<PAGE> 1
Rule 424(b)(1)
SEC Reg. No. 333-03977
2,200,000 SHARES
[PC SERVICE SOURCE LOGO]
COMMON STOCK
Of the 2,200,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock"), of PC Service Source, Inc., a Delaware corporation ("PCSS" or
the "Company"), offered hereby, 1,250,000 shares are being offered by the
Company and 950,000 shares are being offered by certain stockholders of the
Company (the "Selling Stockholders"). The Company will not receive any of the
proceeds from the sale of Common Stock by the Selling Stockholders.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "PCSS." The closing sale price of the Common Stock on the Nasdaq
National Market on June 5, 1996 was $15.75 per share. See "Price Range of Common
Stock and Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $14.00 $0.82 $13.18 $13.18
- --------------------------------------------------------------------------------------------------
Total(3)......................... $30,800,000 $1,804,000 $16,475,000 $12,521,000
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters.
(2) Before deducting expenses of the offering payable by the Company and the
Selling Stockholders estimated at $300,000 and $10,000, respectively.
(3) The Company and certain of the Selling Stockholders have granted the
Underwriters a 30-day option to purchase up to 187,500 and 142,500
additional shares, respectively, of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Stockholders will be $35,420,000, $2,074,600, $18,946,250 and
$14,399,150, respectively. See "Underwriting."
The Common Stock is offered severally by the Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by them,
subject to their right to reject orders, in whole or in part, and to certain
other conditions. It is expected that delivery of the certificates representing
the Common Stock will be made on or about June 11, 1996.
THE ROBINSON-HUMPHREY COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
COMVEST PARTNERS, INC.
June 6, 1996
<PAGE> 2
INSIDE FRONT COVER.
Insert photograph of diagram depicting market position of Company, and
photograph of the Company's headquarters facility.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, financial statements and
related notes included elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus does not give effect to the
exercise of the Underwriters' over-allotment option.
THE COMPANY
PCSS is the leading provider of service logistics to the personal computer
and related peripherals ("PC") hardware repair industry. These service logistics
include sourcing and distributing spare parts, inventory management, warranty
claims processing, parts remanufacturing and related functions. PCSS is the
largest independent distributor of parts used in the repair of PCs in North
America, distributing over 150,000 different parts to approximately 20,000 PC
service and maintenance providers ("Service Providers"). The Company currently
maintains in its inventory over 15,000 different parts. Such parts include
printer parts, logic boards, controllers, disk drives, monitors, memory boards,
cables and related hardware. PCSS has established vendor relationships with over
25 leading original equipment manufacturers ("OEMs"), including AST, Canon,
Compaq, Hewlett-Packard and IBM. To complement its distribution operations, PCSS
seeks to supply additional value-added services to OEMs to allow OEMs to
completely outsource their service logistics functions.
Dataquest estimates that the market for independent, multi-vendor hardware
maintenance in the United States will grow from $5.0 billion in 1995 to $7.7
billion in 1999, representing a compound annual growth rate of 11.2%. Dataquest
further estimates that the market for service logistics companies ("Service
Logistics Companies") in the United States will grow from $1.2 billion in 1995
to $1.9 billion in 1999, representing a compound annual growth rate of 13.0%.
The expected growth rate of Service Logistics Companies is higher because both
OEMs and Service Providers are relying increasingly on Service Logistics
Companies, such as the Company, to outsource their inventory management, order
processing, warranty claims processing, parts remanufacturing and other service
logistics functions on new PCs and PC products and equipment already in use
("the installed base"). The Company believes that it will benefit from the
growth in both of these markets.
The foundation for the Company's service logistics is its ability to
provide accurate, efficient and rapid delivery of repair parts to its customers.
In January 1996, PCSS opened a 155,200 square foot automated distribution
facility at the Alliance Airport located in the Dallas/Fort Worth Metroplex to
enhance its parts distribution capabilities.
PCSS offers a wide range of value-added service logistics to Service
Providers and OEMs to meet their particular needs. These logistics services
include inventory management, parts sales and sourcing, warranty claims
administration, exchanged parts remanufacturing administration, vendor returns,
management reporting, and inventory liquidation and consignment. Under alliance
arrangements with Service Providers, PCSS not only effectively and efficiently
performs many of these functions for the Service Providers, but also becomes the
primary source of specified parts. The Service Provider benefits from this
alliance with the Company because these value-added services decrease the
Service Provider's inventory carrying costs, improve customer service and
responsiveness, and permits the Service Provider to devote less of its capital
to these business functions. The Company has entered into Service Provider
alliances with Ameridata, CompUSA and The Future Now, a division of Intelligent
Electronics and now known as XLConnect ("XLConnect").
PCSS also has leveraged its logistics services capabilities and strong
vendor relationships to establish outsourcing arrangements with OEMs. Under the
terms of an OEM outsourcing arrangement, the OEM may direct authorized Service
Providers, customers and dealers to the Company for some or all of the OEM's
warranty and non-warranty parts business. PCSS believes that OEMs find this type
of arrangement beneficial because, by reducing infrastructure needs, it reduces
the amount of capital committed by the OEM to the non-core segments of its
business, as well as improves the service levels for the OEM's products in the
market. The Company has entered into OEM outsourcing arrangements with AST,
Compaq, Exabyte, NEC and Packard Bell.
3
<PAGE> 4
PCSS believes an important factor in an OEM's decision to outsource its
service logistics functions is the extent to which this arrangement relieves the
OEM of functions outside of the OEM's core competencies. In the service and
warranty logistics area this often includes remanufacturing activities. To
support this function, PCSS commenced its own remanufacturing operations through
Cyclix Engineering Corporation ("Cyclix") during 1995. The principal business
objective of Cyclix is to outsource the remanufacturing and component level
repair operations of OEMs. PCSS believes its remanufacturing capabilities
through Cyclix are an important aspect of the full range of value-added services
which it offers to OEMs in an effort to outsource larger functions of the OEM's
service and warranty logistics functions.
The Company's principal executive offices and mailing address are 2350
Valley View Lane, Dallas, Texas 75234, and its telephone number is (214)
406-8583. The Company was incorporated in Delaware in January 1990.
THE OFFERING
Common Stock offered by the
Company............................. 1,250,000 shares
Common Stock offered by the Selling
Stockholders...................... 950,000 shares
Common Stock to be outstanding after
the Offering........................ 5,527,913 shares(1)
Use of proceeds..................... Reduction of indebtedness and for
working capital. See "Use of Proceeds."
Nasdaq National Market symbol....... PCSS
- ---------------
(1) Excludes 83,208 shares reserved for issuance upon exercise of outstanding
warrants. See "Description of Capital Stock -- Warrants." Also excludes
1,000,000 shares reserved for issuance upon exercise of employee and
director stock options, of which options to purchase 503,500 shares will be
outstanding immediately following the offering. See "Management -- Stock
Option Plan." Also excludes 20,000 and 100,000 shares, respectively,
reserved for issuance under the Company's Director Compensation Plan and
Employee Stock Purchase Plan. See "Management -- Director Compensation" and
"Management -- Employee Stock Purchase Plan."
RISK FACTORS
Prior to making an investment decision, prospective purchasers of Common
Stock should consider all of the information set forth in this Prospectus and
should evaluate the considerations set forth in "Risk Factors."
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and is subject to the safe-harbor created by such section. The Company's actual
results may differ significantly from the results discussed in such forward-
looking statements. Certain factors that might cause such differences include,
but are not limited to, the "Risk Factors" described herein.
4
<PAGE> 5
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------------- --------------------
1993 1994 1995(1) 1995(1) 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................. $24,110 $42,267 $68,690 $16,782 $26,281
Gross margin............................. 6,518 12,096 18,924 4,626 7,573
Earnings (loss) from operations.......... 1,724 2,966 (1,762) 932 1,270
Net earnings (loss)...................... 960 1,895 (1,505) 564 654
======= ======= ======= ======= =======
Earnings (loss) per common share......... $ .30 $ .46 $ (.39) $ .13 $ .15
======= ======= ======= ======= =======
Weighted average common shares
outstanding............................ 3,373 4,103 3,900(2) 4,391 4,373
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................... $17,513 $ 22,836
Total assets........................................................ 40,881 46,204
Long-term debt...................................................... 12,012 1,152
Stockholders' equity................................................ 12,257 28,440
</TABLE>
- ---------------
(1) 1995 results include revenues of $3.1 million for the quarter ended March 31
and non-recurring, pre-tax charges (included in selling, general and
administrative expenses) of $1.9 million ($245,000 for the quarter ended
March 31) related to a supply agreement with Intelogic Trace, Inc.
("Intelogic") terminated in connection with the bankruptcy of Intelogic. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Common stock equivalents are not included as the exercise of options and
warrants would be anti-dilutive.
(3) As adjusted to give effect to the consummation of the offering and the
application of the net proceeds as described in "Use of Proceeds."
5
<PAGE> 6
RISK FACTORS
Before purchasing any shares of Common Stock offered hereby, prospective
investors should carefully consider the following factors in evaluating the
Company, its business and this offering, together with the other information and
financial statements elsewhere in this Prospectus.
RISKS ASSOCIATED WITH INVENTORY OBSOLESCENCE
The market for PCs is characterized by rapidly changing technology and
frequent new product introductions. The introduction of new technologies can
render existing products obsolete or unmarketable. The Company's success depends
in large part on the popularity and success of the products sold by the
manufacturers whose parts the Company stocks, and the ability of the Company to
establish new relationships as other manufacturers and products enter the
market. Further, innovations and improvements in computer and peripheral design,
engineering and production may reduce the rates at which PCs experience failure,
or shorten the useful lives of existing computer systems and associated
components and replacement parts. Such rapid innovations and improvements in
technology, coupled with the need to maintain sufficient inventory levels to
ensure ready availability, subject the Company to the risk of inventory
obsolescence. Although the Company manages inventory levels with the goal of
achieving rapid inventory turnover, there can be no assurance that the Company's
efforts in this area will be successful. If a significant portion of the
Company's inventory is rendered obsolete, unmarketable or consists of
slow-moving parts, its business, financial condition and results of operations
could be materially and adversely affected.
INTENSE COMPETITION AND COMPETITIVE FACTORS
The markets in which the Company operates are characterized by intense
competition from many other independent distributors as well as the OEMs
themselves. Many of the Company's competitors, such as the OEMs, are large and
have substantially greater financial and other resources than the Company. As a
result, such competitors may be able to respond more quickly to changes in
customer requirements or to dedicate greater resources to the development,
promotion and sale of their products and services than the Company. No assurance
can be given that the Company will be able to compete successfully against
current and future competitors. The Company believes that the primary
competitive factors in the parts distribution industry are availability of
parts, speed of delivery, and price. See "Business -- Competition."
RISKS ASSOCIATED WITH EXPANDING OPERATIONS
The Company is experiencing rapid internal growth, which places significant
demands on its management and operational resources. The Company's future
performance will depend in part upon its ability to manage expanding operations,
respond to changes in its business and develop the management skills of its
managers and supervisors. If the Company is unable to manage that growth
effectively, the Company's business, financial condition and results of
operations could be materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent, in part, upon its key management
and technical personnel. In particular, the Company is highly dependent upon
Avery More, Chairman of the Board and Chief Financial Officer, and Mark T. Hilz,
President and Chief Executive Officer. The loss of the services of either of
Messrs. More or Hilz could have a material adverse effect on the Company.
Expansion of the Company's business may require additional managers and
employees with industry experience. Competition for skilled management personnel
in the industry is intense, which may make it more difficult and expensive to
attract and retain qualified managers and employees. The Company has no
employment or noncompetition agreements with any of its key personnel. See
"Management."
DEPENDENCE ON KEY SUPPLIERS
The Company depends on numerous suppliers (including over 25 leading OEMs)
to provide the Company with the parts it sells. During 1995, the Company's three
largest suppliers accounted for
6
<PAGE> 7
approximately 49% of the Company's total net revenues. In addition, the
Company's business is dependent on the terms provided by its suppliers,
including pricing and related provisions and product availability. There are
generally no long-term supply agreements governing the Company's relationship
with its key suppliers. The Company's primary supply arrangements are thus
subject to termination or curtailment at any time, with little or no advance
notice. Although management expects no such loss to occur, the refusal or
inability of any major manufacturer to ship to the Company, or an increase in
prices charged to the Company as compared to the prices charged by such
manufacturers to service providers, could have a material adverse effect on the
Company's business, financial condition and results of operation. See
"Business -- Customers and Suppliers."
RISK OF LOSS OF MATERIAL CUSTOMER
The Company sells parts to customers throughout the United States and
certain other countries. In 1995, international sales accounted for
approximately 7% of the Company's total net revenues. Although in 1995, no
customer of the Company accounted individually for more than 10% of the
Company's net revenues, an unexpected decline in the volume of sales to any
significant customer could have a material adverse effect on the Company. There
are generally no written sales agreements governing the Company's relationship
with its larger customers. Those relationships are thus subject to termination
or curtailment at any time, with little or no advance notice. See
"Business -- Customers and Suppliers."
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Common Stock may be subject to significant
fluctuations in response to variations in the Company's quarterly operating
results, general trends in the Company's industry and other factors, as well as
general economic conditions. In addition, the stock market, at times, has
experienced substantial price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
fluctuations may adversely affect the market price of the Common Stock. See
"Price Range of Common Stock and Dividends."
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the offering, the Company's directors, officers and
affiliates will own, in the aggregate, approximately 32% of the Company's
outstanding Common Stock. Therefore, such stockholders may be able to control
the outcome of substantially all actions requiring stockholder approval,
including the election of the entire Board of Directors of the Company (the
"Board"), and the outcome of any stockholder votes concerning a merger, asset
sale, or other major corporate transaction affecting the Company. Such control,
coupled with certain anti-takeover provisions included in the Company's
Certificate of Incorporation and Bylaws, could have the effect of delaying,
deterring, or preventing an unsolicited takeover of the Company that
stockholders might consider to be in their best interests. See "Principal and
Selling Stockholders" and "Description of Capital Stock -- Certain Provisions of
the Company's Certificate of Incorporation and Bylaws."
NO CASH DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and has
no plans to pay cash dividends in the foreseeable future. In addition, the
Company's revolving bank line of credit restricts payment of cash dividends to
its stockholders. See "Price Range of Common Stock and Dividends."
SHARES ELIGIBLE FOR FUTURE SALE
Sales or the availability for sale of a substantial number of shares of
Common Stock in the public market following the offering (pursuant to Rule 144
or otherwise) could adversely affect the market price of the Common Stock. Of
the outstanding shares of Common Stock to be outstanding following this
offering, 3,748,912 shares may be traded on the Nasdaq National Market without
restriction. The Company, its directors, its executive officers and all of its
stockholders currently owning five percent or more of the Company's Common
Stock, who will hold in the aggregate 1,779,001 shares of Common Stock after
this
7
<PAGE> 8
offering, will execute agreements (the "Lockup Agreements") pursuant to which
they will not sell any Common Stock or any securities convertible into the
Company's Common Stock without the prior consent of The Robinson-Humphrey
Company, Inc. for a period of 180 days from the effective date of the
Registration Statement on Form S-1 (together with all amendments and exhibits
filed or to be filed in connection therewith, the "Registration Statement").
Upon completion of the offering, the Company's directors, executive officers and
affiliates will own, in the aggregate, approximately 32% of the outstanding
Common Stock, and may have power, subject to the Lockup Agreements, to cause the
Company to register their shares of Common Stock for immediate resale. See
"Underwriting" and "Shares Eligible For Future Sale."
PROVISIONS TO PREVENT POSSIBLE TAKEOVERS
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that may delay, deter, or prevent a takeover of the Company that
stockholders might consider to be in their best interests. See "Description of
Capital Stock -- Certain Provisions of the Company's Certificate of
Incorporation and Bylaws."
RISK OF ISSUANCE OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Board to issue
preferred stock with such rights and preferences as the Board designates, all
without stockholder approval. Such preferred stock could have economic and
voting rights superior to those of the Common Stock offered hereby, and shares
of preferred stock with those rights could be issued without an opportunity on
the part of the holders of Common Stock to approve or disapprove such issuance.
See "Description of Capital Stock -- Preferred Stock."
8
<PAGE> 9
USE OF PROCEEDS
The net proceeds from the sale of 1,250,000 shares of Common Stock offered
by the Company hereby are estimated to be approximately $16.2 million ($18.6
million if the Underwriters' over-allotment option is exercised in full). The
Company will not receive any of the proceeds from the sale of Common Stock by
the Selling Stockholders. See "Principal and Selling Stockholders."
