2001, employees purchased 149
shares at approximately $0.64 per share under the provisions of the Company's
Employee Stock Purchase Plan.
Changes in the status of options under the Company's stock option plans are
summarized as follows:
January 1, 2001 Weighted January 1, 2000 Weighted
to Average to Average
June 30, 2001 Price December 31, 2000 Price
------------- ----- ----------------- -----
Options outstanding at
beginning of period 3,222 $4.00 3,221 $7.84
Options granted 280 1.14 1,025 2.83
Options exercised - - (78) 6.38
Options forfeited/canceled (327) 4.09 (946) 8.35
Options outstanding at
end of period 3,175 $3.95 3,222 $4.00
========= ==========
Number of options at end
of period:
Exercisable 1,780 $3.85 1,969 $5.02
Available for grant 95 255
During the six month period ended June 30, 2001, 207 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.
9
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(All amounts in thousands, except per share data)
(Unaudited)
9. NET INCOME/(LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Basic EPS was computed by dividing reported earnings/losses available to
common shareholders by the weighted average shares outstanding during the
year. Diluted EPS was the same as basic EPS for the three and six-month
period ended June 30, 2001.
The following options, warrants and preferred shares were not included in the
computation of diluted EPS since the effect of these securities would have
been antidilutive. Options to purchase 3,175 and 3,960 shares of common stock
at a weighted average price of $2.86 and $7.17 per share were outstanding for
the three months ended June 30, 2001 and June 30, 2000, respectively. Options
to purchase 3,175 and 2,914 shares of common stock at a weighted average
price of $2.85 and $7.81 per share were outstanding for the six months ended
June 30, 2001 and June 30, 2000, respectively. Warrants to purchase 1,155
common shares at a weighted average price of $2.22 and $4.22 were outstanding
for the three and six months ended June 30, 2001, 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. Preferred shares to purchase
1,375 common shares at a weighted average price of $8.00 were outstanding for
the three and six months ended June 30, 2001. Preferred shares to purchase
1,375 common shares at a price of $8.00 per share were outstanding for the
six months ended June 30, 2000.
Three Months Ended
-----------------------------------------------------------------------------------------------------------
June 30, 2001 June 30, 2000
------------------------------------------------------ ------------------------------------------------
Per Per
(Loss)/Income Shares Share Income/(Loss) Shares Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
---------------- ----------------- ------------ ---------------- ----------------- ----------
Basic EPS:
Net (loss)/income
available to common
shareholders ($6,451) 12,280 ($0.53) $1 12,027 $0.00
=========== =======
Effect of dilutive
securities:
Options -- - -- 2
Warrants -- - -- 44
Preferred Shares -- - -- 1,375
---------------- ------------------ ---------------- ------------------
Diluted EPS:
Net (loss)/income
available to common
shareholders and
assumed conversions ($6,451) 12,280 ($0.53) $1 13,448 $0.00
=========== =============== ========== ======
Six Months Ended
------------------------------------------------------------------------------------------------------------
June 30, 2001 June 30, 2000
----------------------------------------------------- --------------------------------------------------
Per Per
(Loss)/Income Shares Share Income/(Loss) Shares Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
--------------- ---------------- ----------- --------------- ---------------- ----------
Basic and Diluted EPS:
Net loss available to
common shareholders ($10,890) 12,280 ($0.89) ($3,149) 12,028 ($0.26)
=========== ===========
10
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(All amounts in thousands, except per share data)
(Unaudited)
10. DERIVATIVES
The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
as amended as of January 1, 2001 and the effect was not material.
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 up
to 60 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.
The foreign exchange contracts have not been designated as hedging
instruments and the gains and losses on forward contracts are recorded in
the consolidated statements of operations.
Warrants:
Effective April 13, 2001, the Company adopted Emerging Issues Task Force
Issue 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"), which
requires how freestanding contracts that are indexed to, and potentially
settled in, a company's own stock should be classified and measured by the
company. The warrant is for 975 Common Shares and is held by the Company's
subordinated creditors. In March 2000, the strike price of this warrant was
lowered from $8.00 to $5.25 and subsequently lowered to $1.15 on April 13,
2001 as part of the modification agreements reached on that date. The
adoption of EITF 00-19 resulted in a classification out of additional
paid-in capital to warrants, a temporary equity item, of $254 at December
31, 2000. Immediately prior to April 13, 2001, the warrants were repriced
to fair value resulting in an increase in the book value of the warrants
of $108 and a corresponding decrease to cumulative effect of accounting
change. Simultaneously, EITF 00-19 required an adjustment of the original
value of the warrants of $600 as well as the increase in their fair market
value determined at the time of their first repricing of $600 less the
amount previously reclassified of $254 for a total adjustment of $946
recorded as a reduction to additional paid-in capital and an increase to
cumulative effect of accounting change. The warrant is now marked to market
at its fair value and adjusted through gains/losses in the period in which
it is revalued.
