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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 September 29, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-9919
PSC INC.
(Exact name of Registrant as Specified in Its Charter)
New York 16-0969362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 S.W. Fifth Avenue, Suite 4100, Portland, Oregon 97204
--------------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
503-553-3920
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 12 months preceding (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of November 5, 2002, there were 12,834,467 shares of common stock
outstanding.
1
PSC INC. AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements Page
Number
------
Consolidated Balance Sheets as of
December 31, 2001 and September 29, 2002 (Unaudited)..........................................3-4
Consolidated Statements of Operations and
Accumulated Deficit for the three and nine months ended:
September 29, 2001 (Unaudited) and September 29, 2002 (Unaudited) ..............................5
Consolidated Statements of Cash Flows
for the nine months ended:
September 29, 2001 (Unaudited) and September 29, 2002 (Unaudited) ..............................6
Notes to Consolidated Financial Statements (Unaudited) ......................................7-13
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations ..............................................14-17
Item 3 Quantitative and Qualitative Disclosures about Market Risk.....................................17
PART II: OTHER INFORMATION
Item 1 Legal Proceedings ..........................................................................18-19
Item 2 Changes in Securities..........................................................................19
Item 3 Defaults upon Senior Securities................................................................19
Item 4 Submission of Matters to a Vote of Security Holders ...........................................19
Item 5 Other Information ...........................................................................20
Item 6 Exhibits and Reports on Form 8-K...............................................................20
Item 7 Critical Accounting Policies and Estimates ...................................................20
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
--------------------
PSC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
December 31, 2001 September 29, 2002
----------------- ------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $1,865 $1,543
Accounts receivable, net of allowance for doubtful
accounts of $879 and $591, respectively 33,850 33,245
Inventories, net 17,885 22,040
Prepaid expenses and other 3,195 5,573
----------------------- ------------------------
Total current assets 56,795 62,401
Property, Plant and Equipment, net of
accumulated depreciation of $20,707 and $23,237
respectively 8,997 8,655
Goodwill, net of accumulated amortization of $43,214 and $43,214 63,285 63,327
Intangibles, net of accumulated amortization of $4,921 and $6,105 6,640 8,622
----------------------- ------------------------
----------------------- ------------------------
Total assets $135,717 $143,005
======================= ========================
See accompanying notes to the Consolidated Financial Statements.
3
PSC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
(Continued)
December 31, 2001 September 29, 2002
----------------- ------------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current Liabilities:
Current portion of long-term debt $119,349 $123,998
Accounts payable 17,325 21,505
Accrued expenses 19,889 22,710
Accrued payroll and related employee benefits 3,836 2,676
--------------------- --------------------
Total current liabilities 160,399 170,889
Long-Term Debt, less current maturities - -
Other Long-Term Liabilities 2,497 2,847
Shareholders' Equity (Deficit):
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; 100,000 authorized
12,834 and 12,834 shares issued and outstanding 129 129
Additional paid-in capital 73,078 73,078
Accumulated deficit (95,606) (99,491)
Accumulated other comprehensive loss (3,424) (3,091)
Less treasury stock repurchased at cost, 180 shares (1,357) (1,357)
--------------------- --------------------
Total shareholders' equity (deficit) (27,179) (30,731)
--------------------- --------------------
Total liabilities and shareholders' equity (deficit) $135,717 $143,005
===================== ====================
See accompanying notes to the Consolidated Financial Statements.