The Company intends to use such net proceeds to reduce the Company's
outstanding indebtedness under its existing revolving bank line of credit by
approximately $11.5 million. As the outstanding borrowings under the Company's
revolving bank line of credit are reduced, the Company's borrowing capacity will
be increased consistent with the terms of the revolving credit agreement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company plans to use the remainder of the proceeds and its
increased borrowing capacity, together with funds generated from operations, for
general working capital purposes and capital expenditures. Management believes
that the majority of the proceeds available for working capital purposes will be
used to purchase inventory required to support, and to carry receivables
generated by, growth in the Company's revenues. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." In addition, working capital may be used for acquisitions.
Although PCSS has not acquired any companies in the past, it does consider
acquisitions as an appropriate method of enhancing its operations. Accordingly,
the Company regularly reviews and discusses proposals to acquire businesses that
offer products or services which are expected to enhance or complement the
Company's operations. The Company does not, however, currently have any
agreements or understandings with respect to any such acquisitions.
At May 31, 1996, the Company's revolving bank line of credit had an
outstanding balance of approximately $11.5 million. The Company's revolving bank
line of credit expires in December 1997, and bears interest at the rate of
NationsBank, Texas, N.A. prime (8.25% as of May 31, 1996) plus one percent. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
9
<PAGE> 10
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "PCSS" since March 29, 1994. The table below sets forth the
high and low closing prices of the Common Stock, as reported on the Nasdaq
National Market, during the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
First Quarter..................................................... $ 9.00 $8.50
Second Quarter.................................................... 9.50 6.50
Third Quarter..................................................... 7.75 5.75
Fourth Quarter.................................................... 9.38 7.25
YEAR ENDED DECEMBER 31, 1995
First Quarter..................................................... $11.50 $8.50
Second Quarter.................................................... 11.50 7.75
Third Quarter..................................................... 10.38 8.00
Fourth Quarter.................................................... 9.00 6.50
YEAR ENDED DECEMBER 31, 1996
First Quarter..................................................... $10.25 $8.25
Second Quarter (through June 5, 1996)............................. 15.75 9.75
</TABLE>
The closing sale price of the Common Stock as reported on the Nasdaq
National Market on June 5, 1996, was $15.75. As of June 5, 1996, there were 60
holders of record of the Company's Common Stock.
Since the Company's initial public offering in 1994, the Company has not
declared or paid any cash dividends or distributions on its capital stock. The
Company does not intend to pay any cash dividends on its Common Stock in the
foreseeable future, as the current policy of the Company's Board is to retain
all earnings to support operations and finance expansion. The Company's existing
revolving bank line of credit restricts the payment of cash dividends without
the lender's prior approval. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." Future declaration and payment of dividends, if any, will be
determined in light of then current conditions, including the Company's
earnings, operations, capital requirements, financial condition, restrictions in
financing agreements and other factors deemed relevant by the Board.
10
<PAGE> 11
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to give effect to the sale by the Company of
1,250,000 shares of Common Stock offered hereby and the application of the net
proceeds therefrom as described under "Use of Proceeds." The table should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt......................................................... $12,012 $ 1,152
Stockholders equity:
Preferred stock, $.01 par value, authorized 5,000,000 shares, none
outstanding;
Common stock, $.01 par value, authorized 20,000,000 shares, 4,017,000
shares issued, 5,547,000 shares issued as adjusted(1)(2).......... 40 55
Additional paid-in capital........................................... 10,633 27,364
Retained earnings.................................................... 1,764 1,764
Less treasury stock (19,131 shares; 59,310 shares as adjusted).... 180 743
Total stockholders' equity................................... 12,257 28,440
Total capitalization......................................... 24,269 29,592
</TABLE>
- ---------------
(1) Excludes 83,208 shares reserved for issuance upon exercise of outstanding
warrants. See "Description of Capital Stock -- Warrants." Also excludes
1,000,000 shares reserved for issuance upon exercise of employee and
director stock options, of which options to purchase 533,500 are
outstanding, and of which 503,500 will be outstanding immediately following
the offering. See "Management -- Stock Option Plan." Also excludes 20,000
and 100,000 shares, respectively, reserved for issuance under the Company's
Director Compensation Plan and Employee Stock Purchase Plan. See
"Management -- Director Compensation Plan" and "Management -- Description
of Employee Stock Purchase Plan."
(2) In connection with the offering, CompuCom Systems, Inc. ("CompuCom"), a
selling stockholder, has agreed to exercise its warrant to purchase up to
250,000 shares of Common Stock and sell such shares in the offering.
Pursuant to the net exercise provisions of the warrant, 209,821 shares of
Common Stock will be issued upon net exercise of the warrant and such
shares are reflected as issued Common Stock, as adjusted. See "Description
of Capital Stock."
11
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. The operating results and balance
sheet data for each of the five years ended December 31, 1995 are derived from
the audited financial statements of the Company, which have been audited by KPMG
Peat Marwick LLP, and the operating results and balance sheet data for the
fiscal quarters ended March 31, 1995 and March 31, 1996 are derived from the
unaudited financial statements of the Company. The results of operations for the
first quarter of 1996 are not necessarily indicative of the results that may be
expected for the entire year.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- ------------------
1991 1992 1993 1994 1995(1) 1995(1) 1996
------ ------ ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net revenues........................ $2,754 $9,797 $24,110 $42,267 $68,690 $16,782 $26,281
Cost of revenues.................... 1,980 6,969 17,592 30,171 49,766 12,156 18,708
------ ------ ------- ------- ------- ------- -------
Gross margin...................... 774 2,828 6,518 12,096 18,924 4,626 7,573
Operating expenses:
Selling, general and
administrative................. 930 2,320 4,656 8,746 19,176 3,401 5,869
Depreciation and amortization..... 22 41 138 384 1,510 293 434
------ ------ ------- ------- ------- ------- -------
Total operating
expenses................ 952 2,361 4,794 9,130 20,686 3,694 6,303
------ ------ ------- ------- ------- ------- -------
Earnings (loss) from
operations..................... (178) 467 1,724 2,966 (1,762) 932 1,270
Net interest income (expense)....... (135) (121) (177) 115 (473) (7) (229)
------ ------ ------- ------- ------- ------- -------
Earnings (loss) before income
taxes.......................... (313) 346 1,547 3,081 (2,235) 925 1,041
Income taxes (benefit).............. -- 128 587 1,186 (730) 361 387
------ ------ ------- ------- ------- ------- -------
Net earnings (loss)............... (313) 218 960 1,895 (1,505) 564 654
====== ====== ======= ======= ======= ======= =======
Earnings (loss) per common share.... $ (.06) $ .09 $ .30 $ .46 $ (.39) $ .13 $ .15
====== ====== ======= ======= ======= ======= =======
Weighted average common
shares outstanding................ 3,216 3,367 3,373 4,103 3,900(2) 4,391 4,373
====== ====== ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH
------------------------------------------------- 31,
1991 1992 1993 1994 1995 1996
------ ------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................... $1,799 $1,935 $ 4,164 $10,702 $15,310 $17,513
Total assets........................ 2,207 3,492 7,567 20,015 33,127 40,881
Long-term debt, excluding
convertible debt(3)............... 610 -- 1,610 873 10,165 12,012
Stockholders' equity, including
convertible debt.................. 1,320 2,119 3,312 13,081 11,603 12,257
</TABLE>
- ---------------
(1) 1995 results include revenues of $3.1 million for the quarter ended March 31
and non-recurring, pre-tax charges (included in selling, general and
administrative expenses) of $1.9 million ($245,000 for the quarter ended
March 31) related to a supply agreement with Intelogic terminated in
connection with the bankruptcy of Intelogic. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(2) Common Stock equivalents are not included as exercise of options and
warrants would be anti-dilutive.
(3) CompuCom held $1.5 million of convertible debt in the Company during 1991,
1992 and 1993. In January 1994, CompuCom converted that debt into 2,000,000
shares of Common Stock. See "Certain Transactions."
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As part of the Company's efforts to broaden its service logistics
capabilities and to accommodate its continued growth, the Company has made
significant investments in its facilities, information systems and personnel
since the end of 1993. In June 1995, the Company relocated to its new corporate
headquarters, and in January 1996 the Company relocated its distribution
operations to a 155,200 square foot automated distribution facility near the
Alliance Airport located in the Dallas/Fort Worth Metroplex. In addition, the
Company has installed a sophisticated computer network and integrated telephone
system to automate and streamline the Company's inventory, ordering and
distribution processes. The Company has also made numerous additions to its
management team and substantially increased the number of and training provided
to its sales representatives.
In July 1995, the Company commenced the operations of Cyclix, a parts
remanufacturing subsidiary, which seeks to outsource the remanufacturing and
component level repair operations of OEMs. The Company believes its
remanufacturing capabilities through Cyclix are an important aspect of the full
range of value-added services which it offers to OEMs. Typical of similar
remanufacturing operations, Cyclix's financial operating model results in higher
gross margins and higher operating costs than the Company's distribution
operations. Although Cyclix has incurred operating losses to date as it pursues
the development of its business and absorbs certain fixed expenses, management
believes that Cyclix will achieve profitable operations for 1996. As this
remanufacturing operation grows as a percentage of the Company's overall
business mix, this different operating model will have an increasing impact on
the Company's consolidated income statement and operating margins.
Also during 1995, the Company's then largest Service Provider alliance
partner, Intelogic unexpectedly filed for bankruptcy protection which resulted
in pre-tax charges of $1.9 million, as discussed in more detail below. This loss
was exacerbated by the investment which the Company made in facilities and
personnel necessary to service the then anticipated long-term relationship with
Intelogic. The Company does not expect to make similar investments in facilities
and personnel to accommodate future Service Provider alliances it pursues.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components
of the consolidated statements of operations as a percentage of net revenues.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ----------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... 73.0 71.4 72.5 72.4 71.2
----- ----- ----- ----- -----
Gross margin......................... 27.0 28.6 27.5 27.6 28.8
Operating expenses:
Selling, general and
administrative.................... 19.3 20.7 27.9 20.3 22.3
Depreciation and amortization........ .6 .9 2.2 1.7 1.7
----- ----- ----- ----- -----
19.9 21.6 30.1 22.0 24.0
----- ----- ----- ----- -----
Earnings (loss) from operations...... 7.1 7.0 (2.6) 5.6 4.8
Net interest income (expense).......... (.7) .3 (.7) -- (.8)
----- ----- ----- ----- -----
Earnings (loss) before income
taxes............................. 6.4 7.3 (3.3) 5.6 4.0
Income taxes (benefit)................. 2.4 2.8 (1.1) 2.2 1.5
----- ----- ----- ----- -----
Net earnings (loss).................. 4.0% 4.5% (2.2)% 3.4% 2.5%
===== ===== ===== ===== =====
</TABLE>
13
<PAGE> 14
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1995
The Company recorded net earnings of $654,000, or $.15 per common share, on
4,372,707 shares for the first quarter of 1996 compared with net earnings of
$564,000, or $.13 per common share, on 4,390,999 shares for the same period in
1995.
Net revenues for the first quarter of 1996 of $26.3 million represent an
increase of $9.5 million, or 57%, over the first quarter of 1995. The Company's
outsourcing agreement with Intelogic contributed $3.1 million in net revenues
during the first quarter of 1995 and that agreement was terminated in April 1995
in connection with the bankruptcy and liquidation of Intelogic. Excluding sales
to Intelogic during the first quarter of 1995, revenues increased by $12.6
million, or 93%. The increase was principally due to higher revenues from
Service Provider alliance arrangements, which increased $4.8 million (excluding
sales to Intelogic during 1995), including sales to new customers of $3.8
million. Revenues from the parts distribution operations, excluding parts
distribution to Service Provider alliances and OEM customers, grew by
approximately $5.3 million, or 44%. OEM outsourcing revenues grew to $3.4
million in the first quarter of 1996, which included sales to new customers of
$1.6 million, versus $708,000 in the comparable quarter last year.
Gross margin improved $2.9 million, or 64%, from the first quarter of 1995
to the first quarter of 1996. The gross margin percentage for the first quarter
of 1996 increased to 28.8% compared with 27.6% for the same period in 1995. The
increase in gross margin percentage was largely due to variations in the parts
actually sold during the period and the fact that Cyclix, the Company's recently
established remanufacturing subsidiary, had slightly higher margins than the
remainder of the Company's business.
Selling, general and administrative expenses ("SG&A") as a percentage of
net revenues rose to 22.3% compared with 20.3% for the first quarter of 1995.
The $2.5 million increase in SG&A resulted primarily from a $1.8 million
increase in compensation expense that was driven by higher average employee
levels, which rose to 348 for the first quarter of 1996 compared with 256 for
the first quarter of 1995. Occupancy expenses also increased $373,000, as the
Company occupied its new headquarters, with its higher rent expense which began
in June 1995, and as the Company moved into its new distribution facility, with
its higher rent expense, during the first quarter of 1996. SG&A was also
adversely impacted by relocation and related expenses, totaling approximately
$120,000, relating to the move from the Company's previous distribution facility
into the Company's new distribution facility during the first quarter of 1996.
Depreciation and amortization was flat as a percentage of revenues. The
$141,000 increase in depreciation and amortization expense in the first quarter
of 1996 as compared with the same period in 1995 was due to a higher asset base
resulting from capital expenditures made to the Company's information systems
and capital expenditures related to the Company's new distribution facility and
new corporate headquarters.
Interest expense increased to $229,000 in the first quarter of 1996 from
$7,000 for the first quarter of 1995 due to higher borrowing levels against the
Company's revolving line of credit. These higher borrowing levels were dictated
by increases in working capital which were required to support the increase in
sales.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Net revenues for the year ended December 31, 1995 totaled $68.7 million, an
increase of $26.4 million, or 63%, from fiscal 1994. During 1995 and 1994
Intelogic accounted for $3.1 million and $1.1 million in revenues, respectively.
As discussed below, the Intelogic supply agreement was terminated in connection
with Intelogic's bankruptcy filing. The Company's revenues grew by 59% if
Intelogic is excluded from the calculation. The increase in sales was
principally the result of the development of the Company's OEM outsourcing
programs ($7.0 million in 1995 compared to $1.1 million in 1994), increases in
sales to Service Providers generally and in particular to those with whom the
Company has developed alliances. Revenues from those alliance arrangements were
$9.6 million in 1995 compared to $0.4 million in 1994. International sales also
contributed to the growth in revenue, contributing $4.9 million in 1995,
compared to $3.0 million in 1994.
Gross margins improved $6.8 million, or 56%, from 1994 to 1995. Gross
margin as a percentage of revenues declined to 27.5% in 1995 as compared with
28.6% in 1994, primarily due to changes in the mix of
14
<PAGE> 15
parts actually sold and services provided during the period. Because the gross
margin varies among the different PC spare parts which the Company regularly
keeps in inventory, as well as the types of services provided, changes in the
mix of parts sold and services provided by the Company during a particular
period affect the Company's gross margin. In addition, margin may be affected by
the acquisition or disposition of products the Company regularly keeps in
inventory.
SG&A as a percentage of net revenues increased from 20.7% to 27.9% from
1994 to 1995. The increase in SG&A was principally the result of significant
increases in compensation and severance payments, Intelogic losses, and
occupancy expenses.
Compensation increased significantly during 1995 compared to 1994 because
of an increase in the number of employees. Employee headcount rose to 327 by
1995 year-end compared to 224 at 1994 year-end. This increase is in addition to
the approximately 45 persons terminated during the year as a result of the
closure of the component level returned parts repair facility in San Antonio,
Texas (the "San Antonio Facility") which was acquired by the Company from
Intelogic. The increases in personnel were necessary to support increased
revenue growth, but because training was necessary for many of the Company's new
employees, salary expense was incurred in advance of improvements to revenues as
a result of new personnel. This was also true at Cyclix which began operations
in July 1995 and, as expected, did not generate sufficient revenue to cover its
expenses during 1995. Although dependent on many factors, including factors
beyond the Company's control, management expects Cyclix to break even or
generate a profit from its operations during 1996. Compensation expense also
increased as a result of $243,000 in severance payments made to terminated
members of management at the Company's corporate headquarters and employees
formerly employed at the now closed San Antonio Facility.
In November 1994 the Company entered into a supply agreement with Intelogic
to provide substantially all of the spare parts and replacement parts required
by Intelogic's service operations. In addition to agreeing to supply parts to
Intelogic, the Company acquired the San Antonio Facility, certain parts
inventory and repair equipment. Intelogic filed for bankruptcy in March 1995 and
its business was sold in April 1995. Following the sale of Intelogic, the supply
agreement with the Company was terminated. As a result, the Company determined
to close the San Antonio Facility and terminated the employment of approximately
45 employees at that facility. The bankruptcy filing of Intelogic resulted in a
pre-tax charge to the Company in 1995 of $1.935 million, of which $907,000 was
for uncollected receivables in excess of the approximately $900,000 recovered by
the Company from its escrow-security account with Intelogic, and $931,000
related to the write-off of certain fixed assets formerly used at the San
Antonio Facility. The balance of the pre-tax charge is represented by the
severance payments made to terminated employees at the San Antonio Facility. The
reserves and charges relating to Intelogic by quarter were as follows: the
Company reserved $245,000 against the Intelogic receivable during the first
quarter, $316,000 during the second quarter, and recognized a total charge of
$1,271,000 in the third quarter relating to uncollected receivables ($340,000)
and the write-off of fixed assets ($931,000) formerly used at the closed San
Antonio Facility.
