<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1996.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
PC SERVICE SOURCE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5065 52-1703687
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
2350 VALLEY VIEW LANE
DALLAS, TEXAS 75234
(214) 406-8583
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
<TABLE>
<S> <C> <C>
MARK T. HILZ COPIES OF COMMUNICATIONS TO:
PRESIDENT AND CHIEF EXECUTIVE
OFFICER BRIAN M. LIDJI, ESQ. G. WILLIAM SPEER, ESQ.
PC SERVICE SOURCE, INC. SAYLES & LIDJI, P.C. POWELL, GOLDSTEIN, FRAZER & MURPHY
2350 VALLEY VIEW LANE 4400 RENAISSANCE TOWER 191 PEACHTREE STREET, N.E.
DALLAS, TEXAS 75234 1201 ELM STREET 16TH FLOOR
(214) 406-8583 DALLAS, TEXAS 75270 ATLANTA, GEORGIA 30303
(Name, address, including zip code, (214) 939-8700 (404) 572-6600
and telephone number, including area
code, of agent for service)
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to the made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER UNIT(2) OFFERING PRICE(2) FEE
- ----------------------------------------------------------------------------------------------------------
Common Stock,
$0.01 par value................... 2,530,000 Shares $13.50 $34,155,000 $11,778
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 330,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457(c); based upon the price of the Registrant's Common
Stock, as reported by the Nasdaq National Market on May 15, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
CROSS REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
FORM
S-1
ITEM
NUMBER CAPTION LOCATION IN PROSPECTUS
- ------ --------------------------------------------------- ---------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus................... Facing Page of Registration
Statement; Outside Front Cover
Page
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front and Outside Back
Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................................... Use of Proceeds
5. Determination of Offering Price.................... Outside Front Cover Page;
Underwriting
6. Dilution........................................... Not Applicable
7. Selling Security Holders........................... Principal and Selling
Stockholders; Management
8. Plan of Distribution............................... Outside Front Cover Page;
Underwriting
9. Description of Securities to be Registered......... Outside Front Cover Page;
Description of Capital Stock
10. Interests of Named Experts and Counsel............. Not Applicable
11. Information With Respect to the Registrant......... Outside Front Cover Page;
Prospectus Summary; Risk
Factors; Capitalization; Price
Range of Common Stock and
Dividends; Selected
Consolidated Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operation;
Management; Certain
Transactions; Principal and
Selling Stockholders;
Description of Capital Stock,
Shares Eligible for Future
Sale; and Consolidated
Financial Statements; Business
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not applicable
</TABLE>
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED MAY 17, 1996
2,200,000 SHARES
PC SERVICE SOURCE, INC.
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 May 16, 1996 was $14.25 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>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2)
- --------------------------------------------------------------------------------------------------
Per Share........................ $ $ $ $
- --------------------------------------------------------------------------------------------------
Total(3)......................... $ $ $ $
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</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 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
$ , $ , $ and $ , 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 , 1996.
THE ROBINSON-HUMPHREY COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
COMVEST PARTNERS, INC.
, 1996
<PAGE> 4
INSIDE FRONT COVER.
Insert photograph of diagram depicting market position of Company, and
photographs of the Company's headquarters facility and distribution center.
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> 5
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 logistics services to the personal computer
and related peripherals ("PC") hardware repair industry. These logistics
services 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 for
repair parts 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 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 providers, such as the Company, to
outsource their inventory management, order processing, warranty claims
processing, parts remanufacturing and other service logistics functions on new
and on 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 logistics services 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 also offers value-added
logistics services to Service Providers and OEMs to meet their particular needs.
PCSS offers a wide range of logistics services to Service Providers. 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 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 (also known as XLConnect)
(a division of Intelligent Electronics).
PCSS 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> 6
PCSS believes an important factor in an OEM's decision to outsource its
service logistic 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
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........................ 5,525,995 shares(1)
Use of proceeds..................... Reduction of indebtedness and for
working capital. See "Use of Proceeds."
Nasdaq National Market symbol....... PCSS
- ---------------
(1) Excludes 100,000 shares reserved for issuance upon exercise of outstanding
warrants. See "Description of Capital Stock and 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 are
outstanding. 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 "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> 7
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 $ 23,105
Total assets........................................................ 40,881 46,473
Long-term debt...................................................... 12,012 1,152
Stockholders' equity................................................ 12,257 28,709
</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 antidilutive.
(3) As adjusted to give effect to the consummation of this offering and the
application of the net proceeds as described in "Use of Proceeds."
5
<PAGE> 8
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 changes 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 on 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."
6
<PAGE> 9
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 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 written 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 fiscal 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, and 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 36% of the Company's
outstanding Common Stock and, therefore, may be able to control the outcome of
substantially all actions requiring stockholder approval, including the election
of the entire 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 Dividend Policy."
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 this 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, 3,539,720 shares may be traded on the Nasdaq National Market without
restriction. The Company, its
7
<PAGE> 10
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 1,753,706 shares of Common Stock after this 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 36% 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."
8
<PAGE> 11
USE OF PROCEEDS
The net proceeds from the sale of 1,250,000 shares of Common Stock offered
by the Company hereby (assuming a public offering price of $14.25, and after
deducting the underwriting discount and estimated expenses of the offering) are
estimated to be $16.4 million ($19.0 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 $10.7 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."
At May 15, 1996, the Company's revolving bank line of credit had an
outstanding balance of approximately $10.7 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 15, 1996) plus one percent. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 May 16, 1996)............................. 14.25 9.75
</TABLE>
The closing sale price of the Common Stock as reported on the Nasdaq
National Market on May 16, 1996, was $14.25. As of May 15, 1996, there were 61
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.
9
<PAGE> 12
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 (assuming a public offering
price of $14.25 per share) 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 27,633
Retained earnings.................................................... 1,764 1,764
Less treasury stock (19,131 shares; 58,605 shares as adjusted).... 180 743
Total stockholders' equity................................... 12,257 28,709
Total capitalization......................................... 24,269 29,861
</TABLE>
- ---------------
(1) Excludes 100,000 shares reserved for issuance upon exercise of outstanding
warrants. See "Description of Capital Stock and Warrants." Excludes
1,000,000 shares reserved for issuance upon exercise of employee and
director stock options, of which options to purchase 503,500 are
outstanding. 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
"Description of Director Compensation Plan" and "Description of Employee
Stock Purchase Plan."
(2) In connection with this offering, CompuCom Systems, Inc. ("CompuCom"), a
selling stockholder, has agreed to exercise its warrant to purchase up to
250,000 shares and sell such shares in the offering. Pursuant to the net
exercise provisions of the warrant, 210,526 shares of Common Stock will be
issued upon net exercise of the warrant and such shares are reflected in
the issued Common Stock, as adjusted. See "Description of Capital Stock."
10
<PAGE> 13
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
------ ------ ------- ------- ------- -------
<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 in the quarter ended March 31
and non-recurring, pre-tax charges (included in selling, general and
administrative expenses) of $1.9 million ($245,000 in 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."
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As part of the Company's efforts to broaden its 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 newly-constructed distribution facility near the Alliance
Airport 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 that its Cyclix
remanufacturing capabilities are an important element 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 Trace Inc. ("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>
12
<PAGE> 15
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 4,461,751 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. Revenue 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 revenue declined to 27.5% in 1995 as compared with
28.6% in 1994, primarily due to changes in the mix of parts actually sold and
services provided during the period. Because the gross margin varies among the
13
<PAGE> 16
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; 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 to its customers. 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 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.
14
<PAGE> 17
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 (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 customer service provider.
Gross margin increased $5.6 million, an 86% increase 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 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.
15
<PAGE> 18
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 in 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 in 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."
(2) Common stock equivalents are not included as exercise of options and
warrants would be antidilutive.
16
<PAGE> 19
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 financing. 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 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 of those OEMs. 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 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.
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<PAGE> 20
BUSINESS
PCSS is the leading provider of logistics services to the PC hardware
repair industry. These logistics services 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 for repair parts 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 providers, such as PCSS, to outsource
their inventory management, order processing, warranty claims processing, parts
remanufacturing and other service logistics functions on new 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 logistics services 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 also offers value-added
logistics services to Service Providers and OEMs to meet their particular
needs..
PCSS offers a wide range of logistics services to Service Providers. 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 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, The Future Now (also known as XLConnect) (a
division of Intelligent Electronics).
PCSS 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
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<PAGE> 21
value added services it offers to OEMs in an effort to outsource larger
functions of the OEM's service and warranty logistics functions.
INDUSTRY
The demand for logistics services in the computer industry represents a
significant and growing market opportunity. Industry sources estimate 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. However, PCSS believes the PC spare parts industry is not dependent on the
level or type of computer hardware sales in a particular year, but also reflects
the amount and type of equipment already in the installed base. 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 logistics services 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.