4
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
------------------------------------- ------------------------------------
September 29, 2001 September 29, September 29, September 29,
------------------ -------------- --------------- --------------
2001 2002 2001 2002
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $44,610 $42,452 $145,537 $127,199
Cost of sales 27,831 26,749 90,614 78,073
------------------ -------------- --------------- --------------
Gross profit 16,779 15,703 54,923 49,126
Operating Expenses:
Sales & marketing expense 6,708 8,184 22,233 24,275
Engineering, research and development 3,783 3,167 12,993 9,520
General and administrative expense 3700 3,303 10,832 10,336
Severance and other costs 748 230 1,430 230
Debt restructuring costs 490 (250) 2,825 425
Amortization of intangibles resulting
from business acquisitions 2,628 - 8,150 -
------------------ -------------- --------------- --------------
Total Operating Expenses 18,057 14,634 58,463 44,786
------------------ -------------- --------------- --------------
Income (loss) from operations (1,278) 1,069 (3,540) 4,340
Interest and Other (Income)/Expense:
Interest expense, net 4,107 2,944 12,708 10,011
(Gain) loss from asset sale 73 - (208) -
Other (income) expense (449) (309) (140) (456)
------------------ -------------- --------------- --------------
3,731 2,635 12,360 9,555
Loss before income tax provision/(benefit) (5,009) (1,566) (15,900) (5,215)
Income tax provision/(benefit) (116) 21 721 (1,330)
------------------ -------------- --------------- --------------
Loss before cumulative effect of accounting (4,893) (1,587) (16,621) (3,885)
change
Cumulative effect of accounting change - - 838 -
------------------ -------------- --------------- --------------
Net income/(loss) $ (4,893) $ (1,587) $ (15,783) $ (3,885)
------------------ -------------- --------------- --------------
Net income/(loss) per share before cumulative effect
of accounting change:
Basic and diluted: $ (0.39) $ (0.12) $ (1.35) $ (0.30)
Net income/(loss) per share of cumulative effect of
accounting change:
Basic and diluted: $ - - $ 0.07 -
Net income/(loss) per share after cumulative effect
of accounting change:
Basic and diluted: $ (0.39) $ (0.12) $ (1.28) $ (0.30)
Weighted average number of common and common share
equivalent shares outstanding:
Basic and diluted: 12,499 12,834 12,353 12,834
Accumulated Deficit:
Accumulated deficit, beginning of period $ (84,017) $ (97,904) $ (73,127) $ (95,606)
Net income/(loss) (4,893) (1,587) (15,783) (3,885)
------------------ -------------- --------------- --------------
Accumulated deficit, end of period $ (88,910) $ (99,491) $ (88,910) $ (99,491)
------------------ -------------- --------------- --------------
See accompanying notes to the Consolidated Financial Statements.
5
PSC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
Nine months Ended
-------------------------------------------------
September 29, 2001 September 29, 2002
------------------ ------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,783) $ (3,885)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 13,392 5,103
Change in fair value of fee option and warrants 46 (247)
Gain on dispositions of assets (208) -
Cumulative effect of accounting change (838) -
(Increase)/decrease in assets:
Accounts receivable, net 2,177 605
Inventories (339) (4,155)
Prepaid expenses and other 1,523 (2,375)
Increase/(decrease) in liabilities:
Accounts payable (3,851) 4,159
Accrued expenses 2,092 2,827
Accrued payroll and related employee benefits (1,600) (1,164)
Additions/(reductions) to other long-term liabilities, net 341 607
---------------- ----------------
Net cash provided by / (used in) operating activities (3,048) 1,475
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (1,259) (2,365)
Additions to intangible and other assets (2,158) (3,034)
Proceeds from sales of assets 12,774 -
---------------- ----------------
Net cash provided by / (used in) investing activities 9,357 (5,399)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt 2,000 3,267
Payments of long-term debt (12,522) -
Exercise of options and issuance of common shares 375 -
---------------- ----------------
Net cash provided by / (used in) financing activities (10,147) 3,267
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (531) 335
---------------- ----------------
Net increase / (decrease) in cash and cash equivalents (4,369) (322)
CASH AND CASH EQUIVALENTS:
Beginning of period 5,461 1,865
---------------- ----------------
End of period $ 1,092 $ 1,543
================ ================
SUPPLEMENTAL CASH FLOW INFORMATION: .................
Interest paid ................. $ 2,012 $ 2,526
Income taxes paid ................. $ 3,735 $ 1,318
Increase in debt discount and accrued expenses related to debt modification $ 4,100 $ -
See accompanying notes to the Consolidated Financial Statements.
6
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 29, 2002
(All amounts in thousands)
(Unaudited)
(1) DESCRIPTION OF BUSINESS AND CURRENT EVENTS
PSC Inc. (the Company) is a leading provider of retail automation
solutions, mobile and wireless systems, and automated data collection
products. Its range of products includes wireless portable, vehicle mount
and fixed station data collection terminals, warehouse management software,
self-checkout systems and handheld and fixed-position bar code scanners.
PSC products are used in supply chain management solutions in the retail,
manufacturing, warehousing, distribution and logistics markets.
Approximately 48% of the sales are reported in the United States, 33% in
Europe and the remaining 19% occur in South America, Australia, Asia and
Japan.
In November 2000, the Company announced a restructuring plan to reduce its
debt and to achieve future profitability and growth. These restructuring
plans included replacement of executive management, consolidation of
redundant administrative activities, sale or disposal of unprofitable
operations and streamlining of product lines and production operations to
reduce cost and increase profit contribution for products sold.
In February 2001, the Company sold its verification and imager product
lines for $3.8 million. The gain on the sale was $3.2 million, recorded in
other income/expense on the consolidated statement of operations.
In May 2001, the Company sold its Webster, New York facility for $5.0
million. The transaction resulted in a gain of $0.1 million in 2001, after
a write-down of the facility value in 2000 of $7.9 million.
In July 2001, the Company sold its LazerData business for $6.4 million. The
loss on the sale was $2.9 million recorded in other (income)/expense in the
consolidated statement of operations.