In connection with the debt modification the Company has agreed to pay the
subordinated lenders on a pro rata basis for fees up to a maximum payment
of $1.5 million based upon the average prevailing per share market price of
the Company's Common Shares on the 15 trading days immediately prior to
April 2, 2002, or, if the subordinated lenders elect, April 2, 2003.
These warrants and fee option are accounted for under SFAS 133 as
derivative instruments. These derivatives do not qualify for hedge
accounting, in accordance with SFAS 133, because they relate to the
Company's stock price and not to the underlying debt with which they were
issued. A mark to market loss of $380 on the warrants is recorded as other
gains/losses in current earnings for the three-month period ended June 30,
2001.
11
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(All amounts in thousands, except per share data)
(Unaudited)
11. RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current
year presentation.
12
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, 2000 annual report on Form 10-K.
Overview
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As part of a previously announced restructuring plan to reduce debt and achieve
greater profitability, certain non-core assets were identified for disposition.
On February 16, 2001, the Company sold its verification and imager product lines
for $3.8 million. On May 14, 2001, the Company sold its Webster, New York
headquarters for $5.0 million. On July 13, 2001, the Company sold its
LazerData business for $3.5 million and accrued a loss of $2.9 million in the
three-month period ended June 30, 2001.
Results of Operations: Three Months ended June 30, 2001 and June 30, 2000
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Net Sales. Net sales during the three months ended June 30, 2001 decreased
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$16.9 million or 25.2% compared with the same period in 2000. The decrease in
net sales is attributed primarily to the loss of the sales of the U-Scan(R)
Express Self-Checkout System of $13.7 million, decreased sales of handheld
scanners of $2.1 million and decreased sales of verifiers and other products of
$3.5 million, offset by increased sales of Mobile & Wireless products of $2.4
million.
Gross Profit. Gross profit during the three months ended June 30, 2001
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decreased $5.9 million or 23.2% compared with the same period in 2000. As a
percentage of sales, gross profit increased for the three-month period ended
June 30, 2001 to 39.2% from 38.2% for the same period last year. The decrease
in gross profit dollars is primarily due to the loss of sales of the U-Scan(R)
Express Self-Checkout System while the increase in gross profit percent is due
to the increased sales of the higher margin Mobile and Wireless products.
Engineering, Research and Development. Engineering, Research and Development
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(ER&D) expenses decreased $1.1 million or 20.2%, compared to the same period in
2000. As a percentage of sales, ER&D was 8.6% for the three months ended June
30, 2001 versus 8.0% of net sales for the same period in 2000. The decrease in
ER&D is primarily attributable to cost savings efforts brought about by business
restructuring.
Sales and Marketing. Sales and marketing expenses for the three months ended
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June 30, 2001 decreased $0.5 million compared to the same period in 2000. As a
percentage of sales, Sales and Marketing was 15.3% in 2001 versus 12.2% in 2000.
The dollar decrease is primarily attributable to cost savings brought about by
business restructuring. The percentage increase is due to costs being spread
over a lower sales base.
General and Administrative. General and Administrative (G&A) expenses decreased
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$0.7 million compared to the first quarter of 2000. As a percentage of sales,
G&A was 8.3% in 2001 versus 7.2% in 2000. The dollar decrease is primarily
attributable to a $0.7 million reduction in litigation expense in 2001 compared
to 2000. The percentage increase is due to costs being spread over a lower
sales base.
Severance and Other Costs. During the three months ended June 30, 2001, the
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Company recorded a pretax charge of $0.2 million for employee severance and
benefit costs resulting primarily from its plans to consolidate the Webster, New
York operations with its Eugene, Oregon operations. During the same period in
2000, the Company reversed a previous charge of $0.3 million associated with the
acquisition of Percon and reorganization actions in connection with the
Company's sales force.