PC 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 to 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
and associated peripherals 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 logistics
services 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 logistics services 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
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<PAGE> 22
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 logistics services, 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 $4.2 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 services
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 the same or next day basis. The Company has
also 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 PCs and peripheral 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 remanufacturing of a 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
request, 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.
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The Company offers a full complement of PC spare and replacement parts,
distributing over 150,000 different parts and maintains in its inventory over
15,000 different PC parts from over 25 leading OEMs, such as AST, Canon, Compaq,
Epson, Exabyte, Hewlett-Packard, IBM, NEC, Okidata, Packard Bell, 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 logistics services to
Service Providers and OEMs. These services capabilities in combination with the
Company's core distribution expertise effectively allow PCSS to become the spare
parts department for its customers. PCSS offers these logistics services 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, improves 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 The Future Now (also known as XLConnect) (a division of Intelligent
Electronics). 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 PC and
peripherals 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 logistics services
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.
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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 addition,
Cyclix has entered into remanufacturing arrangements with Radius for the repair
of Radius monitors and other various computers parts. Cyclix also remanufactures
personal computer equipment for large corporate end users. These arrangements
may be terminated by either party at any time, but the Company enters into them
with the expectation 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
information system is a Unix server based Hewlett-Packard 9000 T-500 running an
Informix database program customized to the Company's requirements. The CTI
system is an essential element of the call centers operation, automatically
routing customer calls to the appropriate account representative and 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 sales
lost 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 customers'
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.
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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 (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 fiscal 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 The Future Now (also known as XLConnect) (a
division of Intelligent Electronics). 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 Systems,
Inc. ("CompuCom"), the owner of more than 5% of the Company's Common Stock prior
to the completion of this 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.
COMPETITION
The Company is the leading provider of logistics services to the PC repair
and maintenance industry. These logistics services 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
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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 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.
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 15, 1996 and with respect to a
nominee for election as a director.
<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 Nominee for Director at 1996 Annual Meeting
</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.
25
<PAGE> 28
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 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. 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. Mr. Haft is a nominee for election to
the Board for the first time at the Company's 1996 Annual Meeting and is
expected to be elected as a Class I director whose term expires in 1999.
26
<PAGE> 29
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 347,500
are available for 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,
27
<PAGE> 30
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>
28
<PAGE> 31
- ---------------
(A) The potential realizable values set forth under these columns result from
calculations assuming 5% and 10% growth rates as set by 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
In February 1996, the Board adopted and the stockholders of the Company are
being asked to approve at the 1996 Annual Meeting of Stockholders, the 1996
Employee Stock Purchase Plan (the "Employee Plan"), covering 100,000 shares of
the Company's Common Stock. The purpose of the Employee 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 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 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
29
<PAGE> 32
employees of the Company (as defined in the Employee Plan) and its subsidiaries
are eligible to participate in the Employee 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 Plan. The Employee Plan is
administered by the Stock Option Committee. The interpretation and construction
of the Employee Plan and the adoption of rules and regulations for administering
the Employee 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. The number of shares
granted under the Employee 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 and nominees, 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 1,666,000 shares of Common Stock. Rosetta Stone
also owns a majority of TeKnowlogy, Inc., of which Mr. Tenenhaus is the
President. In addition, Mr. Haft, a nominee to become a director of PCSS, is
also a director of TeKnowlogy. TeKnowlogy is a private company and does not have
a compensation committee.
30
<PAGE> 33
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. 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 the voting agreement was to expire at such time as
CompuCom's ownership of PCSS Common Stock falls below 5% of the outstanding
Common Stock of PCSS. Rosetta Stone has pledged 1,690,000 shares of Common Stock
of the Company to secure certain debts of Rosetta Stone to CompuCom incurred in
connection Rosetta Stone's acquisition of Common Stock from CompuCom.
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. 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 that 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.
31
<PAGE> 34
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 this 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 Securities
and Exchange Commission (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)............................ 1,666,000(1) 41.3% 170,000 1,496,000(1) 27.1%
Mark T. Hilz.......................................... 194,000(2) 4.6% 30,000 164,000(2) 2.7%
Jay Haft.............................................. 25,000(1) * 25,000 -- --
More Childrens' Trust................................. 25,000(1) * 25,000 -- --
Robert S. Leff........................................ 8,500(3) * 8,500(3) *
James Ounsworth....................................... (4) (4) (4) (4)
Edward C. Raymund..................................... 12,500(5) * 12,500(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.................................. 2,145,869(10) 50.6% 1,945,869(10) 33.3%
CompuCom Systems, Inc................................. 983,880(11) 23.0% 750,000 194,406 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." Rosetta Stone has
granted options to a trust for the benefit of Mr. More's minor children
(the "More Childrens' Trust") and to Mr. Jay Haft, a nominee to become a
director of the Company, pursuant to which the More Childrens' Trust and
Mr. Haft have the right to acquire from Rosetta Stone 25,000 shares of PCSS
Common Stock each at a price of $3.00 per share. In connection with this
offering, the More Childrens' Trust and Mr. Haft are selling these options
to the underwriters at the closing of this 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 Childrens' Trust and Mr.
Haft.
(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.
(3) Includes 2,000 shares issuable upon exercise of options which are
exercisable at or within 60 days.
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<PAGE> 35
(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 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 206,000 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 Systems, Inc. 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.
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 May 15, 1996,
there were 61 stockholders of record holding 4,035,469 shares of Common Stock.
No shares of Preferred Stock have been issued. Upon consummation of this
offering, 5,525,995 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 ("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.
33
<PAGE> 36
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. The warrant 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, subject to CompuCom's
agreement, not to exercise the warrant for 90 days after the date of this
Registration Statement of which this Prospectus is a part. The warrant exercise
price and the number of shares of Common Stock covered by the warrant are
subject to adjustment in order to protect the holder of the warrant against
dilution in certain events.
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. At a price of $14.25 per common share, CompuCom would be entitled to
receive a total of 210,526 shares upon exercising the warrant pursuant to the
net exercise provisions.
The Company issued a five-year warrant to purchase 100,000 shares of Common
Stock at an exercise price of $10.80 per share to the representative of the
underwriters, in connection with the 1994 initial public offering of the
Company's Common Stock. 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.
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 Company's 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
34
<PAGE> 37
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.
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".
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 redemption 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 corporation 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.
35
<PAGE> 38
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.
36
<PAGE> 39
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, 5,525,995 shares of Common Stock will be
issued and outstanding. The shares sold in this offering (except any shares
acquired by an "affiliate" of the Company (as defined in the rules and
regulations of the Securities Act) and 3,539,720 shares outstanding will be
freely tradeable without restriction under the Securities Act. The remaining
shares of Common Stock outstanding after this 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 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 55,260
shares immediately after this 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 options to acquire 533,500
shares have been granted and are outstanding. See "Management -- Stock Option
Plan" and "Description of Capital Stock and Warrants." There are 100,000 shares
reserved for issuance under the Company's Employee Stock Purchase 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 1,753,706 shares upon the completion of this 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.
37
<PAGE> 40
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 to purchase from the Company and
the Selling Stockholders, and the Company and the Selling Stockholders have
agreed to sell to the Underwriters, the number of shares of Common Stock set
forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
The Robinson-Humphrey Company, Inc. ......................................
Rauscher Pierce Refsnes, Inc. ............................................
ComVest Partners, Inc. ...................................................
---------
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 if any are purchased.
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 $ per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ 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 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 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 this 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
38
<PAGE> 41
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 Securities
Exchange Act of 1934, 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.
39
<PAGE> 42
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>
40
<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,
------------------
1994 1995
------- ------- MARCH 31,
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, 2000.
(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 computer room, call center and
telephony systems room.
<PAGE> 56
------------------------------------------------------
------------------------------------------------------
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............................ 9
Capitalization......................... 10
Selected Consolidated Financial Data... 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 12
Business............................... 18
Management............................. 25
Principal and Selling Stockholders..... 32
Underwriting........................... 37
Legal Matters.......................... 39
Experts................................ 39
Available Information.................. 39
Index to Financial Statements.......... 40
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
2,200,000 SHARES
PC SERVICE SOURCE, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
THE ROBINSON-HUMPHREY
COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
COMVEST PARTNERS, INC.