In addition, but to a lesser extent, the Company's occupancy expenses
increased as a result of the opening of Cyclix, the six months of rent paid for
the closed San Antonio Facility, and the movement of the Company's management
office's into its new headquarters. The Company has no remaining lease
obligations on the closed San Antonio Facility nor on its former corporate
offices, and as of the first quarter of 1996 the Company has relocated its
distribution facility and will have no remaining rental obligations on its
former distribution facility.
Depreciation and amortization increased $1.1 million from 1994 to 1995 as a
result of capital expenditures made to the Company's information system,
telephone system and capital expenditures relating to the relocation of the
Company's headquarters and relocation of the Company's distribution facility
which was relocated in January 1996, but which was substantially complete in
1995. Furniture and equipment expenditures also increased with the Company's
increase in headcount.
Increases in working capital required to support the increase in the
Company's sales resulted in the Company becoming a net borrower of cash under
its revolving line of credit. Therefore, the Company had interest expense of
$473,000 during 1995 as opposed to interest income of $115,000 during 1994.
15
<PAGE> 16
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993
Net revenues for the year ended December 31, 1994 totaled $42.3 million, an
increase of $18.2 million, or 75%, from 1993. Substantially all of the increase
was attributable to the increase in shipments as average net revenues per
shipment remained comparable to 1993. The Company's efforts of increasing its
marketing and advertising strategies along with the expansion of the Company's
OEM products contributed to the volume increase in distribution during 1994. The
remainder of the increase in revenues came from services provided by the Company
from the outsourcing arrangements which it entered into during the second half
of 1994 with two of its vendors and one Service Provider.
Gross margin increased $5.6 million, or 86%, from 1993, principally as a
result of higher net revenues. The higher gross margin as a percentage of net
revenues of 28.6% in 1994, as compared to 27% in 1993, is primarily due to a
higher margin on laser printer parts gained from the Company's volume discount
purchases.
SG&A rose $4.1 million, or 88%, to support the higher revenue volume in
1994 compared to 1993. The Company also experienced higher SG&A as a percentage
of net revenues, which increased to 20.7% from 19.3%, principally from higher
personnel related costs. This increase reflects costs for personnel to support
the Company's planned growth for its outsourcing and remanufacturing businesses,
as well as operating inefficiencies incurred during its 1994 systems conversion.
Depreciation and amortization expense increased as a percentage of net
revenues largely due to the Company's investment in a new telephone system
during 1994, its continued enhancements of management information systems and
furniture and equipment purchases due to increases in Company personnel.
Subsequent to the funding of the proceeds from the Company's initial public
offering in March 1994, the Company repaid its interest-bearing debt and
invested the remainder of the proceeds in short-term investments. As a result of
the switch from a borrowing position in 1993 to an investing of cash position in
1994, the Company had a positive variance in net interest.
16
<PAGE> 17
QUARTERLY FINANCIAL DATA
The following tables sets forth selected unaudited quarterly financial
information. This information is derived from unaudited financial statements of
the Company and includes all adjustments, consisting of normal recurring
accruals, which are, in the opinion of management adjustments that are necessary
to present a fair statement of the results for such periods. The operating
results for any quarter are not necessarily indicative of results for any future
period.
STATEMENTS OF OPERATIONS FOR THE QUARTERS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1994 1995(1) 1995(1) 1995(1) 1995 1996
--------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............. $ 9,699 $9,872 $10,952 $11,744 $16,782 $15,274 $16,301 $20,333 $26,281
Cost of revenues......... 7,022 7,032 7,834 8,283 12,156 11,102 11,995 14,513 18,708
------ ------ ------- ------- ------- ------- ------- ------- -------
Gross margin........... 2,677 2,840 3,118 3,461 4,626 4,172 4,306 5,820 7,573
Operating expenses:
Selling, general and
administrative....... 1,825 2,024 2,297 2,600 3,401 4,357 6,436 4,982 5,869
Depreciation and
amortization......... 65 92 98 129 293 440 383 394 434
------ ------ ------- ------- ------- ------- ------- ------- -------
Total operating
expenses....... 1,890 2,116 2,395 2,729 3,694 4,797 6,819 5,376 6,303
------ ------ ------- ------- ------- ------- ------- ------- -------
Earnings (loss) from
operations........... 787 724 723 732 932 (625) (2,513) 444 1,270
Net interest income
(expense).............. (29) 38 50 56 (7) (75) (166) (225) (229)
------ ------ ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
income taxes......... 758 762 773 788 925 (700) (2,679) 219 1,041
Income taxes (benefit)... 303 305 308 270 361 (266) (1,012) 187 387
------ ------ ------- ------- ------- ------- ------- ------- -------
Net earnings (loss).... $ 455 $ 457 $ 465 $ 518 $ 564 $ (434) $(1,667) $ 32 $ 654
======= ====== ======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
common share........... $ .13 $ .11 $ .11 $ .12 $ .13 $ (.11) $ (.43) $ .01 $ .15
======= ====== ======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding..... 3,376 4,319 4,333 4,376 4,391 3,893 (2) 3,896(2) 4,338 4,373
======= ====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
--------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 72.4 71.3 71.5 70.5 72.4 72.7 73.6 71.4 71.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross margin............. 27.6 28.7 28.5 29.5 27.6 27.3 26.4 28.6 28.8
Operating expenses:
Selling, general and
administrative......... 18.8 20.5 21.0 22.2 20.3 28.5 39.5 24.5 22.3
Depreciation and
amortization........... 0.7 0.9 0.9 1.1 1.7 2.9 2.4 1.9 1.7
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses......... 19.5 21.4 21.9 23.3 22.0 31.4 41.9 26.4 24.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Earnings (loss) from
operations............. 8.1 7.3 6.6 6.2 5.6 (4.1) (15.5) 2.2 4.8
Net interest income
(expense)................ (0.3) 0.4 0.5 0.5 -- (0.5) (1.0) (1.1) (0.8)
----- ----- ----- ----- ----- ----- ----- ----- -----
Earnings (loss) before
income taxes........... 7.8 7.7 7.1 6.7 5.6 (4.6) (16.5) 1.1 4.0
Income taxes (benefit)..... 3.1 3.1 2.8 2.3 2.2 (1.8) (6.2) 0.9 1.5
----- ----- ----- ----- ----- ----- ----- ----- -----
Net earnings (loss)...... 4.7% 4.6% 4.3% 4.4% 3.4% (2.8)% (10.3)% 0.2% 2.5%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) 1995 results include revenues of $3.1 million for the quarter ended March 31
and non-recurring, pre-tax charges (included in selling, general and
administrative expenses) of $245,000, $419,000 and $1,271,000 for the three
months ended March 31, June 30 and September 30, respectively, related to a
supply agreement with Intelogic terminated in connection with the bankruptcy
of Intelogic. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations"
(2) Common stock equivalents are not included as exercise of options and
warrants would be anti-dilutive.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically been a net user of cash from operations, and
has financed its working capital requirements and its capital expenditures from
revolving credit, subordinated debt and equity financings. The principal uses of
cash have been to fund accounts receivable and inventories. Inventories
increased to support the Company's growth, and higher revenues generated the
increase in accounts receivable. In addition, however, during 1995 the Company's
use of cash was increased by the $1.3 million after-tax charge associated with
Intelogic and the $370,000 after-tax loss associated with the start up of
Cyclix.
At December 31, 1995, the Company had working capital of $15.3 million
($10.7 million at December 31, 1994) and a working capital ratio of 2.4 (2.8 at
December 31, 1994). Days in accounts receivable decreased from 42.0 days to 41.5
days as a result of improved collection procedures implemented in 1995 and
improvements to overcome system conversion inefficiencies which occurred in
1994. Inventory turns declined in 1995 as compared to 1994 principally as a
result of the bulk inventory purchased from Intelogic moving slower than the
Company's conventionally acquired inventory. In addition, during 1995 the
Company added many new OEM lines, each of which required the Company to make
some initial investments in inventory. It usually takes approximately two to
four months for the sales to develop in those new OEM lines. It is management's
intent to increase the inventory turns to optimum levels by focusing on improved
inventory management for new and existing OEM lines, but increasing the
inventory turns is limited by the need to maintain adequate parts to meet
customer requirements.
The Company currently maintains a revolving bank line of credit which
provides for borrowings up to a maximum of $12.0 million, based on a borrowing
base of qualified inventory and eligible receivables. The line of credit is used
for working capital purposes and matures in December 1997. At March 31, 1996,
the Company had approximately $10.9 million in borrowings, leaving $1.1 million
available under the line of credit. The Company has initiated discussions with
its lender contemplating an increase in its line of credit, as well as
improvement in terms and restrictions relating to borrowings thereunder.
In April 1996, the Company entered into a financing agreement that will
allow for the acquisition of up to $1.0 million of capital assets through
leasing arrangements. An additional $1.8 million of capital asset financing
through leasing arrangements is anticipated to become available to the Company
during the second quarter of 1996.
The Company made capital expenditures of $4.8 million during 1995,
approximately $2.3 million of which was for improvements to its management
information systems, related computer equipment and enhancements to its high
capacity computer telephony integrated system ("CTI"), $1.7 million for
furniture and fixtures, and $742,000 for leasehold improvements in the Company's
new corporate headquarters and its new distribution facility. The Company made
capital expenditures of $729,000 during the first quarter of 1996 largely for
warehouse equipment and information systems. In the second quarter of 1996 the
Company intends to refinance approximately $425,000 of the $729,000 of
expenditures using a capital lease through the lease financing arrangement
entered into in April. The Company anticipates capital expenditures for the
remainder of 1996 of approximately $2.8 million, including non-cash capital
expenditures of approximately $1.8 million for assets acquired through leases.
These capital expenditures will be primarily for a new enhanced CTI telephone
system and continued improvements and modification to the Company's information
systems. The Company believes these expenditures are required to support and
manage future growth of its business.
The Company believes that its balances of cash and cash equivalents and its
long-term borrowing capability, together with the proceeds of this offering and
equipment financing related to capital expenditures for the purchase of
equipment, will be sufficient to meet its 1996 working capital and capital
expenditure requirements.
18
<PAGE> 19
BUSINESS
PCSS is the leading provider of service logistics to the PC hardware repair
industry. These service logistics include sourcing and distributing spare parts,
inventory management, warranty claims processing, parts remanufacturing and
related functions. PCSS is the largest independent distributor of parts used in
the repair of PCs in North America, distributing over 150,000 different parts to
approximately 20,000 Service Providers. The Company currently maintains in its
inventory over 15,000 different parts. Such parts include printer parts, logic
boards, controllers, disk drives, monitors, memory boards, cables and related
hardware. PCSS has established vendor relationships with over 25 leading OEMs,
including AST, Canon, Compaq, Hewlett-Packard and IBM. To complement its
distribution operations, PCSS seeks to supply additional value-added services to
OEMs to allow OEMs to completely outsource their service logistics functions.
Dataquest estimates that the market for independent multi-vendor hardware
maintenance in the United States will grow from $5.0 billion in 1995 to $7.7
billion in 1999, representing a compound annual growth rate of 11.2%. Dataquest
further estimates the market for Service Logistics Companies in the United
States will grow from $1.2 billion in 1995 to $1.9 billion in 1999, representing
a compound annual growth rate of 13.0%. The expected growth rate of Service
Logistics Companies is higher because both OEMs and Service Providers are
relying increasingly on Service Logistics Companies, such as PCSS, to outsource
their inventory management, order processing, warranty claims processing, parts
remanufacturing and other service logistics functions on new PCs and the
installed base of PC products. The Company believes that it will benefit from
the growth in both of these markets.
The foundation of the Company's service logistics is its ability to provide
accurate, efficient and rapid delivery of repair parts to its customers. In
January 1996, PCSS opened a 155,200 square foot automated distribution facility
at the Alliance Airport located in the Dallas/Fort Worth Metroplex to enhance
its parts distribution capabilities.
PCSS offers a wide range of service logistics to Service Providers and OEMs
to meet their particular needs. These service logistics include inventory
management, parts sales and sourcing, warranty claims administration, exchanged
parts remanufacturing administration, vendor returns, management reporting, and
inventory liquidation and consignment. Under alliance arrangements with Service
Providers, PCSS not only effectively and efficiently performs many of these
functions for the Service Providers, but also becomes the primary source of
specified parts. The Service Provider benefits from this alliance with the
Company because these value added services decrease the Service Provider's
inventory carrying costs, improves customer service and responsiveness, and
permits the Service Provider to devote less of its capital to these business
functions. The Company has entered into service provider alliances with
Ameridata, CompUSA and XLConnect.
PCSS also has leveraged its logistics services capabilities and strong
vendor relationships to establish outsourcing arrangements with OEMs. Under the
terms of an OEM outsourcing arrangement, the OEM may direct authorized service
providers, customers and dealers to the Company for some or all of the OEM's
warranty and non-warranty parts business. PCSS believes that OEMs find this type
of arrangement beneficial because, by reducing infrastructure needs, it reduces
the amount of capital committed by the OEM to the non-core segments of its
business, as well as improves the service levels of the OEM's products in the
market. The Company has entered into OEM outsourcing arrangements with AST,
Compaq, Exabyte, NEC and Packard Bell.
PCSS believes an important factor in an OEM's decision to outsource its
service logistics functions is the extent to which such an arrangement relieves
the OEM of functions outside of the OEM's core competencies. These service and
warranty logistics areas often include remanufacturing activities. To support
this function, PCSS commenced its own remanufacturing operations through Cyclix
during 1995. The principal business objective of Cyclix is to outsource the
remanufacturing and component level repair operations of OEMs. PCSS believes its
remanufacturing capabilities through Cyclix are an important aspect of the full
range of value-added services which it offers to OEMs in an effort to outsource
larger functions of the OEM's service and warranty logistics functions.
19
<PAGE> 20
INDUSTRY
The demand for logistics services in the computer industry represents a
significant and growing market opportunity. Dataquest estimates there to be over
72 million PCs and 66 million printers installed in the United States. Dataquest
estimates that by 1999 there will be over 122 million PCs and 88 million
printers in the United States, and 350 million PCs worldwide. As the number of
PCs increase, the need for repairs and replacement parts increases as well. PCSS
believes the PC spare parts industry is not primarily dependent on the level or
type of computer hardware sales in a particular year, but also depends on the
installed base of equipment. As a result, the need for any particular PC spare
part will often continue for an extended period of time, even after the OEM
discontinues manufacturing that particular PC or peripheral.
The Company believes OEMs and Service Providers are increasingly utilizing
the expertise of third parties to manage their service logistics functions.
Dataquest estimates that OEMs spend approximately 3.5% of gross revenues
providing warranty services and support to its customers. As the benefits of
outsourcing parts logistics functions to third parties becomes more apparent,
the Company believes the utilization of Service Logistics Companies, such as
PCSS, will increase significantly. The Company also believes this supply market
will consolidate rapidly as OEMs and Service Providers continue to seek service
logistics outsourcing arrangements, and as access to financial resources and
economies of scale become more critical.
Service Providers include (i) independent service organizations, (ii) OEM
service organizations and (iii) PC resellers. Service Providers purchase
replacement parts for the service and repair of PCs and peripherals. These parts
may be purchased directly from the OEM or from any of the hundreds of
independent distributors, the largest of which is PCSS. The Company believes the
role of a distributor of computer spare parts and peripherals generally has
increased in importance in recent years as an increasing number of OEMs choose
to sell their products through distributors, rather than through Service
Providers, resellers or dealers directly. This trend is occurring primarily
because of the OEM's high costs of warehousing, inventory management, financing
and distribution associated with dealing directly with numerous Service
Providers. The Company also believes independent distributors, such as PCSS,
serve as an important link between OEMs and Service Providers, by offering a
more cost effective method of mass-distribution of small product orders than
presently provided by OEMs.
BUSINESS STRATEGY
As the largest independent distributor of parts used in the repair of PCs
in the United States, the Company believes it has positioned itself to be the
distribution hub for spare parts between OEMs and Service Providers. In
addition, the Company's knowledge of the service logistics arena and significant
investments in establishing a highly automated infrastructure will allow it to
provide complete outsourcing capabilities for its Service Provider and OEM
customers. The Company seeks to enhance its leadership position and leverage its
service logistics capabilities by offering its customers an efficient
distribution system and value-added service logistics functions. The key
components of this strategy include:
Focus on Service Provider Alliances to Complement its Core Distribution
Business. PCSS seeks to expand its service alliance arrangements with Service
Providers. Under those alliances, PCSS becomes the primary parts source for
Service Providers. As the Service Provider's vendor of choice, the Company
offers a variety of support services, including, parts inventory management,
parts sourcing and warranty claims administration. These alliances allow the
Company to achieve a more predictable flow of orders for spare parts.