During 2001, 50% of all asset disposition proceeds were applied to reduce
indebtedness to PSC's senior lenders.
In July 2001, the Company substantially completed the process of hiring a
new executive management team and relocated its corporate headquarters to
Portland, Oregon.
In September 2001, the Company completed its restructuring process with a
further reduction in costs and expenses, including staffing costs. Total
severance and other restructuring costs during 2001 and 2000 were
approximately $1.5 million and $4.9 million, respectively. Debt
restructuring costs for legal and consulting totaled $3.6 million in 2001
and $0.4 million for the first nine months of 2002. Total cost reductions
related to all restructuring activities, including sales of businesses
referred to above was estimated to be approximately $40.0 million on an
annualized basis.
Also in September 2001, the Company initiated efforts to attract new equity
capital to reduce and refinance its indebtedness and provide additional
equity resources to support ongoing operations. The Company secured the
services of an investment banking firm to assist in this effort. At
September 29, 2002, these efforts are ongoing. In all presently
contemplated recapitalization transactions, the Company anticipates that
the equity interests of all existing shareholders will be extinguished.
However, the precise outcome of
7
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 29, 2002
(All amounts in thousands)
(Unaudited)
existing equity shareholder interests will be dependent upon further
negotiations and discussions with prospective private equity investors and
cannot be predicted with assurance at this time. As with all business
transactions, it is not possible to predict whether any transaction will be
consummated.
Management's cash flow projections for the Company balances the cash
collections from revenue activities with the disbursement requirements for
suppliers, capital expenditures and personnel costs. The Company's cost
reduction efforts have been focused on achieving a neutral or positive cash
flow from operations. Successfully continuing to operate in this neutral to
positive cash flow pattern is dependent upon the Company's ability to
effectively achieve its sales plan as well as its continued cost control
performance. Management believes that its revenue and cost performance
objectives are achievable and sustainable during this period of
recapitalization. If the Company's performance deviates negatively from
this objective, management intends to take all steps necessary to reduce
cash costs to rebalance the Company's operations to return to a neutral or
positive cash flow performance.
In March 2002, the Company and its lenders reached an agreement in
principle to extend the maturities of the Company's existing financing
facilities to August 1, 2002. On August 1, 2002, the Company and its
lenders agreed to extend the maturities of the Company's existing financing
facilities to September 1, 2002. Since September 1, 2002, the Company and
its lenders have agreed to a series of extensions to the maturities of its
financing facilities. The Company anticipates that it will be able to
obtain additional extensions as necessary. The terms of the extended
financing arrangements were substantially unchanged from the prior
agreements. The Company is required to achieve certain milestones in its
recapitalization process. Management believes that a restructuring
transaction acceptable to the Company's lenders can be achieved, although
there can be no assurance that such a transaction will be accomplished. In
the event that the Company is unsuccessful in these restructuring efforts,
the lenders would be entitled to exercise their respective rights and
remedies under the credit facilities and applicable law, in which case the
Company would not have sufficient funds to repay its outstanding debt and
no assurance can be given that alternative sources of sufficient financing
would be available on acceptable terms, or on any terms at all.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared by
the Company without audit, or concurrent review by outside auditors, as
required by the reporting provisions of the Securities and Exchange
Commission. See Item 7, "Critical Accounting Policies and Estimates", on
page 21.
In the opinion of management, these financial statements include all
adjustments necessary to present fairly the Company's financial position as
of September 29, 2002, the results of operations for the three and nine
months ended September 29, 2001 and September 29, 2002 and its cash flows
for the nine months ended September 29, 2001 and September 29, 2002. The
results of operations for the three and nine months ended September 29,
2002 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, 2001 annual report on
Form 10-K.
8
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 29, 2002
(All amounts in thousands)
(Unaudited)
(3) 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:
December 31, 2001 September 29, 2002
----------------------- -----------------------
Raw materials $14,586 $18,009
Work-in-process 3,522 4,699
Finished goods 4,071 3,886
------------ ------------
22,179 26,594
Less inventory reserve (4,294) (4,554)
------------ ------------
$17,885 $22,040
============ ============
(4) LONG TERM DEBT
Current maturities of long-term debt consists of the following:
December 31, 2001 September 29, 2002
----------------------- -----------------------
Term loan, net of debt discount
of $1,265 and $0 $58,935 $60,106
Senior revolving credit 30,419 33,720
Subordinated term loan, net of
discount of $943 and $766 29,057 29,234
Subordinated promissory note 938 938
------------ ------------
Long term debt, net $119,349 $123,998
============ ============
The company has continued to negotiate with its senior and subordinated
lenders to provide extensions to its credit facilities. The term loan and
senior revolving credit agreements, together with amendments to those
agreements, expire on November 15, 2002. The company anticipates that it
will be able to obtain additional extensions as necessary. The company has
classified the entire term loan and senior revolving credit facility as
current. In addition all subordinated indebtedness has been reclassified as
current. See Note 1, "Description of Business And Current Events".