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 57
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company will pay all expenses of this offering other than those
computed as the basis of shares sold, which will be prorated among the Company
and the Selling Stockholders. Total expenses, other than the Underwriters'
discounts, in connection with the issuance and distribution of the Common Stock
are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $ 12,046
NASD filing fee........................................................... $ 3,994
Legal fees and expenses................................................... $ *
Blue Sky fees and expenses (including legal fees)......................... $ *
Printing and engraving expenses........................................... $ *
Accounting fees and expenses.............................................. $ *
Transfer Agent and Registrar fees......................................... $ *
Miscellaneous............................................................. $ *
--------
Total........................................................... $
========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Generally, Delaware law permits a corporation to indemnify a person who was
or is an officer, director, agent, or employee, or who serves at the
corporation's request as an officer, director, agent, or employee, of another
corporation, partnership, trust joint venture, or other enterprise ("nominee"),
who was, is, or is threatened to be named a defendant in a legal proceeding by
virtue of such person's position in the corporation or nominee, but only if the
person acted in good faith and reasonably believed that the conduct was in or at
least not opposed to the corporation's best interest, and, in the case of a
criminal proceeding, the person had no reasonable cause to believe the conduct
was unlawful. A person may be indemnified within the above limitations against
judgments, fines, settlements, and reasonable expenses actually incurred.
Generally, an officer, director, agent, or employee of the corporation or
nominee may not be indemnified, however, against judgments, fines, and
settlements incurred in a proceeding in which the person is found liable to the
corporation and may not be indemnified for expenses unless, and only to the
extent that, in view of all the circumstances, the person is fairly and
reasonably entitled to indemnification for such expenses. A corporation must
indemnify a director, officer, employee, or agent against reasonable expenses
incurred in connection with a proceeding in which the person is a party because
of the person's corporate position, if the person was successful, on the merits
or otherwise, in the defense of the proceeding. Under certain circumstances, a
corporation may also advance expenses to such person. Under Delaware law, a
corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of the corporation against any
liability asserted against and incurred by the person in such capacity, or
arising out of the person's status as such a person, regardless of whether the
applicable law otherwise empowers the corporation to indemnify that person
against such liability.
Article 12 of the Company's certificate of incorporation requires
indemnification of directors and officers to the fullest extent permitted by the
Delaware General Corporation Law. The Company has entered into agreements with
its directors contractually obligating the Company to indemnify the directors to
the extent currently required by the Certificate of incorporation.
The Underwriting Agreement provides for indemnification of the Company and
its officers and directors by the Underwriters against certain liabilities,
including liabilities arising under the Securities Act.
II-1
<PAGE> 58
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1993 the Company has issued a total of 2,000,000 shares of
unregistered common stock. The Company relied on the exemption from registration
contained in Section 4(2) as well as Section 3(a)(9) of the Securities Act of
1933, as amended, in connection with the CompuCom Systems, Inc. ("CompuCom")
conversion of its convertible note described below. The issuance to CompuCom did
not involve a public offering. The following table reflects the issuance of
unregistered securities during the last three years.
<TABLE>
<CAPTION>
NO. OF
DATE OF SHARES
SHAREHOLDERS ISSUANCE ISSUED
----------------------------------------------------------------- ------- ---------
<S> <C> <C>
CompuCom Systems, Inc............................................ 1/5/94 2,000,000
</TABLE>
On January 5, 1994, CompuCom exercised its right to convert its convertible
note into 2,000,000 shares of common stock, and in connection therewith received
a warrant to purchase 250,000 shares of common stock at $2.25 per share.
The following table shows employee and director stock options granted
during the previous three years made in reliance upon Section 4(2) and Rule 701.
<TABLE>
<CAPTION>
GRANTEE # OF SHARES
-------------------------------------------------------------------------- -----------
<S> <C>
Brad Clark................................................................ 2,500
Russell Clevenger......................................................... 5,000
Jim Contardi.............................................................. 25,000
Linda Grimmer............................................................. 10,000
Rick Orsini............................................................... 10,000
John Pillow............................................................... 10,000
Ed Raymund................................................................ 10,000
Robert Smith.............................................................. 10,000
Steve Underwood........................................................... 10,000
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------------------
<C> <S>
1** -- Form of Underwriting Agreement
3.1+++ -- Restated Articles of Incorporation of the Company
3.2++ -- Amended and Restated Bylaws of the Company
4+ -- Specimen Certificate evidencing Common Stock
5* -- Opinion and Consent of Sayles & Lidji, A Professional Corporation
10.1++ -- Financing and Security Agreement between the Company and NationsBank,
Texas, N.A., as amended
10.2++++ -- Stock Option Plan, including form of Stock Option Agreement, as
amended
10.3+ -- Director Compensation Plan
10.4** -- Employee Stock Purchase Plan
11** -- Computation of Per Share Earnings
23.1** -- Consent of KPMG Peat Marwick LLP
23.2* -- Consent of Sayles & Lidji, A Professional Corporation (included in
Exhibit 5)
23.3** -- Consent of Jay Haft
24** -- Power of Attorney (included at page II-4)
</TABLE>
II-2
<PAGE> 59
- ---------------
+ fPreviously filed as an exhibit to the Company's Registration Statement on
Form SB-2 Registration Number 33-76068-D, initially filed with the
Securities and Exchange Commission on March 4, 1994, and declared effective
on March 28, 1994.
++ Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1994, filed with the Securities and Exchange
Commission on March 31, 1995.
+++ Previously filed as an exhibit to the Company's report on Form S-8,
Registration Number 33-98176, filed with the Securities and Exchange
Commission on October 17, 1995.
++++ Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1995, filed with the Securities and Exchange
Commission on March 31, 1996.
* To be filed by amendment
** Filed herewith.
(b) Financial Statement Schedules.
Schedule II Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to include
any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change
to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
II-3
<PAGE> 60
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Securities
Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; and
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant 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 Registrant 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 Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PC SERVICE SOURCE, INC.
May 16, 1996 By: /s/ MARK T. HILZ
------------------------------------
Mark T. Hilz
President and Chief Executive
Officer
POWER OF ATTORNEY
Each individual whose signature appears below hereby designates and
appoints Avery More, Mark T. Hilz and Bernard Rohde, and each of them, as such
person's true and lawful attorneys-in-fact and agents (the "Attorneys-in-Fact")
with full power of substitution and resubstitution, for such person and in such
person's name, place, and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration statement,
which amendments may make such changes in this registration statement as either
Attorney-in-Fact deems appropriate and requests to accelerate the effectiveness
of this registration statement, and to file each such amendment with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto such Attorneys-in-Fact and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that such Attorneys-in-Fact or either of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on May 16, 1996.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- -------------------------------------------- --------------------------------------------
<C> <S>
/s/ MARK T. HILZ President, Chief Executive Officer and
- -------------------------------------------- Director (Principal Executive Officer)
Mark T. Hilz
/s/ AVERY MORE Chairman of the Board, Chief Financial
- -------------------------------------------- Officer and Director
Avery More (Principal Financial Officer)
/s/ BERNARD ROHDE Chief Accounting Officer, Controller and
- -------------------------------------------- Secretary (Principal Accounting Officer)
Bernard Rohde
/s/ PHILIP W. WISE Director
- --------------------------------------------
Philip W. Wise
/s/ MORTI TENENHAUS Director
- --------------------------------------------
Morti Tenenhaus
/s/ ROBERT S. LEFF Director
- --------------------------------------------
Robert S. Leff
/s/ EDWARD L. RAYMUND Director
- --------------------------------------------
Edward L. Raymund
/s/ JAMES OUNSWORTH Director
- --------------------------------------------
James Ounsworth
</TABLE>
II-5
<PAGE> 62
SCHEDULE II
PC SERVICE SOURCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- -------------------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Accounts receivable --
allowance for doubtful
accounts:
1993.................... $ 63 $ 211 $ -- $ 55 $ 219
1994.................... 219 210 -- 154 275
1995.................... 275 1,197(A) -- 1,205(A) 267
Inventories -- reserve for
obsolescence:
1993.................... -- 353 -- -- 353
1994.................... 353 332 1,835(B) -- 2,520
1995.................... 2,520 646 -- 825 2,341
</TABLE>
- ---------------
(A) Includes charge and write-off of $907 of account receivable for Intelogic
Trace.
(B) Inventory was acquired in connection with the outsourcing supply agreement
with Intelogic Trace. Management established this reserve to record
inventory acquired at its net realizable value.
<PAGE> 63
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------
<C> <S> <C>
1** -- Form of Underwriting Agreement
3.1+++ -- Restated Articles of Incorporation of the Company
3.2++ -- Amended and Restated Bylaws of the Company
4+ -- Specimen Certificate evidencing Common Stock
5* -- Opinion and Consent of Sayles & Lidji, A Professional Corporation
10.1++ -- Financing and Security Agreement between the Company and
NationsBank, Texas, N.A., as amended
10.2++++ -- Stock Option Plan, including form of Stock Option Agreement, as
amended
10.3+ -- Director Compensation Plan
10.4** -- Employee Stock Purchase Plan
11** -- Computation of Per Share Earnings
23.1** -- Consent of KPMG Peat Marwick LLP
23.2* -- Consent of Sayles & Lidji, A Professional Corporation (included in
Exhibit 5)
23.3** -- Consent of Jay Haft
24** -- Power of Attorney (included at page II-4)
</TABLE>
- ---------------
+ Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 Registration Number 33-76068-D, initially filed with the
Securities and Exchange Commission on March 4, 1994, and declared effective
on March 28, 1994.
++ Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1994, filed with the Securities and Exchange
Commission on March 31, 1995.
+++ Previously filed as an exhibit to the Company's report on Form S-8,
Registration Number 33-98176, filed with the Securities and Exchange
Commission on October 17, 1995.
++++ Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1995, filed with the Securities and Exchange
Commission on March 31, 1996.
* To be filed by amendment
** Filed herewith.
<PAGE> 1
Exhibit 1
PGFM DRAFT OF May 16, 1996
PC SERVICE SOURCE, INC.
COMMON STOCK
------------------------------
UNDERWRITING AGREEMENT
, 1996
--------------- ---
THE ROBINSON-HUMPHREY COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
COMVEST PARTNERS, INC.
As representatives of the several
Underwriters named in Schedule I hereto,
c/o The Robinson-Humphrey Company, Inc.
3333 Peachtree Road, N.E.
Atlanta, Georgia 30326
Dear Sirs:
PC Service Source, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
1,250,000 shares of common stock, par value $.01 per share ("Common Stock"), of
the Company (the "Company Firm Shares"), and the stockholders of the Company
named in Schedule II hereto (the "Selling Stockholders") propose, subject to
the terms and conditions stated herein, to sell to the Underwriters an
aggregate of 1,000,000 shares of Common Stock in the respective amounts set
forth opposite their names in Schedule II hereto (such shares together with the
Company Firm Shares, the "Firm Shares") and, at the election of the
Underwriters, subject to the terms and conditions stated herein, the Company
and the Selling Stockholders propose, subject to the terms and conditions
stated herein, to sell to the Underwriters up to 187,500 and 150,000 additional
shares, respectively, of Common Stock (the "Optional Shares") (the Firm Shares
and the Optional Shares that the Underwriters elect to purchase pursuant to
Section 2 hereof are collectively called the "Shares"). In your capacity as
representatives of the several Underwriters, you are referred to herein as the
"Representatives."
1. (a) REPRESENTATIONS AND WARRANTIES OF THE
COMPANY. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(i) A registration statement on Form S-1
(File No. 333-_____) with respect to the Shares, including a
prospectus subject to completion, has been filed by the
Company with the Securities and Exchange Commission (the
<PAGE> 2
"Commission") under the Securities Act of 1933, as amended
(the "Act"), and one or more amendments to such registration
statement may have been so filed. After the execution of this
Agreement, the Company will file with the Commission either
(A) if such registration statement, as it may have been
amended, has become effective under the Act and information
has been omitted therefrom in accordance with Rule 430A under
the Act, a prospectus in the form most recently included in an
amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration
statement) with such changes or insertions as are required by
Rule 430A or permitted by Rule 424(b) under the Act and as
have been provided to and approved by the Representatives, or
(B) if such registration statement, as it may have been
amended, has not become effective under the Act, an amendment
to such registration statement, including a form of
prospectus, a copy of which amendment has been provided to and
approved by the Representatives prior to the execution of this
Agreement. As used in this Agreement, the term "Registration
Statement" means such registration statement, as amended at
the time when it was or is declared effective, including all
financial statement schedules and exhibits thereto and
including any information omitted therefrom pursuant to Rule
430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Preliminary Prospectus" means
each prospectus subject to completion included in such
registration statement or any amendment or post-effective
amendment thereto (including the prospectus subject to
completion, if any, included in the Registration Statement at
the time it was or is declared effective); and the term
"Prospectus" means the prospectus first filed with the
Commission pursuant to Rule 424(b) under the Act or, if no
prospectus is required to be so filed, such term means
the prospectus included in the Registration Statement. For
purposes of the following representations and warranties, to
the extent reference is made to the Prospectus and at the
relevant time the Prospectus is not yet in existence, such
reference shall be deemed to be to the most recent Preliminary
Prospectus.
(ii) No order preventing or suspending the
use of any Preliminary Prospectus has been issued and no
proceeding for that purpose has been instituted or threatened
by the Commission or the securities authority of any state or
other jurisdiction. If the Registration Statement has become
effective under the Act, no stop order suspending the
effectiveness of the Registration Statement or any part
thereof has been issued and no proceeding for that purpose has
been instituted or threatened or, to the best knowledge of the
Company, contemplated by the Commission or the securities
authority of any state or other jurisdiction.
(iii) When any Preliminary Prospectus was
filed with the Commission it (A) contained all statements
required to be stated therein in accordance with, and complied
in all material respects with the requirements of, the Act and
the rules and regulations of the Commission thereunder and (B)
did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the
2
<PAGE> 3
circumstances under which they were made, not misleading.
When the Registration Statement or any amendment thereto was
or is declared effective, and at each Time of Delivery (as
hereinafter defined), it (A) contained or will contain all
statements required to be stated therein in accordance with,
and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not or will not include any
untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not
misleading. When the Prospectus or any amendment or
supplement thereto is filed with the Commission pursuant to
Rule 424(b) (or, if the Prospectus or such amendment or
supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is
declared effective) and at each Time of Delivery, the
Prospectus, as amended or supplemented at any such time, (A)
contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the
rules and regulations of the Commission thereunder and (B) did
not or will not include any untrue statement of a material
fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances
under which they were made, not misleading. The foregoing
provisions of this paragraph (iii) do not apply to statements
or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to
the Company by any Underwriter through the Representatives
specifically for use therein.
(iv) The descriptions in the Registration
Statement and the Prospectus of statutes, legal and
governmental proceedings or contracts and other documents are
accurate and fairly present the information required to be
shown; and there are no statutes or legal or governmental
proceedings required to be described in the Registration
Statement or the Prospectus that are not described as required
and no contracts or documents of a character that are required
to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration
Statement that are not described and filed as required.
(v) Each of the Company and its subsidiary
has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its
jurisdiction of incorporation and has full power and authority
(corporate and other) to own or lease its properties and
conduct its business as described in the Prospectus. The
Company has full power and authority (corporate and other) to
enter into this Agreement and to perform its obligations
hereunder. Each of the Company and its subsidiary is duly
qualified to transact business as a foreign corporation and is
in good standing under the laws of each other jurisdiction in
which it owns or leases properties, or conducts any business,
so as to require such qualification, except where the failure
to so qualify would not have a material
3
<PAGE> 4
adverse effect on the financial position, results of
operations or business of the Company and its subsidiary.
(vi) The Company's authorized, issued and
outstanding capital stock is as set forth in the Prospectus
under the caption "Capitalization." All of the issued shares
of capital stock of the Company have been duly authorized and
validly issued, are fully paid and nonassessable and conform
to the description of the Common Stock contained in the
Prospectus. None of the issued shares of capital stock of the
Company or its predecessors or its subsidiary has been issued
or is owned or held in violation of any preemptive rights of
stockholders, and no person or entity (including any holder of
outstanding shares of capital stock of the Company or its
subsidiary) has any preemptive or other rights to subscribe
for any of the Shares.
(vii) All of the ______________ issued
shares of capital stock of the Company's subsidiary have been
duly authorized and validly issued, are fully paid and
nonassessable, and, of such shares, _______________ are owned
beneficially by the Company free and clear of all liens,
security interests, pledges, charges, encumbrances, defects,
stockholders' agreements, voting trusts, equities or claims of
any nature whatsoever and _________ are owned beneficially of
record by Philip W. Wise. Other than Cyclix Engineering
Corporation, the Company does not own, directly or indirectly,
any capital stock or other equity securities of any other
corporation or any ownership interest in any partnership,
joint venture or other association other than as disclosed in
the Prospectus.
(viii) Except as disclosed in the Prospectus,
there are no outstanding (A) securities or obligations of the
Company or of its subsidiary convertible into or exchangeable
for any capital stock of the Company or such subsidiary, (B)
warrants, rights or options to subscribe for or purchase from
the Company or such subsidiary any such capital stock or any
such convertible or exchangeable securities or obligations, or
(C) obligations of the Company or such subsidiary to issue any
shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or
options.
(ix) Since the date of the most recent
audited financial statements included in the Prospectus,
neither the Company nor its subsidiary has sustained any
material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as disclosed in or
contemplated by the Prospectus.
(x) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (A) neither the Company nor its subsidiary has
incurred any liabilities or obligations, direct or contingent,
or entered into any transactions, not in the ordinary course
of business, that are material to the Company and its
subsidiary, (B) the Company has not purchased
4
<PAGE> 5
any of its outstanding capital stock or declared, paid or
otherwise made any dividend or distribution of any kind on its
capital stock, (C) there has not been any change in the
capital stock, long-term debt or short-term debt of the
Company or its subsidiary, and (D) there has not been any
material adverse change, or any development involving a
prospective material adverse change, in or affecting the
financial position, results of operations or business of the
Company and its subsidiary, in each case other than as
disclosed in or contemplated by the Prospectus.