Expand OEM Service Logistics Outsourcing. As OEMs continue to rationalize
their infrastructure and focus on their core competencies, there exists a
greater opportunity to enter into outsourcing arrangements outside of the OEM's
core competencies. PCSS seeks to leverage its strong vendor relationships and
sophisticated services infrastructure to capture additional outsourcing
arrangements with OEMs. As several of the Company's OEMs are familiar with its
distribution expertise already, PCSS cross-sells its service logistics
outsourcing capabilities, such as warranty processing, end-of-life programs and
parts remanufacturing to such OEMs. In addition, PCSS seeks to expand the
breadth of value-added service logistics functions. Through such OEM
arrangements, PCSS is pursuing its goal of becoming the primary supplier of
spare parts and services for both in-warranty and out-of-warranty programs
offered by OEMs. PCSS believes by offering these
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<PAGE> 21
service logistics, it can provide the OEMs with a more cost-effective and
reliable means of performing these functions.
Maintain and Enhance Innovative Technology Based Systems. PCSS will
continue to develop and use sophisticated information systems to improve
efficiency, monitor operations, manage inventory risks, improve customer
service, and provide innovative service logistics to OEMs and Service Providers.
During the last two years, PCSS has invested $4.7 million in the establishment
and enhancement of its innovative technology based systems. These systems
include advanced telecommunications, voice response equipment, electronic mail
and messaging, automated fax technology, radio frequency scanning and
bar-coding, and automated inventory management. The Company also maintains its
sophisticated, high capacity CTI for handling and processing orders received
through the Company's call center, which is staffed by trained account
representatives.
OPERATIONS
PCSS conducts its parts distribution and processing business principally
from its distribution center at the Alliance Airport facility located in the
Dallas/Fort Worth Metroplex. Recognizing the immediate demands of its customers,
PCSS established a highly automated and integrated order processing and
distribution system which allows the Company to provide efficient and accurate
delivery of products on a same or next day basis. The Company also has
established a system of "work cells" for receiving, recording and warehousing
daily supply shipments. All parts are bar coded and tracked throughout the
155,200 square foot facility through radio frequency scanning equipment that is
integrated with the Company's computer network. Parts are received daily from
OEMs and other suppliers, bar coded, logged into the Company's information
system, and shelved in the Company's warehouse for quick access based on real
time daily demand.
In addition, many PC replacement parts are remanufactured from returned
goods in need of repair. For example, a part may no longer work because one of
its many components is defective. When a Service Provider purchases a
replacement for a defective part, the defective part ("core") may often be
returned for credit. The core may then be repaired and resold as a
remanufactured part. Service Providers often prefer lower cost remanufactured
parts because they have performance specifications equivalent to newly
manufactured parts. This aspect of the PC parts business requires that the
Company distribute new or remanufactured parts to its customers, collect broken
but repairable parts, and then administer the remanufacturing of those parts for
resale. Therefore, unlike many distribution businesses, products flow to and
from the Company and its customers, and to and from its suppliers. In addition
to new parts being received and shelved daily, cores are also received daily
from customers, sorted and distributed to the Company's remanufacturing
subcontractors, including Cyclix. Following the return of a remanufactured core,
it is bar coded and placed in inventory.
Service Providers can make purchases 24 hours a day 365 days a year by
credit card, cash on delivery, or, for approved accounts, by open account.
Service Providers typically call an account representative, toll-free
(1-800-PCParts) to place orders for same or next day delivery. Utilizing its
high capacity CTI system, the Company's call center automatically routes
customer calls to the appropriate account representative. Each account
representative has a work station that provides access to the Company's
information system, through which the account representative may retrieve
detailed information about accounts, products, inventory, shipping and the
status of all orders. Through the information system's imaging and direct fax
capabilities, the account representative may access exploded-view diagrams of a
substantial majority of parts in inventory from the account representative's
work station and fax the image to the Service Provider to confirm the
identification of the ordered part. Once the order is placed, the account
representative immediately transmits the order to the distribution center where
the part is picked, packed and shipped in accordance with the Service Provider's
instruction, usually the same day the order is placed. In 1995, the Company's
integrated processing and delivery system achieved a 99.5% accuracy rate on all
orders.
The Company offers a full complement of PC spare and replacement parts,
distributing over 150,000 different PC parts, of which it maintains
approximately 15,000 in its inventory, from over 25 leading OEMs, such as AST,
Canon, Compaq, Epson, Exabyte, Hewlett-Packard, IBM, NEC, Okidata, Packard Bell,
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<PAGE> 22
Lexmark and Toshiba. These parts include printer parts, logic boards,
controllers, disk drives, monitors, memory boards, cables, and related hardware.
SERVICES
The Company offers a wide range of value-added service logistics to Service
Providers and OEMs. These services capabilities in combination with the
Company's core distribution expertise allow PCSS to become the spare parts
department for its customers. PCSS offers these service logistics in two
formats, Service Provider alliances and OEM outsourcing arrangements, each based
on the demands of its customers. In 1995, Service Provider alliances and OEM
outsourcing arrangements generated $9.6 million and $7.0 million of the
Company's total revenues, respectively.
Service Provider Alliances. Typically, a substantial portion of a Service
Provider's cost structure is attributable to parts inventory ownership and
logistics management for these materials. The Company offers a range of services
directed at minimizing this cost burden of the Service Provider. These support
services include inventory management, parts sourcing, warranty claims
administration, vendor returns, management reporting and inventory liquidation
and consignment. Because this type of support generally requires a high level of
process integration between the Service Provider and the Company, the Company
seeks to provide these services through long term alliances. Under these
arrangements, the Company becomes the primary source of specified parts for the
Service Provider. The Service Provider benefits from this alliance with the
Company because these value-added services decrease the Service Provider's
inventory carrying costs, improve service, and permits the Service Provider to
devote less of its capital to these business functions.
The Company has entered into Service Provider alliances with Ameridata,
CompUSA and XLConnect. Some of the Service Provider alliances are currently the
subject of long-term supply agreements and others may be terminated by either
party at any time. The Company, however, enters into Service Provider alliances
with the expectation that these arrangements will lead to long-term
relationships or contracts with those parties.
OEM Logistics Outsourcing. Dataquest estimates that OEMs spend
approximately 3.5% of gross revenues providing warranty services and support to
its customers. As a result, PCSS seeks arrangements with OEMs of PCs to handle
all or a defined portion of these parts distribution and warranty processing
functions. Under the terms of such an OEM outsourcing arrangement, the OEM
directs some or all of its customers and dealers to the Company for some or all
of the OEM's warranty and non-warranty parts business. PCSS believes these
arrangements benefit OEMs by reducing infrastructure needs, reducing the amount
of capital committed by the OEM to the non-core segments of its business, and
improving customer service and responsiveness. The Company believes that as a
specialist in managing the key business functions associated with parts
distribution, which includes its expertise in two-way distribution logistics,
the Company is able to provide parts and related service logistics at lower
costs than manufacturers themselves can provide such services.
In 1994, the Company entered into arrangements with Compaq to provide
warranty administration processing for a portion of Compaq's network of
value-added resellers and national dealers. In January 1996, the Company and
Compaq expanded an arrangement pursuant to which all calls received by Compaq
for replacement parts from non-authorized Service Providers and end-users are
routed via a dedicated T-1 line directly to the Company's call center for
handling and order processing. The Company has also entered into an arrangement
with AST to supply spare parts order fulfillment services for all AST
non-warranty service parts. Other OEMs with which the Company entered into
arrangements for handling limited functions for the OEM include Exabyte, NEC and
Packard Bell. These arrangements may be terminated by either party at any time,
but the Company has entered into them with the expectation that these
arrangements will lead to long-term relationships or contracts with these
parties.
In order to expand the Company's service offerings to its OEM customers,
PCSS in July 1995 established Cyclix, a provider of parts remanufacturing
outsourcing services. Remanufacturing involves the component level repair of
defective parts returned by Service Providers subsequent to a field replacement
performed for their customers, as well as upgrading the parts to the most recent
technical specification set by the OEM. Cyclix has entered into remanufacturing
arrangements with AST for the repair of AST main logic boards. In
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<PAGE> 23
addition, Cyclix has entered into remanufacturing arrangements with Radius for
the repair of Radius monitors and other various computers parts. Cyclix also
remanufactures PC equipment for large corporate end users. These arrangements
may be terminated by either party at any time, but the Company expects that
these arrangements will lead to long-term relationships or contracts with those
parties. PCSS believes that its remanufacturing capabilities through Cyclix are
an important aspect of the full range of value added services it will offer to
OEMs in an effort to outsource larger functions of the OEM's service and
warranty logistics functions.
MANAGEMENT INFORMATION SYSTEMS
The Company maintains sophisticated information systems to improve
efficiency, process orders, monitor operations, manage inventory risks, offer
faster and higher levels of service, and provide innovative service logistics to
OEMs and Service Providers. These on-line systems provide management with
information concerning sales, inventory levels, customer payments and other
operations which are essential for the Company to operate efficiently and to
enable it to offer additional services. The Company has invested in advanced
telecommunications, voice response equipment, electronic mail and messaging,
automated fax technology, radio frequency scanning and bar-coding and automated
inventory management.
The Company maintains a sophisticated call center utilizing an Aspect
switch, which is integrated with the Company's information system. The Unix
based information system operates on Hewlett-Packard 9000 T-500 machines running
an Informix database program customized to the Company's requirements. The CTI
system is an essential element of the call center's operation, automatically
routing customer calls to the appropriate account representative and, together
with the information system, monitoring information which is used by management
to improve efficiency and customer services. The Company compiles and analyzes
data on, among other things, the amount of time a customer waits until the
customer's call is answered, the accuracy of information conveyed by account
representatives, the number of lost sales due to unavailability of parts,
inventory levels, as well as the status of any particular shipment. During 1995
the call center handled approximately 1,250,000 calls, allowing PCSS to ship
approximately 450,000 packages. Each account representative has a work station
that provides access to the Company's information system, through which the
account representative may retrieve detailed information about customers,
products, inventory, shipping and the status of all orders. Through the
information system's imaging and direct fax capabilities, the account
representative may access exploded-view diagrams of a substantial majority of
parts in inventory from the account representative's work station and fax the
image to the customer to confirm the identification of the ordered part.
PCSS has also developed capabilities which allow pre-approved customers to
place orders electronically, reducing the order processing costs for both the
Company and the customer. The Company believes that this capability will
increasingly become required by many customers and some suppliers and,
accordingly, the Company will continue to invest in enhancing those
capabilities.
SALES AND MARKETING
The Company views service spare parts distribution as a value-added service
business. As such, sustaining the growth of the Company is dependent upon
building and maintaining relationships and loyalties with Service Providers as
well as OEMs. The Company maintains a Service Provider sales force. Each field
sales representative is located in a major metropolitan area and works as a team
with inside sales representatives to cover a designated geographical territory.
Major account managers are assigned to maintain relationships with the Company's
largest national accounts and are assigned territories based on the customer's
market segment. The Company also has a separate sales force focusing on OEM
outsourcing arrangements. The Company's sales representatives visit major OEMs,
Service Providers and attend various trade shows.
The Company regularly advertises its parts and services in recognized trade
magazines, publishes a bi-monthly customer newsletter, a quarterly product
catalogue, and makes direct mailings to potential customers. Customers rely upon
the Company's product catalogs, newsletter and frequent mailings as a source for
product information, including prices. In addition, the Company maintains a
presence on the world-wide web
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<PAGE> 24
(www.pcservice.com). The Company has applied for registration of its PC
SERVICESOURCE(SM) and design service mark and its THE RIGHT PARTS RIGHT NOW(SM)
and design service mark. The Company also conducts customer satisfaction surveys
and purchases market research data to maintain continuous insight into
marketplace trends and requirements.
The Company provides comprehensive training to its sales and account
representatives regarding technical characteristics of products and the
Company's policies and procedures. Each new account representative attends a
four-week course given by the Company. In addition, the Company's ongoing
training program for sales and account representatives is supplemented by
product seminars offered by OEMs.
CUSTOMERS AND SUPPLIERS
PCSS sells parts to customers throughout the United States, Canada, and in
Latin America, as well as in other countries. In 1995, international sales
accounted for approximately 7% of the Company's net revenues. In 1995, no
customer of the Company accounted individually for more than 10% of the
Company's net revenues. The Company sells a variety of parts to approximately
20,000 Service Providers, including CompUSA, Decision One, IBM (MVAS), Tandy
Services and Vanstar. In addition, the Company has entered into Service Provider
alliances with Ameridata and XLConnect. PCSS also entered into outsourcing
arrangements with OEMs, such as AST, Compaq, Exabyte, NEC and Packard Bell to
outsource various service logistics functions. See "Business -- Services." These
arrangements with Service Providers and OEMs may generally be terminated by
either party at any time, but the Company has entered into them with the
expectation that these arrangements will lead to long-term relationships or
contracts with these parties. The Company also sells parts to CompuCom, the
owner of more than 5% of the Company's Common Stock prior to the completion of
the offering, on the same terms as sales to independent parties. See "Certain
Transactions."
The Company depends on numerous suppliers (including over 25 leading OEMs)
to provide the Company with the parts it sells. During 1995, the sale of Canon,
Hewlett-Packard and AST parts accounted for approximately 23%, 15% and 11%,
respectively, of the Company's total net revenues. No other supplier provided
parts accounting for more than 10% of the Company's net revenues. In fiscal
1995, the Company also purchased parts from CompuCom on the same terms as it
purchases parts from independent parties. See "Certain Transactions." There are
generally no long-term supply agreements governing the Company's relationships
with its major suppliers. The Company's primary supply arrangements are thus
subject to termination or curtailment at any time, with little or no advance
notice. Although management expects no such loss to occur, the refusal or
inability of any major manufacturer to ship to the Company, or an increase in
prices charged to the Company as compared to the prices charged by such
manufacturers to service providers, could have a material adverse effect on the
Company's business, financial condition and results of operation. See "Risk
Factors -- Dependence on Key Suppliers."
COMPETITION
The Company is the leading provider of service logistics to the PC repair
and maintenance industry. These service logistics include distribution and
sourcing of spare parts, inventory management, warranty claims, parts
remanufacturing and related functions. Based on industry sources, including
Dataquest's 1994 industry analysis and updates performed by the Company and
Dataquest since that time, the Company is the largest independent distributor of
parts used in the repair of PCs in North America, distributing over 150,000 (of
which it maintains 15,000 in its inventory) different parts for PCs to
approximately 20,000 service and maintenance providers.
The market for the Company's products is large but fragmented. Competition
in the industry is widespread and comes from other independent distributors
(including various small independents) that are not affiliated with an OEM, as
well as from the OEMs themselves. When OEMs act as distributors, they typically
distribute only their own products. Independent distributors typically
distribute a variety of manufacturers' parts. Among the Company's major
independent competitors are Aurora Electronics, The
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<PAGE> 25
Cerplex Group, Parts Now, National Parts Depot and Service Electronics. Certain
of these competitors, such as the OEMs, are large and have substantially greater
financial and other resources than the Company.
The Company believes that its growth is attributable to its ability to
consistently supply needed parts on demand, with rapid delivery, and at
competitive prices. Management believes that these competitive factors will
continue to govern customer decisions in the foreseeable future. See "Risk
Factors -- Competition."
EMPLOYEES
As of May 1, 1996, the Company had 403 full time employees, of which 84
were in administration, 156 were in sales, 112 were in warehouse services and 51
were engineers or technicians. The Company is not party to any collective
bargaining agreement and believes relations with its employees are good.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws and
regulations relating to worker safety and health, environmental regulations and
other matters applicable to businesses in general. The Company does not believe
that these regulations as currently in effect have a material effect on its
business.
PROPERTIES
All of the Company's properties are located within the Dallas/Fort Worth
Metroplex area. In February 1995, the Company entered into a 10-year office
lease that commenced on June 1, 1995, for 63,500 square feet in Dallas, Texas.
This leased space houses the Company's corporate offices, account
representatives and information systems. The Company has the option to terminate
the lease during the fifth year of the lease and the option to renew the lease
for an additional 5-year term.
In May 1995, the Company entered into a 10-year build-to-suit lease that
commenced on December 18, 1995, for a 155,200 square foot distribution center
near the Alliance Airport, out of which orders are received, processed and
shipped. The Company has a build-to-suit lease option for an additional 100,000
square feet at that location.