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Merger Related Costs. During the three months ended June 30, 2000, the Company
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recorded a pretax charge of $1.0 million for failed merger activity. There was
no comparable charge for the same period in 2001.
Interest Expense. Interest expense increased $1.3 million versus the comparable
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period in 2000. The increase is primarily due to additional fees assessed as
part of the debt modification agreement reached in April 2001.
Loss on asset sale. As part of the Company's overall restructuring plans, the
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Company sold its LazerData business for $3.5 million on July 13, 2001 and
recorded $2.9 million for the estimated loss on assets held for sale into the
three-month period ended June 30, 2001. There was no comparable transaction in
the same period last year.
Income Tax Provision/(Benefit). The Company's effective tax rate was (4.7%) for
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the three months ended June 30, 2001 and was 99.8% for the same period in 2000.
The Company has not reflected the tax benefits associated with operating losses
by placing a full valuation allowance against its deferred tax assets recorded.
The tax provision is for foreign taxes.
Results of Operations: Six Months ended June 30, 2001 and June 30, 2000
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Net Sales. Net sales during the six months ended June 30, 2001 decreased $27.9
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million or 21.7% compared with the same period in 2000. The decrease in net
sales is attributed primarily to the loss of the sales of the U-Scan(R) Express
Self-Checkout System of $24.5 million, decreased sales of handheld scanners of
$3.3 million and decreased sales of verifiers and other products of $3.8
million, offset by increased sales of Mobile & Wireless products of $3.7
million.
Gross Profit. Gross profit during the six months ended June 30, 2001 decreased
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$10.1 million or 20.5% compared with the same period in 2000. As a percentage
of sales, gross profit increased for the six-month period ended June 30, 2001 to
38.9% from 38.3% for the same period last year. The decrease in gross profit
dollars is primarily due to the loss of sales of the U-Scan(R) Express Self-
Checkout System while the increase in gross profit percent is due to the
increased sales of the higher margin Mobile and Wireless products and the impact
of cost reduction activities.
Engineering, Research and Development. Engineering, Research and Development
--------------------------------------
(ER&D) expenses decreased $2.0 million or 18.0%, compared to the same period in
2000. As a percentage of sales, ER&D was 9.1% for the six months ended June 30,
2001 versus 8.7% of net sales for the same period in 2000. The decrease in ER&D
is primarily attributable to cost savings efforts brought about by business
restructuring.
Sales and Marketing. Sales and marketing expenses for the six months ended June
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30, 2001 decreased $1.5 million compared to the same period in 2000. As a
percentage of sales, Sales and Marketing was 15.4% in 2001 versus 13.2% in 2000.
The dollar decrease is primarily attributable to cost savings brought about by
business restructuring. The percentage increase is due to costs being spread
over a lower sales base.
General and Administrative. General and Administrative (G&A) expenses remained
---------------------------
unchanged from the same period in 2000. Areas of G&A that decreased in the six-
month period ended June 30, 2001 verses the same period in 2000: Cost savings
resulting from restructuring efficiencies of $0.9 million and decreased charges
for litigation of $1.4 million. In connection with obtaining recent debt
agreements, the Company has expensed $2.3 million in professional and consulting
fees for the six month period ended June 30, 2001 with no comparable expense for
the same period in 2000. As a percentage of sales, G&A was 10.4% in 2001 versus
8.2% in 2000. The percentage increase is due to costs being spread over a lower
sales base.
Severance and Other Costs. During the six months ended June 30, 2001, the
-------------------------
Company recorded a pretax charge of $0.7 million for employee severance and
benefit costs resulting primarily from its plans to consolidate the
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Webster, New York operations with its Eugene, Oregon operations. During the same
period in 2000, the Company recorded a pre-tax charge of $1.7 million associated
with the acquisition of Percon and reorganization actions in connection with the
Company's sales force.
Merger Related Costs. During the six months ended June 30, 2000, the Company
--------------------
recorded a pretax charge of $1.0 million for failed merger activity. There was
no comparable charge for the same period in 2001.
Interest Expense. Interest expense increased $2.3 million versus the comparable
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period in 2000. The increase is primarily due to a 2% default penalty assessed
as part of the waiver amendments reached with senior debt holders and additional
fees assessed as part of the debt modification agreement reached in April 2001.