(xi) The Shares to be issued and sold by
the Company have been duly authorized and, when issued and
delivered against payment therefor as provided herein, will be
validly issued and fully paid and nonassessable and will
conform to the description of the Common Stock contained in
the Prospectus; and the certificates evidencing the Shares
will comply with all applicable requirements of Delaware law.
(xii) Except as disclosed in the Prospectus,
there are no contracts, agreements or understandings between
the Company and any person granting such person the right to
require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to
be owned by such person or to require the Company to include
such securities in the securities registered pursuant to the
Registration Statement (unless any such right has been
effectively waived) or any securities being registered
pursuant to any other registration statement filed by the
Company under the Act.
(xiii) All offers and sales of the Company's
capital stock prior to the date hereof were at all relevant
times duly registered under the Act or exempt from the
registration requirements of the Act by reason of Sections
3(b), 4(2) or 4(6) thereof and were duly registered or the
subject of an available exemption from the registration
requirements of the applicable state securities or blue sky
laws.
(xiv) Neither the Company nor its subsidiary
is, or with the giving of notice or passage of time or both
would be, in violation of its Certificate of Incorporation or
Bylaws or in default under any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument
to which the Company or its subsidiary is a party or to which
any of their respective properties or assets are subject.
(xv) The issue and sale of the Shares to be
issued and sold by the Company and the performance of this
Agreement and the consummation of the transactions herein
contemplated will not conflict with, or (with or without the
giving of notice or the passage of time or both) result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument
to which the Company or its subsidiary is a party or to which
any of their respective
5
<PAGE> 6
properties or assets is subject, nor will such action
conflict with or violate any provision of the Certificate of
Incorporation or Bylaws of the Company or its subsidiary or
any statute, rule or regulation or any order, judgment or
decree of any court or governmental agency or body having
jurisdiction over the Company or its subsidiary or any of
their respective properties or assets.
(xvi) The Company and its subsidiary have
good and marketable title in fee simple to all real property,
if any, and good title to all personal property owned by them,
in each case free and clear of all liens, security interests,
pledges, charges, encumbrances, mortgages and defects, except
such as are disclosed in the Prospectus or such as do not
materially and adversely affect the value of such property and
do not interfere with the use made or proposed to be made of
such property by the Company and its subsidiary; and any real
property and buildings held under lease by the Company or its
subsidiary are held under valid, subsisting and enforceable
leases, with such exceptions as are disclosed in the
Prospectus or are not material and do not interfere with the
use made or proposed to be made of such property and buildings
by the Company or such subsidiary.
(xvii) No consent, approval, authorization,
order or declaration of or from, or registration,
qualification or filing with, any court or governmental agency
or body is required for the sale of the Shares or the
consummation of the transactions contemplated by this
Agreement, except the registration of the Shares under the Act
(which, if the Registration Statement is not effective as of
the time of execution hereof, shall be obtained as provided in
this Agreement) and such as may be required under state
securities or blue sky laws in connection with the offer, sale
and distribution of the Shares by the Underwriters.
(xviii) Other than as disclosed in the
Prospectus, there is no litigation, arbitration, claim,
proceeding (formal or informal) or investigation pending or,
to the knowledge of the Company, threatened (or any basis
therefor) in which the Company or its subsidiary is a party or
of which any of their respective properties or assets are the
subject which, if determined adversely to the Company or such
subsidiary, would individually or in the aggregate have a
material adverse effect on the financial position, results of
operations or business of the Company and its subsidiary.
Neither the Company nor its subsidiary is in violation of, or
in default with respect to, any statute, rule, regulation,
order, judgment or decree, except as described in the
Prospectus or such as do not and will not individually or in
the aggregate have a material adverse effect on the financial
position, results of operations or business of the Company and
its subsidiary, and neither the Company nor its subsidiary is
required to take any action in order to avoid any such
violation or default.
(xix) KPMG Peat Marwick LLP, who have
certified certain financial statements of the Company and its
subsidiary, are, and were during the periods covered by their
reports included in the Registration Statement and the
6
<PAGE> 7
Prospectus, independent public accountants as required by the
Act and the rules and regulations of the Commission thereunder.
(xx) The consolidated financial statements
and schedules (including the related notes) of the Company and
its subsidiary included in the Registration Statement, the
Prospectus or any Preliminary Prospectus were prepared in
accordance with generally accepted accounting principles
consistently applied throughout the periods involved and
fairly present the financial position and results of
operations of the Company and its subsidiary, on a
consolidated basis, at the dates and for the periods
presented. The selected financial data set forth under the
caption "Selected Consolidated Financial Data" in the
Prospectus fairly present, on the basis stated in the
Prospectus, the information included therein.
(xxi) This Agreement has been duly
authorized, executed and delivered by the Company and
constitutes the valid and binding agreement of the Company
enforceable against the Company in accordance with its terms,
subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws
relating to or affecting the enforcement of creditors' rights
generally and to general equitable principles and except as
the enforceability of rights to indemnity and contribution
under this Agreement may be limited under applicable
securities laws or the public policy underlying such laws.
(xxii) Neither the Company nor, to the
knowledge of the Company, any of its officers, directors or
affiliates has (A) taken, directly or indirectly, any action
designed to cause or result in, or that has constituted or
might reasonably be expected to constitute, the stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or (B) since the
filing of the Registration Statement (1) sold, bid for,
purchased or paid anyone any compensation for soliciting
purchases of, the Shares or (2) paid or agreed to pay to any
person any compensation for soliciting another to purchase any
other securities of the Company.
(xxiii) The Company has obtained for the
benefit of the Company and the Underwriters from each of its
directors, executive officers and the other persons whose
names appear on Schedule III hereto a written agreement that
for a period of 180 days from the date of the Prospectus such
director, officer or other person will not, without the prior
written consent of the Representatives, offer, pledge, sell,
contract to sell, grant any option for the sale of, or
otherwise dispose of (or announce any offer, pledge, sale,
grant of an option to purchase or other disposition), directly
or indirectly, any shares of Common Stock or securities
convertible into, or exercisable or exchangeable for, shares
of Common Stock.
(xxiv) Neither the Company, its subsidiary,
nor, to the knowledge of the Company, any director, officer,
agent, employee or other person associated
7
<PAGE> 8
with or acting on behalf of the Company or such subsidiary
has directly or indirectly: used any corporate funds for
unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity; made any
unlawful payment to foreign or domestic government officials
or employees or to foreign or domestic political parties
or campaigns from corporate funds; violated any provision of
the Foreign Corrupt Practices Act of 1977, as amended; or made
any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(xxv) The operations of the Company and its
subsidiary with respect to any real property currently leased
or owned or by any means controlled by the Company or such
subsidiary (the "Real Property") are in compliance with all
federal, state, and local laws, ordinances, rules, and
regulations relating to occupational health and safety and the
environment (collectively, "Laws"), and the Company and its
subsidiary have all licenses, permits and authorizations
necessary to operate under all Laws and are in compliance with
all terms and conditions of such licenses, permits and
authorizations; and there is no pending or, to the knowledge
of the Company, threatened claim, litigation or any
administrative agency proceeding, nor has the Company or such
subsidiary received any written or oral notice from any
governmental entity or third party, that: (A) alleges a
violation of any Laws by the Company or such subsidiary; (B)
alleges the Company or such subsidiary is a liable party under
the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. Section 9601 et seq. or any state
superfund law; (C) alleges possible contamination of the
environment by the Company or such subsidiary; or (D) alleges
possible contamination of the Real Property.
(xxvi) The Company and its subsidiary own or
have the right to use all patents, patent applications,
trademarks, trademark applications, trade names, service
marks, copyrights, franchises, trade secrets, proprietary or
other confidential information and intangible properties and
assets (collectively, "Intangibles") necessary to their
respective businesses as presently conducted or proposed to be
conducted; to the knowledge of the Company, neither the
Company nor such subsidiary has infringed or is infringing,
and neither the Company nor such subsidiary has received
notice of infringement with respect to, asserted Intangibles
of others; and, to the knowledge of the Company, there is no
infringement by others of Intangibles of the Company or its
subsidiary.
(xxvii) The Company and its subsidiary are
insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as are
prudent and customary in the businesses in which they are
engaged; and neither the Company nor such subsidiary has any
reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a comparable cost.