During 1995 the Company also entered into a 3-year lease that commenced on
March 1, 1995, for a 51,500 square foot facility in Dallas, Texas to be used for
the remanufacturing operations of Cyclix. The Company has the option to renew
the lease for an additional 3-year term.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
offices and directors of the Company as of May 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------- --- -------------------------------------------------
<S> <C> <C>
Avery More................. 41 Chairman of the Board and Chief Financial Officer
Mark T. Hilz............... 37 Director, President and Chief Executive Officer
Philip W. Wise............. 42 Director, President and Chief Executive Officer
of Cyclix Engineering Corporation
James N. Contardi.......... 33 Vice President, Sales and Marketing
Danny T. Hendrix........... 41 Vice President, Operations
Bernard W. Rohde........... 37 Vice President, Finance, Chief Accounting Officer
and Secretary
Robert S. Leff............. 49 Director
James Ounsworth............ 53 Director
Edward C. Raymund.......... 67 Director
Morti Tenenhaus............ 41 Director
Jay Haft................... 60 Director
</TABLE>
AVERY MORE is Chairman of the Board and Chief Financial Officer of the
Company. Mr. More is a Class III director whose term expires in 1998. He is a
member of PCSS's Executive Committee and Stock Option Committee. Mr. More was
formerly President and Chief Executive Officer of CompuCom from 1989 to 1993 and
a member of the CompuCom Board of Directors from 1989 to 1994. From 1984 to
1988, he served as a member of the Board of Directors and Executive Vice
President of ComputerCraft Corporation. Mr. More also serves as managing partner
of Eureka Ventures and President of Rosetta Stone Corporation, both of which are
engaged in merchant banking and venture capital activities in the computer
industry. See "Certain Transactions." Mr. More became a PCSS director and
Chairman of the Board in 1990.
MARK T. HILZ is a director and President and Chief Executive Officer of the
Company. Mr. Hilz is a Class III director whose term expires in 1998. He is a
member of PCSS's Executive Committee. Mr. Hilz has served as an executive
officer of the Company from its inception and was appointed to his present
position in 1991. Mr. Hilz became a PCSS director in 1990. From 1988 to 1989,
Mr. Hilz served as Regional Manager of Robec Distributors, a national
distributor of computer products. Mr. Hilz was President of Hilz Computer
Products from 1983 to 1988.
PHILIP W. WISE is a director of the Company and the President and Chief
Executive Officer of Cyclix. Mr. Wise is a Class I director whose term expires
in 1999. Prior to joining Cyclix, he was an industry consultant from 1994 to
1995, Executive Vice President of CompuCom from 1993 to 1994, and Senior Vice
President of CompuCom from 1991 to 1993. Mr. Wise became a PCSS director in
1990.
JAMES N. CONTARDI is Vice President, Sales and Marketing of the Company.
Prior to joining the Company, Mr. Contardi held several sales and marketing
positions with IBM Corporation from 1985 to 1994.
DANNY T. HENDRIX is Vice President, Operations of the Company. Prior to
joining the Company, Mr. Hendrix was director and acting general manager of
service operations for AST Computer from 1994 to 1995, and director of service
operations for Dell Computer from 1987 to 1994.
BERNARD W. ROHDE is Vice President, Finance, Chief Accounting Officer and
Secretary of the Company. Prior to joining the Company, Mr. Rohde was Controller
and Chief Accounting Officer of Source, Inc. from 1994 to 1995, and Controller
of Source, Inc., from 1990 to 1994.
ROBERT S. LEFF is a director of the Company, co-founder of Merisel, Inc.,
and a strategic consultant to companies in the computer industry. Mr. Leff is a
Class II director whose term expires in 1997. He is a member of PCSS's Audit
Committee and Compensation Committee. Mr. Leff became a PCSS director in 1994.
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JAMES OUNSWORTH is a director of the Company and Senior Vice President and
General Counsel of Safeguard Scientifics, Inc. Mr. Ounsworth is a Class I
director whose term expires in 1996, and has been renominated for election as a
Class II director at the 1996 annual meeting of stockholders, with a term
expiring in 1997. Prior to joining Safeguard Scientifics, Inc., Mr. Ounsworth
was a partner in the law firm of Pepper, Hamilton & Sheetz from 1983 to 1991.
Mr. Ounsworth was elected pursuant to a voting agreement between Mr. More and
CompuCom. See "Certain Transactions."
EDWARD C. RAYMUND is a director of the Company and a director of Tech Data
Corporation and Vision Electronics. Mr. Raymund is a Class I director whose term
expires in 1999. He is a member of the PCSS's Audit Committee and Compensation
Committee. From 1972 until his retirement in 1994, Mr. Raymund was the Chief
Executive Officer of Tech Data Corporation, a distributor of computers,
peripherals, software and networks. Mr. Raymund became a PCSS director in 1994.
MORTI TENENHAUS is a director of the Company and Executive Vice President
of Rosetta Stone Corporation, as well as President and Chief Executive Officer
of TeKnowlogy, Inc. Mr. Tenenhaus is a Class II director whose term expires in
1997. He is a member of PCSS's Executive Committee, Compensation Committee and
Stock Option Committee. Prior to serving in his current capacities, Mr.
Tenenhaus was Senior Vice President of System Integration and Service for
CompuCom from 1989 to 1993. From 1984 to 1988, he served as the Director of
National Accounts for ComputerCraft Corporation. Mr. Tenenhaus became a PCSS
director in 1990.
JAY HAFT is a director of the Company and a strategic consultant to growth
stage companies, managing general partner of Venture Capital Associates, Ltd.,
and GenAm "1" Venture Fund, and of counsel to the law firm of Parker Duryee
Rosoff & Haft. Mr. Haft was a senior partner in that law firm from 1989-1995.
Mr. Haft is a Class I director whose term expires in 1999. He is Chairman of the
Board of Noise Cancellation Technologies, Inc., Extech Inc. and Healthcare
Acquisition Corp., and is a director of Robotic Vision Systems, Inc., CAS
Medical Systems, Viragen, Inc. and Nova Technologies, Inc.
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EXECUTIVE COMPENSATION
The following table summarizes the compensation earned by the Company's
Chief Executive Officer and its six other most highly compensated executive
officers (the "Named Officers") whose compensation exceeded $100,000 in 1995 for
services rendered in all capacities to the Company during the years ended
December 31, 1995, 1994, and 1993.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
------------------- OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS SARS (A)
- ---------------------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Avery More.............................. 1995 $144,000 -- -- $5,760
Chairman of the Board and 1994 -- -- -- --
Chief Financial Officer 1993 -- -- -- --
Mark T. Hilz............................ 1995 129,577 -- -- 6,157
President and 1994 108,780 $86,400 100,000 5,510
Chief Executive Officer 1993 93,804 57,960 120,000 --
James N. Contardi(B).................... 1995 94,712 -- -- 4,643
Vice President, 1994 41,538 21,370 25,000 862
Sales and Marketing 1993 -- -- -- --
Danny T. Hendrix(B)..................... 1995 24,327 -- 20,000 --
Vice President, 1994 -- -- -- --
Operations 1993 -- -- -- --
Philip Wise(B).......................... 1995 72,115 -- -- 91,615
President and Chief Executive Officer, 1994 -- -- 25,000 --
Cyclix Engineering Corp. 1993 -- -- -- --
Brian R. Ervine(C)...................... 1995 96,635 -- -- 5,515
Former Chief Financial 1994 80,000 41,250 45,000 3,400
Officer and Vice President, 1993 -- -- -- --
Finance
Michael P. Montgomery(C)................ 1995 104,808 -- -- 6,352
Former Senior Vice 1994 90,630 54,000 40,000 4,384
President, Operations 1993 72,834 37,950 80,000 --
</TABLE>
- ---------------
(A) Represents amounts paid by the Company to each executive officer's account
under the Company's 401(k) plan. Other compensation for Mr. Wise in 1995
included $90,000 of consulting fees paid prior to his becoming an employee
of the Company. See "Certain Transactions."
(B) Mr. Contardi's employment with the Company commenced in June 1994. The
employment of Messrs. Hendrix and Wise commenced in October 1995 and July
1995, respectively.
(C) In August 1995, Mr. Ervine resigned as Chief Financial Officer and Vice
President, Finance of PCSS and Mr. Montgomery resigned as Senior Vice
President, Operations of PCSS.
STOCK OPTION PLAN
Pursuant to the Company's 1992 Stock Option Plan, as amended (the "Stock
Option Plan"), incentive and nonstatutory options may be granted to eligible
individuals for the purchase of an aggregate of up to 1,000,000 shares of Common
Stock, of which options to acquire 533,500 shares are outstanding and 291,500
are available for future issuance. Eligible individuals include key employees
and non-employee directors of the Company and certain individuals and entities
who are not employees or directors of the Company. The Stock Option Plan is
administered by the Stock Option Committee of the Board, which determines, in
its discretion,
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<PAGE> 29
the number of shares subject to each incentive and nonstatutory option granted
and the related purchase price and option period. The Stock Option Committee
consists of Mr. More and Mr. Tenenhaus, both of whom are disinterested directors
with respect to the Stock Option Plan.
The Stock Option Plan requires that the exercise price for each incentive
stock option must not be less than the greater of (a) the par value per share of
the Common Stock or (b) 100% of the fair market value per share of the Common
Stock at the time the option is granted. The Stock Option Plan requires that the
exercise price for each nonstatutory stock option must not be less than the fair
market value per share of the Common Stock at the time the option is granted. No
incentive stock option, however, may be granted to an employee who owns more
than 10% of the total combined voting power of all classes of outstanding stock
of the Company unless the option price is at least 110% of the fair market value
of the Common Stock at the date of grant and the option period is not more than
five years from the date of grant. No employee may be granted incentive stock
options that first become exercisable during a calendar year to purchase Common
Stock, or stock of any affiliate (or a predecessor of the Company or an
affiliate), with an aggregate fair market value (determined as of the date of
grant of each option) in excess of $100,000. An incentive stock option counts
against the annual limitation only in the year it first becomes exercisable.
Incentive stock options may be granted only to employees of the Company.
The option period may not be more than ten years from the date the option
is granted. Options may be exercised in annual installments as specified by the
Stock Option Committee. All installments that become exercisable are cumulative
and may be exercised at any time after they become exercisable until the option
expires. Options are not assignable or transferable other than by will or the
laws of descent and distribution.
Full payment for shares purchased upon exercise of an option must be made
at the time of exercise. No shares may be issued until full payment is made. The
Stock Option Plan provides that an option agreement may permit an optionee to
tender previously owned shares of Common Stock in partial or full payment for
shares to be purchased on exercising an option. Unless sooner terminated by
action of the Board, the Stock Option Plan will terminate in August 2002.
Subject to certain exceptions, the Stock Option Plan may be amended, altered or
discontinued by the Board without stockholder approval.
The Board has retained the right to amend or terminate the Stock Option
Plan as it deems advisable. However, no amendment shall be made to increase the
number of shares of stock which may be optioned under the Stock Option Plan,
change the class of executive officers and other key employees eligible under
the Stock Option Plan or materially increases the benefits which may accrue to
participants under the Stock Option Plan without submitting such amendments to
shareholders for approval. In addition, no amendments to, or termination of, the
Stock Option Plan shall impair the rights of any individual under options
previously granted without such individual's consent.
OPTION GRANTS IN 1995 TO THE COMPANY'S EXECUTIVE OFFICERS
The following table provides information regarding the stock options
granted by the Company to Named Officers in 1995.
1995 OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OF OPTION TERM(A)
OPTION/SARS GRANTED TO BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#) EMPLOYEES ($/SH) DATE 5%($) 10%($)
- -------------------------- ----------- ---------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Avery More................ -- -- -- -- -- --
Mark T. Hilz.............. -- -- -- -- -- --
James N. Contardi......... -- -- -- -- -- --
Danny T. Hendrix.......... 20,000(B) 11.4% 9.00 10/19/05 105,250 273,250
Philip Wise............... -- -- -- -- -- --
</TABLE>
29
<PAGE> 30
- ---------------
(A) The potential realizable values set forth under these columns result from
calculations assuming 5% and 10% growth rates as set by the Securities and
Exchange Commission (the "Commission") and are not intended to forecast
future price appreciation of the Company's Common Stock. The amounts
reflect potential future value based upon growth at these prescribed rates.
The Company did not use an alternative formula for a grant date valuation,
an approach which would state gains at present, and therefore lower, value.
The Company is not aware of any formula which will determine with
reasonable accuracy a present value based on future unknown or volatile
factors. Actual gains, if any, on stock options exercises are dependent on
the future performances of the Company's Common Stock. There can be no
assurance that the amounts reflected in this table will be achieved.
(B) 4,000 of these options will become exercisable on September 5, 1996, 1997,
1998, 1999 and 2000, respectively.
AGGREGATE OPTION EXERCISES IN 1995 BY THE COMPANY'S EXECUTIVE OFFICERS
The following table provides information as to options exercised, if any,
by each of the Named Officers in 1995 and the value of options held by those
officers at year-end measured in terms of the last reported sale price for the
shares of the Company's Common Stock on December 31, 1995 ($9.00 as reported by
the Nasdaq National Market).
AGGREGATED OPTION EXERCISES IN 1995 AND YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY
SECURITIES UNDERLYING OPTIONS AT
UNEXERCISED OPTIONS DECEMBER 31, 1995
SHARES AT DECEMBER 31, 1995 (A)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Avery More.............. -- -- -- -- -- --
Mark T. Hilz............ -- -- 128,000 152,000 $ 849,000 $ 486,000
James N. Contardi....... -- -- 5,000 20,000 -- --
Danny T. Hendrix........ -- -- -- 20,000 -- --
Philip Wise............. -- -- 25,000 -- --
Brian R. Ervine(B)...... -- -- 29,000 16,000 168,750 --
Michael P. Montgomery(B) 58,371 $437,524 8,000 32,000 -- --
</TABLE>
- ---------------
(A) Market value of shares covered by in-the-money options on December 31,
1995, less option exercise price. Options are in-the-money if the market
value of the shares covered thereby is greater than the option exercise
price.
(B) In August 1995, Mr. Ervine resigned as Chief Financial Officer and Vice
President, Finance of PCSS and Mr. Montgomery resigned as Senior Vice
President, Operations of PCSS.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted the 1996 Employee Stock Purchase Plan (the
"Employee Stock Plan"), covering 100,000 shares of the Company's Common Stock.
The purpose of the Employee Stock Plan is to provide employees of the Company
and its subsidiaries an opportunity to acquire a proprietary interest in the
Company through the purchase of shares of Common Stock at a discount. The
Employee Stock Plan is designed to qualify as an "employee stock purchase plan"
under Section 423 of the Internal Revenue Code of 1986, as amended.
Pursuant to the Employee Stock Plan, the Company will, from time to time,
offer to all eligible employees the right to purchase Common Stock at a discount
from the then market value of that stock. All full-time employees of the Company
(as defined in the Employee Stock Plan) and its subsidiaries are eligible
30
<PAGE> 31
to participate in the Employee Stock Plan, except that employees who are on the
Board are not eligible. As of May 15, 1996, approximately 295 employees were
eligible to participate in the Employee Stock Plan. The Employee Stock Plan is
administered by the Stock Option Committee. The interpretation and construction
of the Employee Stock Plan and the adoption of rules and regulations for
administering the Employee Stock Plan are made by the Stock Option Committee.
At such times as the Stock Option Committee determines, the Company will
offer eligible employees the right to purchase Common Stock. Each offer of stock
shall be made for a specific period, normally one year (a "Stock Purchase
Period"), beginning on a "Commencement Date" and ending on a "Termination Date."
The Stock Option Committee will determine the price at which stock will be sold
during the Stock Purchase Period, which may be at a discount of up to 15% off
the market price of the stock on the Commencement Date. Common Stock purchased
under the Employee Stock Plan must be held until the later of (i) one year after
the Common Stock is issued to the employee or (ii) two years after the
Commencement Date on which the Company offered the Common Stock to the employee.
The number of shares granted under the Employee Stock Plan to eligible employees
will be pursuant to a formula applied to such employees' base pay. The formula
variables will be determined by the Stock Option Committee. Each employee elects
how many, if any, of those shares are desired to be purchased. The Company
withholds the purchase price of such number of shares from the employee's
paychecks ratably over the Stock Purchase Period and credits the amounts
withheld to accounts in the employees' names.
No interest is paid on the amounts withheld by the Company. During the
Stock Purchase Period, each participant may revoke the purchase decision and
withdraw some or all of the amount held in his or her account. Participants also
have the right to exercise their rights to buy stock at any time during the
Stock Purchase Period. The amount remaining in a participant's account on the
Termination Date of a Stock Purchase Period will be used to purchase stock under
the Plan.