Gain on asset sale. As part of the Company's overall restructuring plans, the
------------------
Company sold its verification and imager product lines on February 16, 2001 for
$3.8 million. The gain realized on the sale was approximately $3.2 million. On
May 14, 2001, the Company sold its Webster, New York headquarters for $5.0
million and recorded a gain of $0.1 million. On July 13, 2001, the Company sold
its LazerData business for $3.5 million and an estimated loss on assets held for
sale of $2.9 million in the period ended June 30, 2001. The disposition of
these product lines did not have a material effect on the Company's results of
operations for the six months ended June 30, 2001, nor will the disposition of
these product lines materially impact the full year 2001. There were no
comparable transactions in the six months ended June 30, 2000.
Income Tax Provision/(Benefit). The Company's effective tax rate was (7.7%) for
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the six months ended June 30, 2001 and was 18.0% for the same period in 2000.
The Company has not reflected the tax benefits associated with operating losses
by placing a full valuation allowance against its deferred tax assets recorded.
The tax provision is for foreign taxes.
Liquidity and Capital Resources:
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Current assets decreased $4.4 million from December 31, 2000 primarily due to
decreases in cash and prepaid expenses. Current liabilities increased $88.8
million from December 31, 2000 primarily due to the classification of the senior
term loan and senior revolver loan to current portion of long-term debt.
Accrued expenses increased $5.5 million due to the inclusion of debt fees
associated with the last debt modification agreement. As a result, net working
capital decreased $93.2 million from December 31, 2000.
Property, plant and equipment expenditures totaled $0.5 million for the six
months ended June 30, 2001 compared with $2.2 million for the six months ended
June 30, 2000. The 2001 expenditures are related to new product tooling,
manufacturing equipment, and computer software and hardware.
On March 31, 2001, the Company obtained a waiver from its senior debt holders
that extended the expiration date of the credit facilities until April 13, 2001
and on the same date, the Company received a waiver from the subordinated
lenders that deferred interest payments until April 13, 2001.
On April 13, 2001, the Company obtained an agreement from its senior lenders
extending the maturity date of the credit facility to April 1, 2002. The
agreement modifies certain provisions of the amended credit facilities including
financial covenants and is subject to certain terms and conditions. Among other
provisions, the commitment for its working capital facility was reduced from
$45.0 million to $42.0 million, and the interest rate for the senior credit
facilities was increased to prime + 2.25% from April 1, 2001 to September 30,
2001, prime + 2.50% from October 1, 2001 to December 31, 2001 and prime + 3.50%
from January 1, 2002 to April 1, 2002. As of the current date, the Company has
$34.0 million outstanding under its working capital facility excluding foreign
exchange contracts and is restricted from borrowing additional amounts as
working capital advances except that prior to September 30, 2001, the Company
will be permitted to borrow an amount not to exceed $2.0
15
million to bridge the closings on certain non-core asset sales. The Company is
required to use at least 50% of the net cash proceeds of the sale of the
non-core assets to repay amounts borrowed under its senior credit facilities.
The Company will be required to pay from $1.5 million to $4.5 million in bank
modification fees subject to certain terms and conditions. The term loan and
senior revolving credit facilities are due and payable on April 1, 2002.
In connection with the subordinated credit facilities, the agreement obtained on
April 13, 2001 modifies certain provisions of the credit facilities including
financial covenants as well as providing for repricing of the warrants to
purchase 975 Common Shares of the Company held by subordinated lenders to $1.15
per share. The Company has agreed to pay the subordinated lenders on a pro rata
basis for fees up to a maximum payment of $1.5 million based upon the average
prevailing per share market price of the Company's Common Shares on the 15
trading days immediately prior to April 2, 2002, or if the subordinated lenders
elect, April 2, 2003. Such payment will be made in sequential installments of
30, 90 and 150 days after April 1, 2002 or April 1, 2003, as applicable. The
Company also agreed to pay all interest being accrued from September 30, 2000
until March 31, 2002 on April 2, 2002.
The Company's liquidity is dependent upon its ability to successfully generate
positive cash flow from operations and complete non-core asset sales. Provided
that the Company continues to meet the performance targets from its restructured
operating plan, management believes the Company will generate sufficient cash
flows in 2001 to meet its obligations. The Company will be required to pay up
to $6.0 million in bank fees as indicated above.