8
<PAGE> 9
(xxviii) Each of the Company and its subsidiary
makes and keeps accurate books and records reflecting its
assets and maintains internal accounting controls which
provide reasonable assurance that (A) transactions are
executed in accordance with management's authorization, (B)
transactions are recorded as necessary to permit preparation
of the Company's consolidated financial statements in
accordance with generally accepted accounting principles and
to maintain accountability for the assets of the Company and
its subsidiary, (C) access to the assets of the Company and
its subsidiary is permitted only in accordance with
management's authorization, and (D) the recorded
accountability for assets of the Company and its subsidiary is
compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxix) The Company's subsidiary is not
currently prohibited, directly or indirectly, from paying any
dividends to the Company, from making any other distributions
on such subsidiary's capital stock, from repaying to the
Company any loans or advances to such subsidiary or from
transferring any of such subsidiary's property or assets to
the Company, except as disclosed in the Prospectus.
(xxx) The Company and its subsidiary have
filed all foreign, federal, state and local tax returns that
are required to be filed by them and have paid all taxes shown
as due on such returns as well as all other taxes, assessments
and governmental charges that are due and payable; and no
deficiency with respect to any such return has been assessed
or, to the knowledge of the Company, proposed.
(xxxi) The Company is not, will not become as
a result of the transactions contemplated hereby, and does not
intend to conduct its business in a manner that would cause it
to become, an "investment company" or a company "controlled"
by an "investment company" within the meaning of the
Investment Company Act of 1940.
(xxxii) The Company has not distributed and,
prior to the later to occur of (i) the Time of Delivery and
(ii) completion of the distribution of the Shares, will not
distribute any offering material in connection with the
offering and sale of the Shares other than the Registration
Statement, the Preliminary Prospectus, the Prospectus or other
materials, if any, permitted by the Act.
(xxxiii) The Company has complied with all
provisions of Florida Statutes, Section 517.075, relating to
issuers doing business with Cuba.
(xxxiv) Each of the Company and its subsidiary
has fulfilled its obligations, if any, under the minimum
funding standards of Section 302 of the United States Employee
Retirement Income Security Act of 1974 ("ERISA") and the
regulations and published interpretations thereunder with
respect to each
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<PAGE> 10
"plan" (as defined in ERISA and such regulations and published
interpretations) in which employees of the Company and its
subsidiary are eligible to participate and each such plan is
in compliance in all material respects with the presently
applicable provisions of ERISA and such regulations and
published interpretations, and has not incurred any unpaid
liability to the Pension Benefit Guaranty Corporation (other
than for the payment of premiums in the ordinary course) or to
any such plan under Title IV of ERISA.
(b) REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS.
Each Selling Stockholder, severally, and not jointly, represents and warrants
to, and agrees with, each of the several Underwriters and the Company that:
(i) Such Selling Stockholder has full
right, power and authority to enter into this Agreement and
the Custody Agreement and Power of Attorney (as hereinafter
defined) and to sell, assign, transfer and deliver to the
Underwriters the Shares to be sold by such Selling Stockholder
hereunder.
(ii) Such Selling Stockholder has duly
executed and delivered this Agreement and the Custody
Agreement and Power of Attorney and each constitutes the valid
and binding agreement of such Selling Stockholder enforceable
against such Selling Stockholder in accordance with its terms,
subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws
relating to or affecting the enforcement of creditors' rights
generally and to general equitable principles and, with
respect to this Agreement, except as the enforceability of
rights to indemnity and contribution under this Agreement may
be limited under applicable securities laws or the public
policy underlying such laws.
(iii) No consent, approval, authorization,
order or declaration of or from, or registration,
qualification or filing with, any court or governmental agency
or body is required for the sale of the Shares to be sold by
such Selling Stockholder or the consummation of the
transactions contemplated by this Agreement or the Custody
Agreement and Power of Attorney, except the registration of
such Shares under the Act (which, if the Registration
Statement is not effective as of the time of execution hereof,
shall be obtained as provided in this Agreement) and such as
may be required under state securities or blue sky laws in
connection with the offer, sale and distribution of such
Shares by the Underwriters.
(iv) The sale of the Shares to be sold by
such Selling Stockholder and the performance of this Agreement
and the Custody Agreement and Power of Attorney and the
consummation of the transactions herein and therein
contemplated will not conflict with, or (with or without the
giving of notice or the passage of time or both) result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of
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<PAGE> 11
trust, loan agreement, lease or other agreement or instrument
to which such Selling Stockholder is a party or to which any
of such Selling Stockholder's properties or assets is subject,
nor will such action conflict with or violate any statute,
rule or regulation or any order, judgment or decree of any
court or governmental agency or body having jurisdiction over
such Selling Stockholder or any of such Selling Stockholder's
properties or assets.
(v) Such Selling Stockholder has, and
immediately prior to the First Time of Delivery (as defined in
Section 4 hereof), such Selling Stockholder will have, good
and valid title to the Shares to be sold by such Selling
Stockholder hereunder, free and clear of all liens, security
interests, pledges, charges, encumbrances, defects,
stockholders' agreements, voting trusts, equities or claims of
any nature whatsoever; and, upon delivery of such Shares
against payment therefor as provided herein, good and valid
title to such Shares, free and clear of all liens, security
interests, pledges, charges, encumbrances, defects,
stockholders' agreements, voting trusts, equities or claims of
any nature whatsoever, will pass to the several Underwriters.
(vi) Such Selling Stockholder has not (A)
taken, directly or indirectly, any action designed to cause or
result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the
sale or resale of the Shares or (B) since the filing of the
Registration Statement (1) sold, bid for, purchased or paid
anyone any compensation for soliciting purchases of, the
Shares or (2) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other
securities of the Company.
(vii) When any Preliminary Prospectus was
filed with the Commission it (A) contained all statements
required to be stated therein in accordance with, and complied
in all material respects with the requirements of, the Act and
the rules and regulations of the Commission thereunder, and
(B) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared
effective and at the First Time of Delivery, it (A) contained
or will contain all statements required to be stated therein
in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the
rules and regulations of the Commission thereunder and (B) did
not or will not include any untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any
amendment or supplement thereto is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectus or such
amendment or supplement is not required to be so filed, when
the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is
declared effective), and at the First Time of Delivery, the
Prospectus, as amended or supplemented at
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<PAGE> 12
any such time, (A) contained or will contain all statements
required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements
of, the Act and the rules and regulations of the Commission
thereunder and (B) did not or will not include any untrue
statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading. The foregoing provisions of this paragraph (iii)
do not apply to statements or omissions made in any
Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with
written information furnished to the Company by any
Underwriter through the Representatives specifically for use
therein.
In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Internal Revenue Code of 1986, as amended,
with respect to the transactions herein contemplated, each of the Selling
Stockholders agrees to deliver to the Representatives prior to or at the First
Time of Delivery (as hereinafter defined) a properly completed and executed
United States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
Each of the Selling Stockholders represents and warrants that
certificates in negotiable form representing all of the Shares to be sold by
such Selling Stockholder hereunder have been placed in custody with
____________________________ (the "Custodian") for delivery under this
Agreement pursuant to a Custody Agreement and Power of Attorney (the "Custody
Agreement and Power of Attorney") executed by each of the Selling Stockholders
appointing __________________ and ___________________________ as agents and
attorneys-in-fact (the "Attorneys-in-Fact") with authority to execute and
deliver this Agreement on behalf of such Selling Stockholder, to determine the
purchase price to be paid by the Underwriters to the Selling Stockholders as
provided in Section 2 hereof, to authorize the delivery of the Shares to be
sold by such Selling Stockholder hereunder and otherwise to act on behalf of
such Selling Stockholder in connection with the transactions contemplated by
this Agreement and the Custody Agreement and Power of Attorney.
Each of the Selling Stockholders specifically agrees that the Shares
represented by the certificates held in custody for such Selling Stockholder
under the Custody Agreement and Power of Attorney are subject to the interests
of the Underwriters hereunder, and that the arrangements made by such Selling
Stockholder for such custody, and the appointment by such Selling Stockholder
of the Attorneys-in-Fact by the Custody Agreement and Power of Attorney, are
irrevocable. Each of the Selling Stockholders specifically agrees that the
obligations of the Selling Stockholders hereunder shall not be terminated by
operation of law, whether by the death or incapacity of any individual Selling
Stockholder or, in the case of an estate or trust, by the death or incapacity
of any executor or trustee or the termination of such estate or trust, or in
the case of a partnership or corporation, by the dissolution of such
partnership or corporation, or by the occurrence of any other event.