(5) 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
9
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 29, 2002
(All amounts in thousands)
(Unaudited)
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 written off in connection with
the sale totaled $6.7 million.
The Company was required to use 50% of the net cash proceeds to repay
amounts borrowed under its senior credit facilities.
(6) SEVERANCE AND OTHER COSTS
As of December 31, 2001, the amount of the severance accruals was
approximately $0.3 million. As of September 29, 2002, the amount of the
severance accruals was approximately $0.2 million, which relates to current
contractual obligations.
(7) 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
--------------------------------------------------------
September 29, 2001 September 29, 2002
-------------------------- -----------------------------
Net income/(loss) $ (4,893) $ (1,587)
Foreign currency translation adjustment 848 (369)
-------------------------- -----------------------------
Comprehensive loss $ (4,045) $ (1,956)
Nine Months Ended
--------------------------------------------------------
September 29, 2001 September 29, 2002
Net income/(loss) $ (15,783) $ (3,885)
Foreign currency translation adjustment (531) 333
-------------------------- -----------------------------
Comprehensive loss $ (16,314) $ (3,552)
-------------------------- -----------------------------
10
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 29, 2002
(All amounts in thousands)
(Unaudited)
Changes in the status of options under the Company's stock option plans are
summarized as follows:
January 1, 2001 Weighted January 1, 2002 Weighted
to Average to Average
September 29, 2001 Price September 29, 2002 Price
------------------------- -- ------------ ------------------------ - -------------
Options outstanding at
beginning of period 3,222 $4.00 3,521 $2.64
Options granted 609 1.11 161 .56
Options exercised - - - -
Options forfeited/canceled (332) 3.91 (72) 2.50
------------- -------------
Options outstanding at
end of period 3,499 $2.74 3,610 $2.57
============= =============
Number of options at end
of period:
Exercisable 1,816 $3.82 2,281 $3.26
Available for grant 770 547
During the nine month period ended September 29, 2002, 30,000 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.
(8) NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Basic EPS was computed by dividing reported earnings available to common
shareholders by weighted average common shares outstanding during the
period. Diluted EPS was the same as basic EPS for the three and nine months
ended September 29, 2001 and September 29, 2002 as the affect of options,
warrants and preferred shares would have been antidilutive. Options,
warrants and preferred shares of 3,499, 975 and 180 common shares,
respectively, were outstanding for the nine months ended September 29,
2001. Options, warrants and preferred shares to purchase 3,610, 975 and 180
of common shares were outstanding for the nine months ended September 29,
2002.
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
SEPTEMBER 29, 2001 SEPTEMBER 29, 2002
------------------------------------------------ -----------------------------------------------
Basic and Diluted Net loss Shares Per Net loss Shares Per
EPS: Share Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Net loss available to
common
shareholders $ (4,893) 12,499 $(0.39) $ (1,587) 12,834 $(0.12)
------------------------------------------------------------------------------------------------
11
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 29, 2002
(All amounts in thousands)
(Unaudited)
NINE MONTHS ENDED
------------------------------------------------------------------------------------------------
SEPTEMBER 29, 2001 SEPTEMBER 29, 2002
------------------------------------------------ -----------------------------------------------
Basic and Diluted Net loss Shares Per Net loss Shares Per
EPS: Share Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Net loss available to
common
shareholders $ (15,783) 12,353 $(1.28) $ (3,885) 12,834 $(0.30)
------------------------------------------------------------------------------------------------
(9) 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 of adoption was not
material to the Company's financial statements.
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.
Effective January 1, 2002, the Company discontinued the use of foreign
exchange forward contract for hedging purposes. As of September 29, 2002,
there were no foreign exchange forward contracts outstanding.
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
prescribes accounting treatment for freestanding contracts that are indexed
to, and potentially settled in, a company's own stock. On April 13, 2001,
the Company entered into a refinancing modification agreement with its
subordinated lenders, in which a portion of the consideration involved a
warrant 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 agreement reached on that date. The adoption of EITF
00-19 resulted in a reclassification of $254 of additional paid-in capital
to warrants, a temporary equity item, at December 31, 2000. Immediately
prior to the April 13, 2001, the warrants were repriced to fair value,
resulting in an increase in the book value of the warrants of $108,
12
PSC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 29, 2002
(All amounts in thousands)
(Unaudited)
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 at the end of each reporting period and the gain/loss is
recorded in Other (income) / expense.
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, 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 gain of $248 and $247 on both the warrants and fee
option is recorded as Other (income) / expense in current earnings for the
three- and nine-month period ended September 29, 2002, respectively.