DIRECTOR COMPENSATION
The current policy of the Company is to pay each director who is not also
an officer or employee of the Company, and who does not beneficially own more
than 5% of the shares of Common Stock outstanding, an annual fee of $2,500, plus
500 shares of Common Stock of the Company. There are authorized for issuance and
delivery under the Director Compensation Plan an aggregate of 20,000 shares of
Common Stock. Under the Director Compensation Plan, eligible directors would
receive no additional fees for meetings attended. The shares, whether or not
registered for resale under the Securities Act, would be subject to an agreement
on the part of the director not to resell such securities for at least two years
without the written consent of the Company.
The purpose of the Director Compensation Plan is to encourage the ownership
of Common Stock by the outside directors upon whose judgment and ability the
Company depends for its long term growth and development and to provide an
effective and economic manner of compensating outside directors. The Director
Compensation Plan is intended to promote a close identity of interests among the
Company, the outside directors and the stockholders, and to provide a further
means to attract and retain outstanding board members.
The Director Compensation Plan will remain in effect until terminated by
the Board. Of the current directors, only Messrs. Leff, Raymond, and Haft will
be eligible for receipt of fees and shares under the Director Compensation Plan.
The Board has the power to amend, modify or terminate the Director Compensation
Plan at any time, except that stockholder approval of an amendment may be
required if deemed to be necessary and advisable under the securities, tax or
other applicable laws or regulations.
COMPENSATION COMMITTEE INTERLOCKS AND OTHER INSIDER PARTICIPATION
Messrs. More and Tenenhaus are the owners of 100% of Rosetta Stone. Rosetta
Stone is the record holder of 1,661,000 shares of Common Stock. Rosetta Stone
also owns a majority of TeKnowlogy, Inc., of which Mr. Tenenhaus is the
President. In addition, Mr. Haft is also a director of TeKnowlogy. TeKnowlogy is
a private company and does not have a compensation committee.
31
<PAGE> 32
CERTAIN TRANSACTIONS
In 1993, Avery More, then the President and Chief Executive Officer of
CompuCom, advised CompuCom that he desired to resign his position with CompuCom
to pursue new and independent businesses. In connection with those pursuits,
CompuCom and Mr. More discussed the possibility of CompuCom selling part of its
interest in the Company to Mr. More. Mr. More and CompuCom believed that the
Company's growth potential was limited by CompuCom's ownership and control of
the Company in view of the fact that many of the Company's customers are direct
competitors of CompuCom. These discussions led to an agreement between CompuCom
and Rosetta Stone, a company owned principally by Mr. More, pursuant to which
CompuCom converted a $1,500,000 convertible subordinated note into 2,000,000
shares of Common Stock and received from the Company a warrant to acquire
250,000 shares of Common Stock at an exercise price of $2.25 per share. On
January 5, 1994, Rosetta Stone purchased 1,700,000 shares of the Company's
Common Stock from CompuCom in exchange for $325,000 in cash and a $3,500,000
promissory note secured by those shares. Rosetta Stone currently has pledged
1,650,000 shares of Common Stock of the Company to secure that note of Rosetta
Stone to CompuCom. In connection with the transaction, CompuCom's stock
ownership was reduced from 84.27% to 36.33%, excluding the warrant it received
in the transaction. In connection with this acquisition, CompuCom agreed for one
year to allow the Company's employees to continue to participate in CompuCom's
group health benefit plans in exchange for a payment of a specified amount per
employee. The agreement with CompuCom provided for an adjustment between
CompuCom and the Company based on the actual loss experience as compared to the
total amount paid to CompuCom on behalf of the Company's employees.
In connection with Rosetta Stone's acquisition of the Company's Common
Stock from CompuCom, Rosetta Stone agreed to vote its shares in the Company for
a single Board nominee selected by CompuCom; that nominee is currently Mr.
Ounsworth. The voting agreement originally was to expire when certain debts of
Rosetta Stone to CompuCom are paid in full. However, in May 1996, CompuCom and
Rosetta Stone agreed that so long as no default existed under the terms of the
debt instruments to CompuCom from Rosetta Stone, the voting agreement would be
suspended at such time as CompuCom's ownership of PCSS Common Stock falls below
5% of the outstanding Common Stock of PCSS.
CompuCom is also a customer of the Company. During 1995, CompuCom purchased
$735,000 of products from the Company and the Company purchased computer parts
and equipment from CompuCom for $5,108,000, in each case on the same terms as
sales to independent parties. CompuCom continues to be a customer of the Company
and may be a supplier to the Company in the future.
During 1995 the Company entered into a consulting agreement with Mr. Philip
Wise, a director of the Company since 1990 and now the President and Chief
Executive Officer of Cyclix, a subsidiary through which the Company commenced
its remanufacturing operation. Under the terms of the consulting agreement, Mr.
Wise received $15,000 per month from January 1995 through June 1995 for a
variety of consulting services, and received options to acquire 25,000 shares of
Common Stock at the then market price. Effective July 1, 1995, the consulting
agreement was terminated and Mr. Wise became an employee of Cyclix. As part of
his at-will employment arrangement and in order to induce him to accept the
employment, the Company sold to Mr. Wise 15% of the outstanding common stock of
Cyclix at the adjusted book value of the Cyclix common stock as of July 1, 1995,
in exchange for a $30,000 five-year promissory note. The note is due and payable
in less than five years upon the occurrence of certain events. The Cyclix common
stock owned by Mr. Wise may be converted into PCSS Common Stock under certain
conditions. The conversion rate is based on the relative performance of Cyclix
and PCSS at the time of any such conversion. Also as part of his employment
package, Mr. Wise is relocating his residence closer to Cyclix's corporate
headquarters and in connection with that relocation, the Company has agreed to
guarantee an interim mortgage for up to $450,000 for one year during which time
Mr. Wise expects to sell his current residence and relocate to his new
residence.
32
<PAGE> 33
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of May 15, 1996, and as adjusted to reflect the
sale of shares offered hereby, by (i) each director of the Company who
beneficially owns Common Stock and certain of the Company's executive officers,
(ii) all of the Company's directors and executive officers as a group, (iii)
each person known to the Company to be the beneficial owner of more than 5% of
the Common Stock as of May 15, 1996, and (iv) each stockholder who will sell
shares of Common Stock in the offering.
The number of shares of the Company's Common Stock beneficially owned by
each individual set forth below is determined under the rules of the Commission
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any shares as
to which an individual has sole or shared voting power or investment power and
any shares which an individual presently, or within 60 days, has the right to
acquire through the exercise of any stock option or other right. However, such
shares are not deemed to be outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned by any other person. Unless
otherwise indicated, each individual has sole voting and investment power (or
shares such powers with their spouse) with respect to the shares of the
Company's Common Stock set forth in the table below.
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
--------------------------- SHARES TO ---------------------------
SHARES PERCENTAGE BE SOLD SHARES PERCENT OF
OFFICERS, DIRECTORS AND BENEFICIALLY OF SHARES IN THE BENEFICIALLY SHARES
5% STOCKHOLDERS OWNED OUTSTANDING OFFERING OWNED OUTSTANDING
- ------------------------------------------------------------------ ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Avery More (Rosetta Stone)............................ 1,661,000(1) 41.2% 120,000 1,491,000(1) 27.0%
Mark T. Hilz.......................................... 194,000(2) 4.6% 30,000 164,000(2) 2.9%
Jay Haft.............................................. 104,071(1) 2.6% 25,000 79,071(1) 1.4%
More Children's Trust................................. 100,000(1) 2.5% 25,000 75,000(1) 1.4%
Robert S. Leff........................................ 9,000(3) * 9,000(3) *
James Ounsworth....................................... (4) (4) (4) (4)
Edward C. Raymund..................................... 13,000(5) * 13,000(5) *
Morti Tenenhaus....................................... 10,000(6) * 10,000(6) *
Philip Wise........................................... 45,000(7) 1.1% 45,000(7) *
James N. Contardi..................................... 5,300(8) * 5,300(8) *
Danny T. Hendrix...................................... -- -- -- --
Bernard W. Rohde...................................... 2,000(9) * 2,000(9) *
All Directors and Executive Officers as a
Group (11) persons.................................. 1,939,300(10) 45.7% 1,739,300(10) 30.3%
CompuCom Systems, Inc................................. 983,880(11) 23.0% 750,000 193,701 3.5%
</TABLE>
- ---------------
* Indicates less than 1%.
(1) The business address of Mr. More is 10000 North Central Expressway, Suite
1460, Dallas, Texas. The shares of Common Stock listed in Mr. More's name
are owned by Rosetta Stone, a corporation in which Mr. More is the
principal stockholder. See "Certain Transactions." Various parties,
including a trust for the benefit of Mr. More's minor children (the "More
Children's Trust") and Mr. Jay Haft, a director of the Company, have made
investments in Rosetta Stone, and in connection therewith have been issued
options from Rosetta Stone to acquire stock of other companies in which
Rosetta Stone has an interest, including PCSS. If all those options to
acquire PCSS Common Stock were exercised, a total of 344,284 shares of PCSS
Common Stock would be acquired by those parties from Rosetta Stone. The
More Children's Trust and Mr. Haft have the right to acquire 100,000 and
103,571 shares, respectively, of PCSS Common Stock at prices set in the
options. In connection with the offering, the More Children's Trust and Mr.
Haft are each selling 25,000 of these options to the underwriters at the
closing of the offering at the price to public for the underlying shares,
net of the underwriting discount and the per share exercise price. The
Underwriters will exercise the options and purchase the underlying Common
Stock at the exercise price from Rosetta Stone for sale to the public at
the price to public. Accordingly, the shares being sold through the
exercise of these options are reflected in the table, with respect to Mr.
More, the More Children's Trust and Mr. Haft. Mr. Haft's shares include 500
shares which he is entitled to receive under the Company's Director
Compensation Plan. See "Underwriting."
33
<PAGE> 34
(2) Includes 148,000 shares issuable upon exercise of options which are
exercisable at or within 60 days and 3,000 shares held by the minor
children of Mr. Hilz as to which he disclaims beneficial ownership. Mr.
Hilz intends to exercise 30,000 options and deliver these shares to the
underwriters to be sold in this offering.
(3) Includes 2,000 shares issuable upon exercise of options which are
exercisable at or within 60 days and includes 500 shares which Mr. Leff is
entitled to receive under the Company's Director Compensation Plan.
(4) Mr. Ounsworth, as an officer of CompuCom, may be deemed to beneficially own
the 983,880 shares held by CompuCom. Mr. Ounsworth disclaims beneficial
ownership of those shares.
(5) Includes 2,000 shares issuable upon exercise of options which are
exercisable at or within 60 days, 500 shares which Mr. Raymund is entitled
to receive under the Company's Director Compensation Plan and 5,000 shares
held by the Raymund Family Partnership (the "Partnership"). Mr. Raymund may
be deemed to beneficially own the Partnership's shares because he is the
general partner of the Partnership. The shares shown as beneficially owned
by Mr. Raymund do not include 500 shares beneficially owned by his wife
Patricia Anne Raymund.
(6) Includes 10,000 shares held by trusts for the benefit of the minor children
of Mr. Tenenhaus as to which he disclaims beneficial ownership. Mr.
Tenenhaus, as an officer and stockholder of Rosetta Stone, may be deemed to
beneficially own the shares of Common Stock listed under Mr. More's
holdings and owned of record by Rosetta Stone. Mr. Tenenhaus disclaims
beneficial ownership of those shares.
(7) Includes 25,000 shares issuable upon exercise of options which are
exercisable at or within 60 days and 12,000 shares held by the minor
children of Mr. Wise as to which he disclaims beneficial ownership.
(8) Includes 5,000 shares issuable upon exercise of options which are
exercisable at or within 60 days.
(9) Includes 2,000 shares issuable upon exercise of options which are
exercisable at or within 60 days.
(10) Includes 184,000 shares issuable upon exercise of options which are
exercisable at or within 60 days.
(11) The business address of CompuCom is 10100 N. Central Expressway, Dallas,
Texas. CompuCom holds 733,880 shares of the Company's Common Stock and
250,000 shares issuable upon exercise of warrants which are exercisable at
or within 60 days.
34
<PAGE> 35
DESCRIPTION OF CAPITAL STOCK
The Company is a Delaware corporation authorized to issue 20,000,000 shares
of Common Stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Stock"). As of June 5, 1996,
there were 60 stockholders of record holding 4,038,092 shares of Common Stock.
No shares of Preferred Stock have been issued. Upon consummation of the
offering, 5,527,913 shares of Common Stock and no shares of Preferred Stock will
be outstanding.
GENERAL
Holders of Common Stock are subject to a potential pro rata decrease in
equity ownership of the Company to the extent that shares of Common Stock or
Preferred Stock are issued in the future. Under the Delaware General Corporation
Law (the "DGCL"), the Board is not required to seek stockholder approval to
issue additional shares of Common Stock or Preferred Stock. However, under rules
of the National Association of Securities Dealers, Inc. (the "NASD"), a company
may not issue common stock equal to 20% or more of its outstanding shares to
acquire the stock or assets of another entity without prior stockholder
approval. The Common Stock has been approved for trading on the Nasdaq National
Market and therefore the Company will be subject to the stockholder voting rules
of the NASD.
COMMON STOCK
All shares of Common Stock being offered in the offering upon issuance will
be, and all shares of Common Stock issued and outstanding at the date of this
Prospectus are, validly issued, fully paid, and nonassessable. Holders of Common
Stock are entitled to one vote for each share held and have no preemptive or
other rights to subscribe for or purchase additional shares. Holders of Common
Stock do not have cumulative voting rights. Subject to the rights of holders of
Preferred Stock that may be issued in the future, holders of Common Stock are
entitled to receive equally and ratably any dividends that the Board may declare
out of legally available funds and, in the event of the liquidation, dissolution
or winding up of the Company, are entitled to share equally and ratably in the
assets, if any, remaining after payment of all of the Company's debts and
liabilities and any liquidation preference on Preferred Stock.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes its Board, without
stockholder approval, to issue up to 5,000,000 shares of Preferred Stock, in one
or more series, to establish the relative rights and preferences of the shares
of any series established by the Board, and to increase or decrease the number
of shares within each such series. Pursuant to its power to establish series of
Preferred Stock, the Board may also, by resolution, establish the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms and conditions of redemption of the
Preferred Stock and may issue shares of Preferred Stock for such consideration
and on such terms as it deems desirable. The Company has issued no shares of
Preferred Stock and has no current intention to issue Preferred Stock.
WARRANTS
The Company issued a warrant to purchase 250,000 shares of Common Stock to
CompuCom as part of the transaction in which CompuCom sold a portion of the
Common Stock it owned to Rosetta Stone and converted the convertible note
CompuCom held. See "Certain Transactions." The exercise price of this warrant is
$2.25 per share and may be exercised for all or any lesser number of shares of
the Common Stock covered by the warrant at any time and from time to time
between its issuance and December 31, 1998. The CompuCom warrant contains a net
exercise provision which permits the holder to surrender a portion of the shares
covered by the warrant in payment of the exercise price. Therefore, the holder
of the warrant can exercise the warrant without making a cash payment by
surrendering that number of shares equal to the then current value of the shares
divided into the total exercise price. In connection with the offering, CompuCom
has, as a selling stockholder, agreed to exercise the warrant and sell such
shares in the offering. At a price of $14.00 per common share, 209,821 shares of
Common Stock would be issued upon net exercise of the warrant.
35
<PAGE> 36
In connection with the 1994 initial public offering of the Company's Common
Stock, the Company issued a five-year warrant originally to purchase 100,000
shares of Common Stock at an exercise price of $10.80 per share to the
representative of the underwriters in that offering. As of the date hereof,
83,208 shares of Common Stock are available to be acquired under the terms of
that warrant. The warrant exercise price and the number of shares of Common
Stock covered by the warrant is subject to adjustment in order to protect the
holders against dilution in certain events. The warrant may be exercised for all
or any lesser number of shares of the Common Stock. As in the case of the
CompuCom warrant, the underwriter's warrant also contains a net exercise
provision. Holders of a majority of the shares issued or issuable under the
warrant may obtain registration of such shares for resale under the Securities
Act. See "Shares Eligible for Future Sale".
DELAWARE ANTITAKEOVER STATUTE
As a Delaware corporation, the Company is subject to Section 203 of the
DGCL. In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of the Company's outstanding voting
stock) from engaging in a "business combination" (as defined in Section 203)
with the Company for 3 years after the date on which that person became an
interested stockholder unless (a) before that person became an interested
stockholder, the Board approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination, (b) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the Company's voting stock outstanding at the
time the transaction began (excluding stock held by directors who are also
officers of the Company and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer), or (c) after the
transaction in which that person became an interested stockholder, the business
combination is approved by the Board and authorized at a meeting of stockholders
by the affirmative vote of the holders of at least two-thirds of the Company's
outstanding voting stock not owned by the interested stockholder.