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<PAGE> 13
2. PURCHASE AND SALE OF SHARES. Subject to the terms and
conditions herein set forth, (a) the Company and each Selling Stockholder
agree, severally and not jointly, to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Company and each Selling Stockholder, at a purchase price of $_________ per
share, the number of Firm Shares (to be adjusted by the Representatives so as
to eliminate fractional shares) determined by multiplying the aggregate number
of Shares to be sold by the Company and the Selling Stockholders as set forth
opposite their respective names in Schedule II hereto by a fraction, the
numerator of which is the aggregate number of Firm Shares to be purchased by
such Underwriter as set forth opposite the name of such Underwriter in Schedule
I hereto, and the denominator of which is the aggregate number of Firm Shares
to be purchased by the Underwriters from the Company and the Selling
Stockholders hereunder and (b) in the event and to the extent that the
Underwriters shall exercise the election to purchase Optional Shares as
provided below, the Company and each Selling Stockholder agree to issue and
sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and each Selling
Stockholder, at the purchase price per share set forth in clause (a) of this
Section 2, that portion of the number of Optional Shares as to which such
election shall have been exercised (to be adjusted by the Representatives so as
to eliminate fractional shares and which shall be proportionate among the
Company and each of the Selling Stockholders based on the number of Optional
Shares proposed to be sold by each of them) determined by multiplying such
number of Optional Shares by a fraction, the numerator of which is the maximum
number of Optional Shares that such Underwriter is entitled to purchase as set
forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the maximum number of the Optional Shares that all of
the Underwriters are entitled to purchase hereunder.
The Company and each of the Selling Stockholders hereby severally
grant to the Underwriters the right to purchase at their election in whole or
in part from time to time up to that number of Optional Shares set forth
opposite their respective names in Schedule II hereto, at the purchase price
per share set forth in clause (a) in the paragraph above for the sole purpose
of covering over-allotments in the sale of Firm Shares. Any such election to
purchase Optional Shares may be exercised by written notice from the
Representatives to the Company and the Attorneys-in-Fact, given from time to
time within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by the
Representatives but in no event earlier than the First Time of Delivery (as
hereinafter defined) or, unless the Representatives, the Company and the
Attorneys-in-Fact otherwise agree in writing, earlier than two or later than
ten business days after the date of such notice. In the event the
Representatives elect to purchase all or a portion of the Optional Shares, the
Company and each of the Selling Stockholders agree to furnish or cause to be
furnished to the Representatives the certificates, letters and opinions, and to
satisfy all conditions, set forth in Section 7 hereof at each Subsequent Time
of Delivery (as hereinafter defined).
3. OFFERING BY THE UNDERWRITERS. Upon the authorization by the
Representatives of the release of the Shares, the several Underwriters propose
to offer the Shares for sale upon the terms and conditions disclosed in the
Prospectus.
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<PAGE> 14
4. DELIVERY OF SHARES; CLOSING. Certificates in definitive form
for the Shares to be purchased by each Underwriter hereunder, and in such
denominations and registered in such names as The Robinson-Humphrey Company,
Inc. may request upon at least 48 hours' prior notice to the Company, shall be
delivered by or on behalf of the Company and the Selling Stockholders to the
Representatives for the account of such Underwriter, against payment by such
Underwriter on its behalf of the purchase price therefor by official bank check
or checks (payable in next day funds) drawn on an Atlanta, Georgia bank,
payable to the order of the Company and the Custodian, as their interests may
appear, in next day available funds. The closing of the sale and purchase of
the Shares shall be held at the offices of Sayles & Lidji, P.C., 4400
Renaissance Tower, 1201 Elm Street, Dallas, Texas 75270, except that physical
delivery of such certificates shall be made at the office of The Depository
Trust Company, 55 Water Street, New York, New York 10041. The time and date of
such delivery and payment shall be, with respect to the Firm Shares, at 10:00
am., Eastern Daylight Time, on ____________________, 1996 and, with respect to
the Optional Shares, at 10:00 a.m., Eastern Daylight Time, on the date
specified by the Representatives in the written notice given by the
Representatives of the Underwriters' election to purchase all or part of such
Optional Shares, or at such other time and date as the Representatives, the
Company and the Attorneys-in-Fact may agree upon in writing. Such time and
date for delivery of the Firm Shares is herein called the "First Time of
Delivery," such time and date for delivery of any Optional Shares, if not the
First Time of Delivery, is herein called a "Subsequent Time of Delivery," and
each such time and date for delivery is herein called a "Time of Delivery." The
Company will make such certificates available for checking and packaging at
least 24 hours prior to each Time of Delivery at the office of The Depository
Trust Company, 55 Water Street, New York, New York 10041 or at such other
location in New York, New York specified by the Representatives in writing at
least 48 hours prior to such Time of Delivery.
5. (a) COVENANTS OF THE COMPANY. The Company covenants and
agrees with each of the Underwriters:
(i) If the Registration Statement has been
declared effective prior to the execution and delivery of this
Agreement, the Company will file the Prospectus with the
Commission pursuant to and in accordance with subparagraph (1)
(or, if applicable and if consented to by the Representatives,
subparagraph (4)) of Rule 424(b) not later than the earlier of
(A) the second business day following the execution and
delivery of this Agreement or (B) the fifth business day after
the date on which the Registration Statement is declared
effective. The Company will advise the Representatives
promptly of any such filing pursuant to Rule 424(b).
(ii) The Company will not file with the
Commission the prospectus or the amendment referred to in the
second sentence of Section 1(a)(i) hereof, any amendment or
supplement to the Prospectus or any amendment to the
Registration Statement unless the Representatives have
received a reasonable period of time to review any such
proposed amendment or supplement and consented to the filing
thereof and will use its best efforts to cause any such
amendment to the Registration Statement to be declared
effective as promptly as possible. Upon the request of the
Representatives or counsel for the
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<PAGE> 15
Underwriters, the Company will promptly prepare and file with
the Commission, in accordance with the rules and regulations
of the Commission, any amendments to the Registration
Statement or amendments or supplements to the Prospectus
that may be necessary or advisable in connection with the
distribution of the Shares by the several Underwriters and
will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective as promptly as
possible. If required, the Company will file any amendment or
supplement to the Prospectus with the Commission in the manner
and within the time period required by Rule 424(b) under the
Act. The Company will advise the Representatives, promptly
after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed
or declared effective or the Prospectus or any amendment or
supplement thereto has been filed and will provide evidence to
the Representatives of each such filing or effectiveness.
(iii) The Company will advise the
Representatives promptly after receiving notice or obtaining
knowledge of (A) the issuance by the Commission of any stop
order suspending the effectiveness of the Registration
Statement or any part thereof or any order preventing or
suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (B) the
suspension of the qualification of the Shares for offer or
sale in any jurisdiction or of the initiation or threatening
of any proceeding for any such purpose, (C) any request made
by the Commission or any securities authority of any other
jurisdiction for amending the Registration Statement, for
amending or supplementing the Prospectus or for additional
information or (D) any threat by the Commission or any such
securities authority to initiate proceedings for issuance of
such stop order or other order preventing or suspending the
use of any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto. The Company will use its
best efforts to prevent the issuance of any such stop order or
other order and, if any such stop order or other order is
issued, to obtain the withdrawal thereof as promptly as
possible.
(iv) If the delivery of a prospectus
relating to the Shares is required under the Act at any time
prior to the expiration of nine months after the date of the
Prospectus and if at such time any events have occurred as a
result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit
to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading, or if for any reason it is
necessary during such same period to amend or supplement the
Prospectus to comply with the Act or the rules and regulations
thereunder, the Company will promptly notify the
Representatives and upon the request of the Representatives
(but at the Company's expense) prepare and file with the
Commission an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance
and will furnish without charge to each Underwriter and to any
dealer in securities as many copies of such amended or
supplemented Prospectus as the Representatives may from time
to time reasonably request. If the delivery of a prospectus
relating to the
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<PAGE> 16
Shares is required under the Act at any time nine months or
more after the date of the Prospectus, upon the request of the
Representatives but at the expense of the Underwriters, the
Company will prepare and deliver to the Underwriters as many
copies as the Representatives may request of an amended
or supplemented Prospectus complying with Section 10(a)(3) of
the Act. Neither the Representatives' consent to, nor the
Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth
in Section 7.
(v) The Company promptly from time to time
will take such action as the Representatives may reasonably
request to qualify the Shares for offering and sale under the
securities or blue sky laws of such jurisdictions as the
Representatives may request and will continue such
qualifications in effect for as long as may be necessary to
complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent
to service of process in any jurisdiction.
(vi) The Company will promptly provide the
Representatives, without charge, (A) four manually executed
copies of the Registration Statement as originally filed with
the Commission and of each amendment thereto, each accompanied
by all exhibits thereto, (B) for each other Underwriter a
conformed copy of the Registration Statement as originally
filed and of each amendment thereto, without exhibits, and (C)
so long as a prospectus relating to the Shares is required to
be delivered under the Act, as many copies of each Preliminary
Prospectus or the Prospectus or any amendment or supplement
thereto as the Representatives may reasonably request.