(10) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
Goodwill, which represents the excess of cost over the fair value of the
acquisition, was previously amortized using the straight-line method over
5-10 years. Effective January 1, 2002, the Company stopped amortizing its
goodwill in accordance with Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company has
completed its initial assessment of adopting SFAS 142, which requires the
identification of any identifiable intangibles that may be associated with
the previously recognized goodwill. Based on the Company's assessment,
there are no identifiable intangibles that should be separately identified
from previously recognized goodwill. The Company is in the process of the
second step, testing for impairment based on the fair value of the
goodwill. The Company believes that the value of goodwill has been
impaired. Although the amount of impairment has not been determined, the
Company believes that the range of adjustment to goodwill will be $25-50
million. The amounts used in the transitional goodwill impairment test
shall be measured as of the beginning of the year of initial application.
The Company is in the process of completing its analysis and anticipates
that it will record the impact of adopting SFAS 142 as an accounting change
no later than the end of the year.
(11) RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform to the
current year presentation.
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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OVERVIEW
--------
The company has undertaken steps to recapitalize its operations through a
new equity contribution and restructuring of its indebtedness. See Note 1,
"Description of Business And Current Events".
General
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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, 2001 annual report on Form 10-K.
RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 29,
2002
--------------------------------------------------------------------------------
NET SALES. Net sales during the three months ended September 29, 2002 decreased
$2.2 million or 4.8% compared with the same period in 2001. $0.6 million of this
decrease related to the sale of business and product lines in 2001, for which
there was no revenue in 2002. The remaining decrease in net sales is attributed
primarily to lower sales of handheld scanners and scan engines of $1.3 million,
mobile and wireless products of $3.4 million, and other products and services of
$0.8 million. The sale of fixed scanners increased $3.9 million compared to the
same period in 2001.
GROSS PROFIT. Gross profit during the three months ended September 29, 2002
decreased $1.1 million or 6.4% compared with the same period in 2001. As a
percentage of sales, gross profit percentage remained relatively unchanged at
37.0% for the third quarter of 2002, as compared to 37.6% for the third quarter
of 2001.
SALES AND MARKETING. Sales and marketing expenses for the three months ended
September 29, 2002 increased $1.5 million compared to the same period in 2001.
As a percentage of sales, sales and marketing expense was 19.3% in 2002 versus
15.0% in 2001. The percentage increase is primarily attributable to the
increased investment in the direct sales organization to enhance contact with
and expand relationships with end user customers.
ENGINEERING, RESEARCH AND DEVELOPMENT (ER&D). ER&D expenses for the three months
ended September 29, 2002 decreased $0.6 million or 16.3%, compared to the same
period in 2001. As a percentage of sales, ER&D was 7.5% in the third quarter of
2002, versus 8.5% of net sales in the third quarter of 2001. The decrease in
ER&D is primarily attributable to cost reimbursement from an independent company
with which the Company is involved in a joint venture new product development
project.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three
months ended September 29, 2002 decreased $0.3 million as compared to the same
period in 2001. Administrative costs decreased by approximately $0.5 million in
2002 compared to 2001, offset by an increase of $0.2 million in legal costs
relating to certain litigation and legal expenses.
DEBT RESTRUCTURING COSTS. Debt restructuring costs for the third quarter of 2002
decreased 151.0% to $(0.25) million from $.5 million for the same period in
2001. The decrease is due to reduced consulting costs necessary to manage the
debt restructuring process, and reversal of excess accrued expenses.
AMORTIZATION OF GOODWILL. Effective January 1, 2002, the Company ceased the
amortization of goodwill, in accordance with Statement of Financial Accounting
Standards No. 142. See Note 10, "Adoption Of New Accounting Pronouncement". The
amortization expense for goodwill was $ 2.6 million for the three months ended
September 28, 2001.
14
INTEREST EXPENSE. Interest expense for the three months ended September 29, 2002
decreased $1.2 million or 28.3% as compared to the third quarter of 2001. This
decrease resulted from lower interest rates and a reduction in loan origination
and amendment fees related to the company's senior and subordinated
indebtedness.
INCOME TAX PROVISION/(BENEFIT). The Company's effective tax rate was (1.3)% for
the three months ended September 29, 2002 versus 2.3% for the three months ended
September 29, 2001. A valuation allowance was recorded against all of the
Company's deferred tax assets including the current operating losses in 2000.
All tax expense or benefit is recorded on a cash basis. The effective tax rates
in both 2002 and 2001 reflect the cash-basis income tax payments made or tax
refunds received during the period.