The restrictions of Section 203 are also inapplicable to certain business
combinations proposed by an interested stockholder after the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the Company's directors, if that extraordinary transaction is approved or not
opposed by a majority of directors who were directors before any person became
an interested stockholder in the previous three years or who were recommended
for election or elected to succeed those directors by a majority of those
directors then in office.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation and Bylaws contain provisions
described below that may reduce the likelihood of a change in management or
voting control of the Company without the consent of the Board. These provisions
could have the effect of delaying, deterring or preventing tender offers or
takeover attempts that some or a majority of the Company's stockholders might
consider to be in their best interests, including offers or attempts that might
result in a premium over the market price for the Common Stock, and may have the
effect of depressing the market price investors are willing to pay for the
Common Stock.
The Board is divided into three classes, the terms of which will expire at
the 1997, 1998, and 1999 annual meetings of stockholders, respectively.
Directors of the Company are elected by the affirmative vote of a plurality of
the shares cast at a meeting at which a quorum is present. The Board has the
right to change the number of directors and to fill vacancies on the Board. The
classification of the Board may have the effect of deterring or delaying a
takeover of the Company because it may take at least two years to gain control
of the Board.
The Company's Certificate of Incorporation permits the Board to issue at
any time, without stockholder approval, Preferred Stock with super-voting rights
or other features that would deter or delay a takeover by reducing the ability
of a potential acquiror to acquire the necessary voting shares to obtain
control. See "Description of Capital Stock -- Preferred Stock".
36
<PAGE> 37
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
As authorized by the DGCL, the Company's Certificate of Incorporation
provides that the Company's directors will have no personal liability to the
Company or its stockholders for monetary damages for breach or alleged breach of
the directors' duty of care. This provision does not apply to (1) the directors'
duty of loyalty, (2) acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law, (3) unlawful dividends,
stock repurchases or stock redemptions and (4) approval of any transaction from
which such director derives an improper personal benefit. In addition, the
Company's Certificate of Incorporation provides that any additional liabilities
permitted to be eliminated by subsequent legislation will automatically be
eliminated without further stockholder vote, unless additional stockholder
approval is required by such legislation.
The principal effect of the limitation of liability provision is that a
stockholder will be unable to pursue an action for monetary damages against a
director of the Company for breach of the duty of care unless the stockholder
can demonstrate one of the specified bases for liability. This provision,
however, will not eliminate or limit director liability arising in connection
with causes of action brought under the Federal securities laws or for breaches
by directors of the duty of loyalty. The Company's Certificate of Incorporation
does not eliminate its directors' duty of care. Accordingly, the provision
should not affect the availability of equitable remedies such as an injunction
or rescission based upon a director's breach of the duty of care.
The Company's Certificate of Incorporation also provides that the Company
will indemnify its directors and officers to the fullest extent permitted by
Delaware law, including circumstances in which indemnification is otherwise
discretionary under Delaware law. The Company generally is required to indemnify
its directors and officers against all judgments, fines, settlements, legal fees
and other expenses incurred in connection with pending or threatened legal
proceedings because of the director's or officer's position with the Company or
another entity that the director or officer serves at the Company's request,
subject to certain conditions. To receive indemnification, the director or
officer must have been successful in the legal proceeding or acted in good
faith, in what was reasonably believed to be a lawful manner, and in, or not
opposed to, the Company's best interest.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the Company's Certificate of Incorporation, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
TRANSFER AGENT AND REGISTRAR
KeyCorp Shareholder Services, Inc., 5050 Renaissance Tower, 1201 Elm
Street, Dallas, Texas 75270, has been appointed as the transfer agent and
registrar for the Common Stock.
37
<PAGE> 38
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, 5,527,913 shares of Common Stock will be
issued and outstanding. The shares sold in the offering (except any shares
acquired by an "affiliate" of the Company (as defined in the rules and
regulations of the Securities Act) and 3,748,912 shares outstanding will be
freely tradeable without restriction under the Securities Act. The remaining
shares of Common Stock outstanding after the offering may not be resold except
pursuant to an effective registration statement under the Securities Act
regarding that sale, in accordance with the provisions of Rule 144, or in other
transactions that are exempt from registration under the Securities Act. In
addition, holders of warrants to acquire 83,208 shares of Common Stock at an
exercise price of $10.80 per share may exercise such warrants utilizing the net
exercise provisions thereof which, at a value of $14.00 per share, would result
in the issuance of 19,019 shares, all of which would be available for sale under
Rule 144. See "Description of Capital Stock -- Warrants."
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated for purposes of Rule 144), including an
affiliate of the Company, who has beneficially owned Common Stock treated as
restricted securities for at least two years is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of Common Stock (approximately 55,279
shares immediately after the offering) and (ii) the average weekly trading
volume of Common Stock on the Nasdaq National Market during the four calendar
weeks preceding the date of the sale. These sales are also subject to certain
other requirements with respect to the manner of sale, notice to the Commission,
and availability of current public information about the Company. Under Rule
144(k), a stockholder who has not been an affiliate of the Company at any time
during the three months before a sale and who has beneficially owned restricted
Common Stock for at least three years before the sale will be entitled to sell
the Common Stock immediately, without regard to the restrictions and
requirements described above. In addition, affiliates of the Company must comply
with the requirements of Rule 144, other than the two-year holding period
requirement, to sell any of their shares of Common Stock that are not treated as
restricted securities.
The Company is unable to estimate the number of shares that may be sold
from time to time under Rule 144 because the number will depend on the market
price and trading volume for the Common Stock, the personal circumstances of the
sellers, and other factors.
The Company has filed a registration statement on Form S-8 to register
shares of Common Stock issuable under the Stock Option Plan and plans to file a
form S-8 to register shares issuable under the Employee Plan. Accordingly,
shares issued pursuant to these stock options will be freely tradeable without
restriction under the Securities Act, except for any shares acquired by an
affiliate of the Company. The Company's Stock Option Plan provides for grants of
options to purchase up to 1,000,000 shares, of which 503,500 will be outstanding
after the offering. See "Management -- Stock Option Plan" and "Description of
Capital Stock." There are 100,000 shares reserved for issuance under the
Employee Stock Plan.
Each of the Company's officers, directors and stockholders currently owning
five percent or more of the Common Stock has agreed not to sell, contract to
sell, grant any option for the sale of, or otherwise dispose of any shares of
Common Stock or any securities convertible into Common Stock currently owned (a
total of 1,779,001 shares upon the completion of the offering, assuming no
exercise of the over-allotment option) for 180 days after the effective date of
the Registration Statement ("lockup period") without the prior written consent
of The Robinson-Humphrey Company, Inc.
The Company cannot predict the effect, if any, that future sales of shares
of Common Stock or the availability of shares for sale will have on the market
price of the Common Stock. Nevertheless, sales of substantial amounts of Common
Stock in the public market could adversely affect the prevailing market price of
Common Stock and impair the Company's ability to raise capital by issuing
additional equity securities.
38
<PAGE> 39
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom The Robinson-Humphrey Company, Inc., Rauscher
Pierce Refsnes, Inc., and ComVest Partners, Inc. are acting as representatives
(the "Representatives"), have severally agreed (i) to purchase from the Company
and three of the Selling Stockholders that portion of 2,150,000 shares of Common
Stock as the number of shares set forth below opposite each such Underwriter's
name bears to the total number of shares set forth below, at the public offering
price less the underwriting discount set forth on the cover page of this
Prospectus, and (ii) to purchase from each of the other two Selling Stockholders
that portion of an option to purchase 25,000 shares of Common Stock as the
number of shares set forth below opposite each such Underwriter's name bears to
the total number of shares set forth below, at the public offering price, less
the option exercise price of $3.00 per share and the underwriting discount set
forth on the cover page of the Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
The Robinson-Humphrey Company, Inc. ...................................... 880,000
Rauscher Pierce Refsnes, Inc. ............................................ 880,000
ComVest Partners, Inc. ................................................... 440,000
---------
Total........................................................... 2,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriter's
obligations is such that they are committed to purchase all shares of Common
Stock offered hereby and the options mentioned above if any such shares are
purchased. The Underwriters severally have agreed to exercise the aforementioned
options, and the issuer of the options will deliver an aggregate of 50,000
shares of Common Stock upon such exercise. The Underwriters also have agreed to
pay to the issuer of the options the option exercise price of $3.00 per share
purchased pursuant to the exercise of such options contemporaneously with the
closing of the offering.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus, and to certain dealers at such price less a concession not
in excess of $0.48 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per share to certain other brokers.
After the shares of Common Stock are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Company and certain of the Selling Stockholders have granted the
Underwriters an option exercisable for 30 days after the date of this Prospectus
to purchase up to an additional 187,500 and 142,500 shares, respectively, of
Common Stock at the public offering price less the underwriting discount set
forth on the cover page of this Prospectus to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by each of them, as shown in the foregoing table, bears to the
2,200,000 shares of Common Stock offered hereby.
The Company, each of its directors and executive officers and the Selling
Stockholders have agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of any Common Stock or any securities convertible into or
exercisable or exchangeable for such Common Stock (other than the shares offered
by the Company and
39
<PAGE> 40
the Selling Stockholders in this offering) in each case for a period of 180 days
after the date of this Prospectus without the prior written consent of The
Robinson-Humphrey Company, Inc.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain
liabilities, including liabilities under the Securities Act.
In connection with the offering, certain underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 10b-6A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") during the two business day period before commencement of offers
of sales of the Common Stock. The passive market making transactions must comply
with applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for the security; however, if all independent bids are lowered
below the passive market maker's bid, such bid must then be lowered when certain
purchase limits are exceeded.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Sayles & Lidji, A Professional
Corporation, Dallas, Texas. Certain legal matters relating to the Common Stock
offered hereby will be passed upon for the Underwriters by Powell, Goldstein,
Frazer & Murphy, Atlanta, Georgia.
EXPERTS
The financial statements and financial statement schedule of the Company as
of December 31, 1995 and 1994 and for each of the years in the three-year period
ended December 31, 1995, included herein and elsewhere in the registration
statement have been included herein and in the registration statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and in the registration statement, and
upon the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus is a part of and does not include all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the Commission's regional offices located
at 7 World Trade Center, Suite 1300, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Room 1024, Judiciary Plaza,
Washington, D.C. 20549 at prescribed rates.
40
<PAGE> 41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-1
Consolidated Balance Sheets as of December 31, 1994 and 1995, and as of March 31, 1996
(unaudited)......................................................................... F-2
Consolidated Statements of Operations for the years ended December 31, 1993, 1994, and
1995, and for the unaudited three months ended March 31, 1995 and March 31, 1996.... F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993,
1994,
and 1995, and for the unaudited three months ended March 31, 1996................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994, and
1995, and for the unaudited three months ended March 31, 1995 and March 31, 1996.... F-5
Notes to Consolidated Financial Statements............................................ F-6
</TABLE>
41
<PAGE> 42
[INTENTIONALLY LEFT BLANK]
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
PC Service Source, Inc.:
We have audited the accompanying consolidated balance sheets of PC Service
Source, Inc. and subsidiary as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PC Service
Source, Inc. and subsidiary as of December 31, 1994 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 15, 1996
F-1
<PAGE> 44
PC SERVICE SOURCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1994 1995 1996
------- ------- -----------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 2,332 $ 833 $ 957
Accounts receivable, less allowance for doubtful accounts of
$275 in 1994, $267 in 1995 and $309 at March 31, 1996.... 5,878 10,251 12,688
Inventories................................................. 7,903 13,202 18,293
Deferred income taxes....................................... 348 1,322 1,120
Income taxes receivable..................................... -- 80 --
Other....................................................... 240 712 774
------- ------- -------
Total current assets................................ 16,701 26,400 33,832
------- ------- -------
Property and equipment:
Computer equipment.......................................... 2,284 4,633 4,896
Furniture and fixtures...................................... 1,531 2,766 3,153
Leasehold improvements...................................... 86 828 907
------- ------- -------
3,901 8,227 8,956
Accumulated depreciation and amortization................... (587) (1,774) (2,193)
------- ------- -------
Net property and equipment.......................... 3,314 6,453 6,763
------- ------- -------
Other noncurrent assets....................................... -- 274 286
------- ------- -------
$20,015 $33,127 $40,881
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under capital leases.... $ 182 $ 320 $ 330
Payable to Intelogic Trace.................................. 1,200 -- --
Accounts payable............................................ 3,111 8,876 12,768
Accrued liabilities......................................... 1,101 1,894 2,909
Income taxes payable........................................ 405 -- 312
------- ------- -------
Total current liabilities........................... 5,999 11,090 16,319
------- ------- -------
Long-term debt, revolving line of credit...................... -- 8,934 10,860
Obligations under capital leases, excluding current
installments................................................ 873 1,231 1,152
Deferred income taxes......................................... 62 269 293
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000
shares;
none issued.............................................. -- -- --
Common stock, $.01 par value. Authorized 20,000,000 shares;
issued 3,893,000 in 1994, 3,955,371 in 1995 and 4,017,000
at
March 31, 1996........................................... 39 40 40
Additional paid-in capital.................................. 10,427 10,494 10,633
Retained earnings........................................... 2,615 1,110 1,764
Less treasury stock (4,724 shares at December 31, 1995 and
19,131 at March 31, 1996)................................ -- (41) (180)
------- ------- -------
Total stockholders' equity.......................... 13,081 11,603 12,257
------- ------- -------
$20,015 $33,127 $40,881
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 45
PC SERVICE SOURCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $ 24,110 $ 42,267 $ 68,690 $ 16,782 $ 26,281
Cost of revenues...................... 17,592 30,171 49,766 12,156 18,708
--------- --------- --------- --------- ---------
Gross margin................ 6,518 12,096 18,924 4,626 7,573
--------- --------- --------- --------- ---------
Operating expenses:
Selling, general and
administrative................... 4,656 8,746 19,176 3,401 5,869
Depreciation and amortization....... 138 384 1,510 293 434
--------- --------- --------- --------- ---------
4,794 9,130 20,686 3,694 6,303
--------- --------- --------- --------- ---------
Earnings (loss) from
operations................ 1,724 2,966 (1,762) 932 1,270
Net interest income (expense)......... (177) 115 (473) (7) (229)
--------- --------- --------- --------- ---------
Earnings (loss) before
income taxes.............. 1,547 3,081 (2,235) 925 1,041
Income taxes (benefit)................ 587 1,186 (730) 361 387
--------- --------- --------- --------- ---------
Net earnings (loss)......... $ 960 $ 1,895 $ (1,505) $ 564 $ 654
========= ========= ========= ========= =========
Earnings (loss) per common share...... $ .30 $ .46 $ (.39) $ .13 $ .15
========= ========= ========= ========= =========
Weighted average common shares
outstanding......................... 3,373 4,103 3,900 4,391 4,373
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 46
PC SERVICE SOURCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
--------- ------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992............ 890,000 $ 9 $ 879 $ (240) $ -- $ 648
Contribution of capital................ -- -- 204 -- -- 204
Net earnings........................... -- -- -- 960 -- 960
--------- ---- -------- -------- ------ -------
Balances at December 31, 1993............ 890,000 9 1,083 720 -- 1,812
Conversion of long-term debt to common
stock............................... 2,000,000 20 1,480 -- -- 1,500
Issuance of common stock............... 1,000,000 10 7,857 -- -- 7,867
Exercise of common stock options....... 3,000 -- 7 -- -- 7
Net earnings........................... -- -- -- 1,895 -- 1,895
--------- ---- -------- -------- ------ -------
Balances at December 31, 1994............ 3,893,000 39 10,427 2,615 -- 13,081
Issuance of common stock............... 1,000 -- 10 -- -- 10
Exercise of common stock options....... 61,371 1 57 -- (41) 17
Net loss............................... -- -- -- (1,505) -- (1,505)
--------- ---- -------- -------- ------ -------
Balances at December 31, 1995............ 3,955,371 $ 40 $ 10,494 $ 1,110 $ (41) $11,603
Exercise of common stock options
(unaudited)......................... 61,629 -- 139 -- (139) --
Net earnings (unaudited)............... -- -- -- 654 -- 654
--------- ---- -------- -------- ------ -------
Balances at March 31, 1996 (unaudited)... 4,017,000 $ 40 $ 10,633 $ 1,764 $ (180) $12,257
========= ==== ======== ======== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 47
PC SERVICE SOURCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................. $ 960 $ 1,895 $(1,505) $ 564 $ 654
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities:
Depreciation and amortization..................... 138 384 1,510 293 434
Deferred income taxes............................. (159) (65) (767) 31 226
Expenses contributed to capital................... 204 -- -- -- --
Loss incurred on terminated supply agreement...... -- -- 1,935 245 --
Other, net........................................ -- -- (307) -- (27)
Changes in assets and liabilities:
Accounts receivable............................. (1,633) (3,167) (5,280) (1,933) (2,437)
Inventories..................................... (1,236) (2,540) (5,299) (1,513) (5,091)
Other current assets............................ (71) (126) (472) (281) (62)
Income taxes.................................... 55 300 (485) -- 392
Payable to Intelogic Trace...................... -- -- (1,200) -- --
Accounts payable................................ 772 1,079 5,765 541 3,892
Accrued liabilities............................. 445 593 682 440 1,015
------- ------- ------- ------- -------
Net cash used in operating activities........ (525) (1,647) (5,423) (1,613) (1,004)
------- ------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures................................. (712) (1,287) (4,810) (799) (729)
Payments for purchase of acquired assets............. -- (1,425) -- -- --
------- ------- ------- ------- -------
Net cash used in investing activities........ (712) (2,712) (4,810) (799) (729)
------- ------- ------- ------- -------
Cash flows from financing activities:
Net long-term debt borrowings (payments)............. 1,639 (1,610) 8,934 300 1,926
Principal payments under capital lease obligations... -- (30) (217) (13) (69)
Net proceeds from initial public offering............ -- 7,867 -- -- --
Proceeds from exercise of common stock options....... -- 7 17 -- --
------- ------- ------- ------- -------
Net cash provided by financing activities.... 1,639 6,234 8,734 287 1,857
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents... 402 1,875 (1,499) (2,125) 124
Cash and cash equivalents at beginning of period....... 55 457 2,332 2,332 833
------- ------- ------- ------- -------
Cash and cash equivalents at end of period............. $ 457 $ 2,332 $ 833 $ 207 $ 957
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 48
PC SERVICE SOURCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
The consolidated financial statements include the accounts of PC Service
Source, Inc. and its majority owned subsidiary (the Company). All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company is a supplier of parts, used in the repair of microcomputers
and associated peripherals, and services to the personal computing service
industry.