The Company is required to meet certain financial covenants related to its
senior and subordinated credit facilities. At June 30, 2001, the Company was in
compliance with these covenants. The term loan and senior revolving credit
agreements expire on April 1, 2002. Accordingly, the Company has classified the
entire term loan and senior revolving credit facility as current.
The Company intends to engage in negotiations with existing creditors or
refinance the Company with new lenders and/or equity prior to April 1, 2002.
While there can be no assurance, management believes that the Company can
sucessfully refinance amounts due under these credit agreements.
The Company has been advised by its independent public accountants that if the
Company is unable to renegotiate the term loan and senior revolving credit
facility prior to the completion of their audit of the Company's financial
statements for the year ended December 31, 2001, their auditors report on those
financial statements may be modified for that contingency.
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
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Item 3: Quantitative and Qualitative Disclosures About Market Risk
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The Company uses foreign currency hedging instruments to reduce the variation in
cash flows from its foreign subsidiaries. These contracts are generally for a
period of sixty days, and are marked to market monthly with the change in fair
value flowing through foreign currency gains/losses. Because of the short
duration of these investments, the Company has not experienced significant
valuation changes. The Company does not enter into foreign currency contracts
for speculative purposes.
The Company is exposed to interest rate risks. A hypothetical 1% increase in
the prime-lending rate, which the interest on all senior debt is indexed to,
would result in an additional $0.7 million in interest expense from July 1, 2001
until the debt is due April 1, 2002.
The adoption of Emerging Issues Task Force Issue 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF 00-19") has resulted in the warrant for 975 Common
Shares now being marked to market. The effect of this is to have the change in
the warrant's fair value flow through other gains/losses when its value is
adjusted. A key variable for determining the fair value of the warrant is the
Company's common stock price. In addition, the fee option on the Company's
subordinated debt is also based on the fair value of the Company's common
stock price. The mark to market adjustment on the option's fair value also
flows through other gains/losses when its value is adjusted. A hypothetical 10%
increase in the Company's common stock price from the closing price would not
have a material effect on the fair value of these instruments for the period.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
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Securities Litigation Reform Act of 1995
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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 and the
successful completion of non-core asset sales. Profits and available cash flows
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.
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PART II: OTHER INFORMATION
Item 1: Legal Proceedings:
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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, 2000 is incorporated herein by reference.
Item 2: Changes in Securities: None
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Item 3: Defaults upon Senior Securities: None
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Item 4: Submission of Matters of Shareholders to a Vote of Security Holders:
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The following matters were submitted to a vote of security holders
subsequent to the period ended June 30, 2001.
(a) The Annual Meeting of Shareholders was held on July 11, 2001.
(b) The names of the directors elected at the Annual Meeting for a three-
year term are as follows:
Edward J. Borey
Robert S. Ehrlich
Jack E. Rosenfeld
Serge Thill (Series A Preferred Director)
The name of each other director whose term of office continued after
the Annual Meeting is as follows:
Dr. Jay M. Eastman
Thomas J. Morgan
Bert W. Wasserman
James C. O'Shea
Terry R. Peets
(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
------- --- --------
Edward J. Borey 11,055,289 623,014
Robert S. Ehrlich 11,055,289 623,014
Jack E. Rosenfeld 11,055,289 623,014
Serge Thill 110,000 -
(Series A Preferred Director) Preferred Shares
(100% of the
outstanding
Preferred Shares)
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(c)(ii) At the Annual Meeting, the shareholders voted upon three other
matters. The description of the other matters voted upon and the
tabulation of votes with respect to each matter are as follows:
Votes Votes Votes
Proxy Item FOR AGAINST ABSTAINING
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Increase the number of authorized Common
Shares 10,534,632 1,124,285 19,386
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Increase the number of Common Shares reserved
for issuance under the 1994 Stock Option Plan 4,226,465 1,104,654 23,361
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Increase the number of Common Shares reserved
for issuance under the 2000 Employee Stock
Purchase Plan 5,024,854 307,817 21,809
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Item 5: Other Information: None
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Item 6: Exhibits and Reports on Form 8-K
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(a) Exhibits: None
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(b) Reports on Form 8-K: None
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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 13, 2001 By: /s/ Edward J. Borey
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Edward J. Borey
President, Chief Executive Officer and Director
DATE: August 13, 2001 By: /s/ Paul M. Brown
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Paul M. Brown
Vice President and Chief Financial Officer
(Principal Financial Officer)
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