RESULTS OF OPERATIONS: NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 29,
2002
--------------------------------------------------------------------------------
NET SALES. Net sales during the nine months ended September 29, 2002 decreased
$18.3 million or 12.6% compared with the same period in 2001. $4.0 million of
this decrease related to the sale of business and product lines in 2001, for
which there was no revenue in 2002. The remaining decrease in net sales is
attributed to lower sales of handheld and scan engines of $9.5 million, lower
mobile and wireless products sales of $2.9 million and lower services and other
miscellaneous products of $3.5 million. Fixed scanning product sales increased
by $1.6 million as compared to the same period last year.
GROSS PROFIT. Gross profit during the nine months ended September 29, 2002
decreased $5.8 million or 10.6% compared with the same period in 2001. As a
percentage of sales, gross profit percentage increased to 38.6% for the nine
months ended September 29, 2002, as compared to 37.7% in the same period in
2001. The increase in gross profit was a result of the streamlining of product
lines and cost reductions in manufacturing overhead.
SALES AND MARKETING. Sales and marketing expenses for the nine months ended
September 29, 2002 increased to $24.3 million from $22.2 million compared to the
same period in 2001. As a percentage of sales, sales and marketing expense was
19.1% in 2002 versus 15.3% in 2001. The percentage increase is primarily
attributable to the increased investment in a direct sales organization to
enhance contact with and expand relationships with end user customers.
ENGINEERING, RESEARCH AND DEVELOPMENT (ER&D). ER&D expenses for the nine months
ended September 29, 2002 decreased $3.5 million or 26.7%, compared to the same
period in 2001. As a percentage of sales, ER&D was 7.5% in the first nine months
of 2002, versus 8.9% of net sales in the first nine months of 2001. The decrease
in ER&D is primarily attributable to cost reimbursement from an independent
company with which the Company is involved in a joint venture new product
development project, and cost savings efforts brought about by business
restructuring.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the nine
months ended September 29, 2002 decreased by $0.5 million to $10.3 million
compared to the same period in 2001. As a percentage of sales, general and
administrative expense was 8.1% versus 7.4% in 2001. General and administrative
costs decreased as a result of the shutdown of the Webster, New York facility
and reduction in personnel costs that was associated with the consolidation of
operations and administration to Oregon. These costs were offset by legal
expenses associated with certain litigation, of approximately $1.3 million.
SEVERANCE AND OTHER COSTS. During the first nine months of 2001, the Company
recorded a pretax charge of $1.4 million for employee severance and benefit
costs resulting primarily from the consolidation of the Webster, New York
operations with its Eugene, Oregon personnel and operations. For the period
ended September 29, 2002, there was $0.2 million in severance expense.
15
DEBT RESTRUCTURING COSTS. Debt restructuring costs for the first nine months of
2002 decreased 85.0% to $0.4 million from $2.8 million for the same period in
2001. The decrease is due to reduced legal and consulting costs necessary to
manage the restructuring process during 2002.
AMORTIZATION OF GOODWILL. Effective January 1, 2002, the Company ceased the
amortization of goodwill, in accordance with Statement of Financial Accounting
Standards No. 142. See Note 10, "Adoption Of New Accounting Pronouncement". The
amortization expense for goodwill was $8.2 million for the nine months ended
September 29, 2001.
INTEREST EXPENSE. Interest expense decreased 21.2% to $10.0 million for the nine
months ended September 29, 2002, as compared the same period in 2001. This
decrease resulted from lower interest rates and a reduction in loan origination
and amendment fees related to the company's senior and subordinated
indebtedness.
INCOME TAX PROVISION/(BENEFIT). The Company's effective tax rate was 25.5% for
the nine months ended September 29, 2002 versus (4.5)% for the nine months ended
September 29, 2001. The Company recognized a $1.3 million tax receivable, in the
quarter ended March 29, 2002 associated with the expected refund from a net
operating loss carryback to prior years. The refund was received in July 2002. A
valuation allowance was recorded against all of the Company's deferred tax
assets including the current operating losses in 2000. All tax expense or
benefit is recorded on a cash basis. The effective tax rates in both 2002 and
2001 reflect the cash-basis income tax payments made or tax refunds received
during the period.
LIQUIDITY AND CAPITAL RESOURCES:
--------------------------------
Current assets at September 29, 2002 increased by $5.6 million from December 31,
2001, primarily due to increased inventories. Current liabilities increased by
$10.5 million, primarily due to an increase in senior indebtedness. All senior
and subordinated debt has been recorded as current liabilities.
Property, plant and equipment expenditures totaled $2.4 million for the nine
months ended September 29, 2002 compared with $1.3 million for the nine months
ended September 29, 2001. The 2002 expenditures are related to new product
tooling for new product introductions.
Additions to intangible assets relates primarily to the development of software
for the Company's retail self-checkout system, which is expected to be released
in 2002. Intangible additions for the nine months ended September 29, 2002 were
$3.0 million, compared to additions of $2.2 million in the nine months ended
September 29, 2001.