The Company began operations in 1989 as Digital Data Corporation (Digital).
In July 1990 the assets of Digital were acquired by a subsidiary of CompuCom
Systems, Inc. (CompuCom), which shortly thereafter changed Digital's name to PC
Parts Express, Inc. From December 1990 until January 1994, the Company remained
a majority-owned subsidiary of CompuCom. In January 1994, CompuCom sold a
substantial portion of its equity position in the Company to Rosetta Stone
Corporation (Rosetta Stone). Subsequent to the acquisition by Rosetta Stone, the
Company changed its name to PC Service Source, Inc.
In April 1994, the Company issued 1,000,000 shares of common stock to the
public. The net proceeds of this initial public offering were $7,867. The net
proceeds were used to pay approximately $2,200 which was outstanding under the
Company's revolving bank credit facility. The balance of the net proceeds was
added to the Company's working capital for general operating purposes.
(b) Credit Risk Concentration and Cash Equivalents
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily investments in cash equivalents and
accounts receivable. The carrying amounts of these financial instruments
approximate fair value because of the short maturity of these instruments. For
purposes of reporting cash flows, the Company considers all highly liquid cash
investments with original maturities of three months or less to be cash
equivalents.
The Company sells its products to customers throughout the U.S. and abroad.
The Company continually evaluates the creditworthiness of its customers'
financial condition and generally does not require collateral. The Company's
allowance for doubtful accounts is based on historical experience and current
market conditions, and losses on uncollectible accounts have consistently been
within management's expectations, except for Intelogic Trace (see note 7).
(c) Inventories
Inventories are stated at the lower of average cost or market and consist
primarily of new and remanufactured microcomputer parts.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets which
range from 3 to 5 years. Leasehold improvements are amortized over the lesser of
the estimated useful lives of the assets or the remaining term of the lease
using the straight-line method.
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires that long-lived assets and certain identifiable intangibles to be
held
F-6
<PAGE> 49
PC SERVICE SOURCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recovered.
This Statement is effective for financial statements for fiscal years beginning
after December 15, 1995. The Company does not expect that its adoption will have
a material effect on its financial position or results of operations.
(e) Revenue Recognition
Revenue is recognized upon shipment with provisions made for anticipated
returns.
(f) Earnings Per Common Share
In 1993 and through the effective date of the initial public offering, the
shares, options and warrants issued within one year prior to the initial public
offering effective date are deemed outstanding throughout such period.
Subsequent to the initial public offering effective date outstanding options and
warrants are included in the calculation if they have a dilutive effect, and the
number of equivalent shares included is determined using the treasury stock
method.
(g) Income Tax
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(h) Noncash Investing Activities
Capital lease obligations of $1,083 and $723 were incurred for computer
equipment and furniture and fixtures in 1994 and 1995, respectively.
(i) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(j) Reclassifications
Certain 1994 amounts have been reclassified to conform with the 1995
presentation.
(k) Interim Financial Statements
The interim financial statements as of March 31, 1996, and for the three
months ended March 31, 1996 and 1995, are unaudited, but reflect all
adjustments, consisting only of normal recurring accruals, which are, in the
opinion of management, necessary to present a fair statement of results for the
interim periods.
(2) LONG-TERM DEBT
The Company has a Revolving Bank Credit Facility (Credit Agreement) with a
bank which allows the Company to borrow up to $10,000 and matures in December
1997. The facility bears interest at 1% above the prime rate (8.5% at December
31, 1995) per annum. Total borrowings are based on specified percentages of
F-7
<PAGE> 50
PC SERVICE SOURCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
qualifying inventories and accounts receivable, as defined in the Credit
Agreement, and are secured by inventories, accounts receivable and substantially
all other assets of the Company. The Credit Agreement subjects the Company to
certain restrictions and covenants related to, among others, tangible net worth,
debt to tangible net worth, interest coverage, and limits the amount available
for capital expenditures and dividends. The Company was not in compliance with
certain covenants for 1995 and obtained a waiver from the bank dated February
15, 1996, which waived the violations at December 31, 1995. Effective January 1,
1996, the bank also established certain revised covenants for 1996, and
management believes the Company will be in compliance with the revised covenants
through December 31, 1996.
The Company has $8,934 outstanding under the Credit Agreement at December
31, 1995. There was no balance outstanding under the credit agreement at
December 31, 1994. The Company's borrowing base, which is adjusted weekly, was
$10,000 at December 31, 1995.
The carrying value of the amount outstanding under the Credit Agreement
approximates the estimated fair value since the obligation bears interest at
current market rates.
Interest payments were $177 in 1993, $29 in 1994 and $332 in 1995.
(3) COMMITMENTS
(a) Operating Leases
The Company leases office and warehouse distribution space and equipment
under various noncancellable operating leases. Certain of the leases contain
renewal options ranging up to five years.
The future minimum rental payments are included below.
<TABLE>
<S> <C>
1996....................................................................... $ 1,392
1997....................................................................... 1,422
1998....................................................................... 1,348
1999....................................................................... 1,348
2000....................................................................... 1,385
Thereafter................................................................. 7,171
-------
$14,066
=======
</TABLE>
Total rental expense charged to operations was $117, $222 and $856, in
1993, 1994 and 1995, respectively.
(b) Capital Leases
During 1994 and 1995, the Company entered into capital leases for computer
equipment and furniture and fixtures expiring in various years through 2000.
Depreciation of assets under capital leases is included in depreciation expense
for the years ended December 31, 1994 and 1995.
Following is a schedule of property held under capital leases at December
31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Computer equipment................................................. $ 832 $ 832
Furniture and fixtures............................................. 253 976
------ ------
1,085 1,808
Less accumulated depreciation...................................... 36 331
------ ------
$1,049 $1,477
====== ======
</TABLE>
F-8
<PAGE> 51
PC SERVICE SOURCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum future lease payments under capital leases as of December 31, 1995
for each year and in the aggregate are:
<TABLE>
<S> <C>
1996........................................................................ $ 438
1997........................................................................ 438
1998........................................................................ 438
1999........................................................................ 395
2000........................................................................ 131
------
Total minimum lease payments................................................ 1,840
Less amount representing interest........................................... 289
------
Present value of net minimum lease payment.................................. 1,551
Less current installments of obligations under capital leases............... 320
------
Obligations under capital leases, excluding current installments............ $1,231
======
</TABLE>
Interest rates on capitalized leases vary from 6% to 8% and are imputed
based on the lower of the Company's incremental borrowing rate at the inception
of each lease or the lessor's implicit rate.
(4) STOCK OPTIONS AND WARRANTS
The Company's Stock Option Plan provides for granting of options to buy
common stock intended to qualify as either "incentive stock options" under the
Internal Revenue Code or "non-qualified stock options." The option price may not
be less than the fair market value of the stock on the date of grant. Generally,
options become exercisable at a rate of 20 percent per year for five years after
the date of grant. At December 31, 1995, there are 1,000,000 shares of the
Company's common stock reserved for stock options and 339,871 shares are
available for future grants. Options granted for common stock are summarized as
follows:
<TABLE>
<CAPTION>
OPTION PRICE
PER SHARE
------------
<S> <C> <C>
Outstanding at December 31, 1992.............................. 100,000 $.25
Granted..................................................... 200,000
-------
Outstanding at December 31, 1993.............................. 300,000 $.25-$2.25
Granted..................................................... 317,500
Exercised................................................... (3,000)
-------
Outstanding at December 31, 1994.............................. 614,500 $.25-$9.00
Granted..................................................... 170,000
Exercised................................................... (61,371)
Expired..................................................... (63,000)
-------
Outstanding at December 31, 1995.............................. 660,129 $.25-$9.13
=======
Shares exercisable:
December 31, 1993........................................... 60,000 $.25
December 31, 1994........................................... 132,500 $.25-$2.25
December 31, 1995........................................... 192,000 $.25-$9.00
</TABLE>
In January 1994, the Company issued to CompuCom a warrant to purchase
250,000 shares of common stock as part of the transaction in which CompuCom sold
a portion of the common stock it owned to Rosetta Stone. The exercise price of
this warrant is $2.25 per share. The warrant may be exercised for all or any
lesser
F-9
<PAGE> 52
PC SERVICE SOURCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
number of shares of the common stock covered by the warrant at any time and from
time to time between issuance and December 31, 1998.
In connection with the Company's initial public offering, the Company sold
warrants covering 100,000 shares of common stock to the representatives of the
underwriters for a purchase price of $.01 per share. The exercise price of these
warrants is equal to 120% of the initial public offering price per share of
common stock. The warrants may be exercised for all or any lesser number of
shares of the common stock covered by the warrants between April 6, 1995 and
April 6, 1999.
(5) RELATED PARTY TRANSACTIONS
The Company's sales to CompuCom were $583 in 1993, $1,409 in 1994 and $735
in 1995. In addition, purchases of computer parts and equipment from CompuCom
were $304, $1,133 and $5,108 in 1993, 1994 and 1995, respectively. At December
31, 1994 and 1995, the Company had accounts receivable outstanding from CompuCom
of approximately $89 and $94, respectively. Selling, general and administrative
expenses included charges from CompuCom for certain insurance and employee
benefits of $235 in 1993 and $361 in 1994.
During 1994, the Company had a consulting agreement with Rosetta Stone that
was terminable at will by either party and pursuant to which the Company paid
Rosetta Stone $15 per month for management advice, consulting services and
strategic planning advice. The consulting agreement was terminated on December
31, 1994.
In 1994, CompuCom agreed to allow the Company's employees to continue to
participate in CompuCom's group health benefit plans through December 31, 1994
in exchange for a payment of a specified amount per employee. The agreement with
CompuCom provided for an adjustment between CompuCom and the Company based on
the actual loss experience as compared to the total amount paid to CompuCom on
behalf of the Company's employees. At December 31, 1995, the Company has a
receivable from CompuCom of $108 representing amounts paid in excess of actual
loss experience.
(6) INCOME TAXES
During 1993, the Company was included in CompuCom's consolidated income tax
return and was allocated taxes at CompuCom's effective income tax rate. The
difference of $204 between income taxes computed on a separate company basis and
the income taxes allocated at CompuCom's effective tax rate has been credited to
additional paid-in capital in 1993.
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----- ------ -----
<S> <C> <C> <C>
Federal:
Current................................................... $ 655 $1,074 $ --
Deferred.................................................. (159) (65) (767)
State....................................................... 91 177 37
----- ------ -----
$ 587 $1,186 $(730)
===== ====== =====
</TABLE>
F-10
<PAGE> 53
PC SERVICE SOURCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) differed from the amounts computed by applying
the U.S. federal income tax rate of 34% to earnings (loss) before income taxes
as a result of the following:
<TABLE>
<CAPTION>
1993 1994 1995
---- ------ -----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).................. $526 $1,048 $(760)
State taxes, net of U.S. federal income tax benefit........ 61 117 25
Other...................................................... -- 21 5
---- ------ -----
$587 $1,186 $(730)
==== ====== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December 31,
1994 and 1995 are presented below.
<TABLE>
<CAPTION>
1994 1995
---- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................................. $ -- $ 696
Inventories, principally due to reserve for obsolescence.......... 196 283
Accrued expenses, principally due to accruals for financial
reporting purposes............................................. 42 182
Accounts receivable, principally due to allowance for doubtful
accounts....................................................... 93 91
Other............................................................. 17 70
---- ------
Total deferred tax assets................................. 348 1,322
Deferred tax liability -- fixed assets, principally due to
differences in depreciation....................................... 62 269
---- ------
Net deferred tax asset.................................... $286 $1,053
==== ======
</TABLE>
At December 31, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $2,046 which are available to
offset future federal taxable income, if any, through 2010.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of the deferred tax assets
will not be realized. The Company expects the deferred tax assets at December
31, 1994 and 1995 will be realized as a result of the reversal during the
carryforward period of existing taxable temporary differences giving rise to
deferred tax liabilities and generation of future taxable income. No valuation
allowance is considered necessary as of December 31, 1994 and 1995.
Income taxes paid were $955 and $693 in 1994 and 1995, respectively.
(7) TRANSACTION WITH INTELOGIC TRACE, INC.
In November 1994, the Company entered into a supply agreement with
Intelogic Trace (Intelogic) to provide substantially all of the spare parts and
replacement parts required by Intelogic's service operations. In addition to
agreeing to supply parts to Intelogic, the Company acquired a component level
returned parts repair facility in San Antonio, Texas (San Antonio Facility),
certain parts inventory, and repair equipment. Intelogic filed for bankruptcy
less than four months later in March 1995 and its business was sold in April
1995. Following that sale, the supply agreement with the Company was terminated.
As a result, the Company determined to close the San Antonio Facility and
terminate the employment of approximately forty-five employees at that facility.
As a result of the bankruptcy filing, the Company realized a pre-tax charge in
1995 of $1,935, of which $907 was for uncollected accounts receivable in excess
of the approximately $900 recovered by the Company from its escrow security
account with Intelogic and $931 related to the write-off of
F-11
<PAGE> 54
PC SERVICE SOURCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain fixed assets formerly used at the San Antonio Facility. The remaining
$97 of the pre-tax charge was for severance packages paid to the approximately
forty-five terminated employees.
(8) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1994
Net revenues................................... $ 9,699 $ 9,872 $10,952 $11,744
Gross margin................................... 2,677 2,840 3,118 3,461
Net earnings................................... 455 457 465 518
Earnings per common share...................... .13 .11 .11 .12
Weighted average common shares outstanding..... 3,376 4,319 4,333 4,376
1995
Net revenues................................... $16,782 $15,274 $16,301 $20,333
Gross margin................................... 4,626 4,172 4,306 5,820
Net earnings (loss)............................ 564 (434) (1,667) 32
Earnings (loss) per common share............... .13 (.11) (.43) .01
Weighted average common shares outstanding..... 4,391 3,893 3,896 4,338
</TABLE>
Earnings (loss) per common share calculations are based on the weighted
average number of shares and dilutive common stock equivalents outstanding in
each period. Therefore, the sum of the quarters does not necessarily equal the
year-to-date earnings (loss) per common share.
F-12
<PAGE> 55
[INSIDE BACK COVER.
Insert photographs of the Company's call center operations, information
systems and network control center, and 155,200 square foot automated
distribution center.]
<PAGE> 56
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------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER, OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 9
Price Range of Common Stock and
Dividends............................ 10
Capitalization......................... 11
Selected Consolidated Financial Data... 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 13
Business............................... 19
Management............................. 26
Certain Transactions................... 32
Principal and Selling Stockholders..... 33
Description of Capital Stock........... 35
Shares Eligible for Future Sale........ 38
Underwriting........................... 39
Legal Matters.......................... 40
Experts................................ 40
Available Information.................. 40
Index to Consolidated Financial
Statements........................... 41
</TABLE>
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2,200,000 SHARES
[PC SERVICE SOURCE, INC.]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
THE ROBINSON-HUMPHREY
COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
COMVEST PARTNERS, INC.
June 6, 1996
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