In March 2002, the Company and its lenders reached an agreement in principle to
extend the maturities of the Company's existing financing facilities to August
1, 2002. On August 1, 2002, the Company and its lenders agreed to extend the
maturities of the Company's existing financing facilities to September 1, 2002.
Since September 1, 2002, the Company and its lenders have agreed to a series of
extensions to the maturities of its financing facilities. The Company
anticipates that it will be able to obtain additional extensions as necessary.
The terms of the financing arrangements with the Company's senior lenders are
substantially unchanged from the previously disclosed April 13, 2001
modification agreement. Among other provisions, the commitment from the senior
lender for the working capital facility is $34.0 million and the commitment for
fixed financing is $60.2 million. The interest rate for the senior credit
facilities is prime + 3.50%. The Company is required to apply 50% of net cash
proceeds from asset sales to repay amounts borrowed under its senior credit
facilities. In addition, the company is required to achieve certain milestones
in its recapitalization process.
16
In connection with the debt modification agreements reached with its lenders on
April 13, 2001, the Company accrued $4.1 million for debt modification fees
payable and recorded a related discount on the debt. Debt discount was amortized
through April 1, 2002, the expiration date of the prior amendment.
At September 29, 2002, liquidity immediately available to the Company consisted
of cash and cash equivalents of $1.5 million. The Company had a revolving credit
facility totaling $34.0 million, of which $33.7 million was outstanding at
September 29, 2002. The Company believes that the liquidity available for
operations is a limiting factor in its ability to finance normal operations.
The Company has experienced recurring losses from operations, has undergone
repeated renegotiations with its lenders of senior and subordinated indebtedness
and has a significant working capital deficit. All of the Company's debt,
totaling $124.0 million at September 29, 2002, is recorded as current.
These matters present the Company with a liquidity issue and raises substantial
doubts about its ability to continue as a going concern. Management's plans in
regard to these matters are discussed in Note 1, "Description Of Business And
Current Events". The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result, should the
Company be unable to continue as a going concern.
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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There has been no significant change in market risk from that disclosed in the
Company's December 31, 2001 annual report on Form 10-K.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
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
existing and new products, competitive product offerings and pricing pressures,
the successful completion of the Company's recapitalization efforts,
successfully negotiating extensions to existing financing or the negotiation of
new financing on acceptable terms, foreign currency and interest rate
fluctuations, fulfillment of lending agreements and the disposition of legal
issues. 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.
17
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS:
-----------------
SYMBOL TECHNOLOGIES, INC.
In November 2000, the Company settled all then-pending litigation with
Symbol Technologies, Inc. ("Symbol"). The agreements resolved all claims
between the parties, settled all disputed royalty payments, amended and
clarified the Company's existing license agreement, and included certain
new patents. ("Settlement Agreement"). Under the Settlement Agreement, the
parties also entered into product supply agreements for products that began
shipping in early 2001. Under the terms of the supply agreements, the
Company agreed to purchase hand-held laser scanners and scan engines from
Symbol and Symbol agreed to purchase fixed position retail scanners from
the Company.
On June 21, 2002, the Company gave official notice to Symbol that the
Company believed Symbol had breached the Settlement Agreement in two
respects. A week later, Symbol brought suit against the Company in New York
State Court in Suffolk County. The lawsuit alleged, among other things,
that the Company failed to deliver new fixed scanner products to Symbol on
a timely basis. Symbol also requested injunctive relief requiring the
Company to deliver certain products to Symbol for distribution under the
Settlement Agreement. The court decision, issued on October 17, 2002,
denied Symbol's request for injunctive relief. Rather than filing a
counterclaim, the Company chose to file a separate lawsuit in New York
State Court in Suffolk County alleging that Symbol breached provisions of
the mutual supply agreements. Both cases are early in the discovery
process.
LEMELSON
This declaratory judgment action, filed by the Company and six other
prominent leaders in the Automatic Identification and Data Capture industry
("Plaintiffs") on July 21, 1999, has finally arrived at the trial stage.
Pre-trial motions began on November 8, 2002, with the trial set to begin on
November 18 in the U.S. Federal District Court located in Las Vegas,
Nevada. The parties expect the trial to take as long as 34 days.
In March of 2000, the District Court had dismissed one count (the
prosecution laches claim) presented by Plaintiffs' in the action.
Plaintiffs' filed an appeal of the dismissal of that count to the United
States Court of Appeals for the Federal Circuit ("Circuit Court"). On
January 24, 2002, the Circuit Court reversed the District Court's decision,
revitalizing Plaintiffs' ability to present the prosecution laches claim in
the trial of the case. In June of 2002, the Lemelson Medical, Educational &
Research Foundation, Limited Partnership ("Lemelson") filed a Petition for
Writ of Certiorari to the Supreme Court of the United States ("Petition")
asking the Court to review the Circuit Court's decision concerning
prosecution laches. Plaintiffs filed an Opposition to Lemelson's Petition
and on October 7, the Supreme Court denied the Writ of Certiorari,
declining to review the appellate court decision.
Since June 30, 2002, Plaintiffs have presented a number of new motions for
summary judgment to the District Court. These motions continue to make
their way through the judicial process. There have been no rulings on these
motions to date. The Company, and as we understand, the other plaintiffs,
continue to be confident of prevailing in this case.
INTERNATIONAL AUTOMATED SYSTEMS
International Automated Systems (IAS) filed a lawsuit in July 1999, against
Optimal Robotics and the Company alleging that the Optimal U-Scan
self-checkout device infringes certain IAS patents. The U-Scan
18
device is the subject of an agreement between Optimal and the Company. The
Company is indemnified by Optimal under the terms of the agreement and
Optimal is defending this action on behalf of the Company.
METROLOGIC INSTRUMENTS, INC.
Metrologic Instruments, Inc. brought suit against the Company, in October
1999 in the U.S. District Court for the District of New Jersey, alleging
infringement of seven patents belonging to Metrologic. The Company
considers all of Metrologic's patent infringement claims to be without
merit based on non-infringement and/or invalidity of the Metrologic
patents. A Markman hearing was held by the presiding judge on August 6-7,
2002, to address on the scope of the patents in suit and the technical
issues related to the patents. Pending the outcome of the Markman hearing,
any remaining issues in the case will be set for trial, most likely in the
first half of 2003.
PLESKO SUIT
Mr. Plesko, currently an employee of PSC, brought suit in July 2001 in the
state courts of New York against PSC and Symbol Technologies, alleging
among other things, that PSC had failed to properly exploit technology that
it earlier purchased from Mr. Plesko's company, GAP/GEO Technologies,
resulting in a loss of royalty revenue. PSC subsequently transferred the
technology to Symbol as part of the settlement of claims between PSC and
Symbol. Both Symbol and the Company have been successful in dismissing Mr.
Plesko's actions against them. Mr. Plesko may appeal the dismissal of
claims against the Company until November 17, 2002, after which time the
case will be dismissed with prejudice.
ITEM 2: CHANGES IN SECURITIES:
---------------------
NASDAQ DELISTING
On July 3, 2002, the Company was notified by Nasdaq (the Nasdaq Stock
Market, Inc.), of its failure to meet minimum listing requirements for
continued reporting on the Nasdaq Small Cap stock market exchange.
On July 11, 2002, the Company responded to the notification, requesting an
Appeal Hearing, which was subsequently scheduled for August 22, 2002. Upon
further assessment by the Company, it concluded that the Company's grounds
for appeal would be insufficient to prevail at the Appeal Hearing. As a
result, on August 19, 2002, the Company withdrew its request for an Appeal
Hearing.
On August 20, 2002, Nasdaq halted trading of the Company's stock. Trading
of PSC common stock commenced on the "Over The Counter" (OTC) Bulletin
Board at that time under the symbol "PSCX.OB".
ITEM 3: DEFAULTS UPON SENIOR SECURITIES:
-------------------------------
None.
ITEM 4: SUBMISSION OF MATTERS OF SHAREHOLDERS TO A VOTE OF SECURITY HOLDERS:
-------------------------------------------------------------------
None.
19
ITEM 5: OTHER INFORMATION:
-----------------
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
---------
99.1 Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K: None
ITEM 7: CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There has been no change in the Company's critical accounting policies and
estimates from those disclosed in the Company's December 31, 2001 annual
report on Form 10-K.
The Company has prepared this 10-Q without concurrent review by outside
auditors, as prescribed under the reporting provisions of the Securities
and Exchange Commission (SEC). On July 29, 2002, the Company notified the
SEC on Form 8-K that it had terminated its auditing relationship with
Arthur Andersen. The Company is in the process of selecting replacement
auditors, but that process has not yet been completed. Once replacement
auditors have been selected, appropriate notification on Form 8-K will be
filed and the Company will arrange for the new auditors to perform a review
of the quarterly financial statements and disclosures reported in this
10-Q. An amendment to this 10-Q will also be filed, to confirm the
completion of the quarterly review process, and adjustments, if any, will
be disclosed at that time.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSC Inc.
DATE: November 18, 2002 By: _______________________________
Edward J. Borey
President,
Chief Executive Officer and
Director
DATE: November 18, 2002 By: _______________________________
Paul M. Brown
Vice President and
Chief Financial Officer
(Principal Financial Officer)
21