(vii) As soon as practicable, but in any
event not later than the last day of the thirteenth month
after the effective date of the Registration Statement, the
Company will make generally available to its security holders
an earnings statement of the Company and its subsidiary, if
any, covering a period of at least 12 months beginning after
the effective date of the Registration Statement (which need
not be audited) complying with Section 11(a) of the Act and
the rules and regulations thereunder.
(viii) During the period beginning from the
date hereof and continuing to and including the date 180 days
after the date of the Prospectus, the Company will not,
without the prior written consent of the Representatives,
offer, pledge, issue, sell, contract to sell, grant any option
for the sale of, or otherwise dispose of (or announce any
offer, pledge, sale, grant of an option to purchase or other
disposition), directly or indirectly, any shares of Common
Stock or securities convertible into, exercisable or
exchangeable for, shares of Common Stock, except as provided
in Section 2 and except for the issuance of Common Stock upon
the exercise of stock options or warrants outstanding on the
date of this Agreement to the extent that such stock options
or warrants are disclosed in the Prospectus.
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<PAGE> 17
(ix) During a period of five years from the
effective date of the Registration Statement, the Company will
furnish to the Representatives and, upon request, to each of
the other Underwriters, without charge, (A) copies of all
reports or other communications (financial or other) furnished
to stockholders, (B) as soon as they are available, copies of
any reports and financial statements furnished to or filed
with the Commission or any national securities exchange, and
(C) such additional information concerning the business and
financial condition of the Company and its subsidiary, if any,
as the Representatives may reasonably request.
(x) Neither the Company nor any of its
officers, directors or affiliates will (A) take, directly or
indirectly, prior to the termination of the underwriting
syndicate contemplated by this Agreement, any action designed
to cause or to result in, or that might reasonably be expected
to constitute, the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or
resale of any of the Shares, (B) sell, bid for, purchase or
pay anyone any compensation for soliciting purchases of, the
Shares or (C) pay or agree to pay to any person any
compensation for soliciting another to purchase any other
securities of the Company.
(xi) The Company will apply the net
proceeds received by it from the offering in the manner set
forth under "Use of Proceeds" in the Prospectus.
(xii) The Company will cause the Shares to
be listed on the Nasdaq National Market at each Time of
Delivery.
(xiii) If at any time during the period
beginning on the date the Registration Statement becomes
effective and ending on the later of (A) the date 30 days
after such effective date and (B) the date that is the earlier
of (1) the date on which the Company first files with the
Commission a Quarterly Report on Form 10-Q after such
effective date and (2) the date on which the Company first
issues a quarterly financial report to stockholders after such
effective date, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in the
reasonable opinion of the Representatives the market price of
the Common Stock has been or is likely to be materially
affected (regardless of whether such rumor, publication or
event necessitates an amendment of or supplement to the
Prospectus), the Company will, after written notice from the
Representatives advising the Company to the effect set forth
above, forthwith prepare, consult with the Representatives
concerning the substance of, and disseminate a press release
or other public statement, reasonably satisfactory to the
Representatives, responding to or commenting on such rumor,
publication or event.
(b) COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling
Stockholder covenants and agrees with each of the Underwriters:
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<PAGE> 18
(i) During the period beginning from the
date hereof and continuing to and including the date 180 days
after the date of the Prospectus, such Selling Stockholder
will not, without the prior written consent of the
Representatives, offer, pledge, issue, sell, contract to sell,
grant any option for the sale of, or otherwise dispose of (or
announce any offer, pledge, sale, grant of an option to
purchase or other disposition), directly or indirectly, any
shares of Common Stock or securities convertible into,
exercisable or exchangeable for, shares of Common Stock,
except as provided in Section 2.
(ii) Such Selling Stockholder will not (A)
take, directly or indirectly, prior to the termination of the
underwriting syndicate contemplated by this Agreement, any
action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to
facilitate the sale or resale of any of the Shares, (B) sell,
bid for, purchase or pay anyone any compensation for
soliciting purchases of, the Shares or (C) pay to or agree to
pay any person any compensation for soliciting another to
purchase any other securities of the Company.
6. EXPENSES. The Company and each of the Selling
Stockholders will pay all costs and expenses incident to the performance of
their respective obligations under this Agreement (in such proportion as may be
agreed upon among them), whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated pursuant to Section 10 hereof,
including, without limitation, all costs and expenses incident to (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and, if applicable,
filing of the Registration Statement (including all amendments thereto), any
Preliminary Prospectus, the Prospectus and any amendments and supplements
thereto, this Agreement and any blue sky memoranda; (ii) the delivery of copies
of the foregoing documents to the Underwriters; (iii) the filing fees of the
Commission and the National Association of Securities Dealers, Inc. relating to
the Shares; (iv) the preparation, issuance and delivery to the Underwriters of
any certificates evidencing the Shares, including transfer agent's and
registrar's fees; (v) the qualification of the Shares for offering and sale
under state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto; (vi) listing of
the Shares on the Nasdaq National Market and (vii) any expenses for travel,
lodging and meals incurred by the Company and any of its officers, directors
and employees in connection with any meetings with prospective investors in the
Shares. In addition, each Selling Stockholder will pay all costs and expenses
incident to (i) the fees, disbursements and expenses of counsel for such
Selling Stockholder, and (ii) the sale and delivery of the Shares to be sold by
such Selling Stockholder to the Underwriters hereunder. It is understood,
however, that, except as provided in this Section, Section 8 and Section 10
hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, stock transfer taxes on resale of any of
the Shares by them, and any advertising expenses relating to the offer and sale
of the Shares.
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<PAGE> 19
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations
of the Underwriters hereunder to purchase and pay for the Shares to be
delivered at each Time of Delivery shall be subject, in their discretion, to
the accuracy of the representations and warranties of the Company and the
Selling Stockholders contained herein as of the date hereof and as of such Time
of Delivery, to the accuracy of the statements of Company officers made
pursuant to the provisions hereof, to the performance by the Company and the
Selling Stockholders of their respective covenants and agreements hereunder,
and to the following additional conditions precedent:
(a) If the registration statement as amended to date has
not become effective prior to the execution of this Agreement, such
registration statement shall have been declared effective not later
than 11:00 am., Eastern Daylight Time, on the date of this Agreement
or such later date and/or time as shall have been consented to by the
Representatives in writing. If required, the Prospectus and any
amendment or supplement thereto shall have been filed with the
Commission pursuant to Rule 424(b) within the applicable time period
prescribed for such filing and in accordance with Section 5(a) of this
Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and
no proceedings for that purpose shall have been instituted, threatened
or, to the best knowledge of the Company and the Representatives,
contemplated by the Commission; and all requests for additional
information on the part of the Commission shall have been complied
with to the reasonable satisfaction of the Representatives.
(b) Powell, Goldstein, Frazer & Murphy, counsel for the
Underwriters, shall have furnished to the Representatives such opinion
or opinions, dated such Time of Delivery, with respect to the
incorporation of the Company, the validity of the Shares being
delivered at such Time of Delivery, the Registration Statement, the
Prospectus, and other related matters as the Representatives may
reasonably request, and the Company shall have furnished to such
counsel prior to such Time of Delivery such documents as they request
for the purpose of enabling them to pass upon such matters.
(c) The Representatives shall have received an opinion,
dated such Time of Delivery, of Sayles & Lidji, P.C., counsel for the
Company, in form and scope satisfactory to the Representatives and
counsel for the Underwriters, to the effect that:
(i) The Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation
and has the corporate power and authority to own or lease its
properties and conduct its business as described in the
Registration Statement and the Prospectus and to enter into
this Agreement and perform its obligations hereunder. The
Company is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of each
other jurisdiction in which it owns or leases property, or
conducts any business, so as to require such qualification,
except where the failure to so qualify would not have a
material adverse effect on the financial position, results of
operations or business of the Company and its subsidiary.
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<PAGE> 20
(ii) The subsidiary of the Company has been
duly incorporated, is validly existing as a corporation in
good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to own
or lease its properties and conduct its business as described
in the Registration Statement and the Prospectus. Such
subsidiary is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of each
other jurisdiction in which it owns or leases property, or
conducts any business, so as to require such qualification,
except where the failure to so qualify would not have a
material adverse effect on the financial position, results of
operations or business of the Company and its subsidiary.
(iii) The Company's authorized, issued and
outstanding capital stock is as set forth in the Prospectus
under the caption "Capitalization." All of the issued shares
of capital stock of the Company (including the Shares to be
sold by the Selling Stockholders) have been duly authorized
and validly issued, are fully paid and nonassessable and
conform to the description of the Common Stock contained in
the Prospectus. None of the issued shares of capital stock of
the Company or its predecessors or of its subsidiary has been
issued or is owned or held in violation of any preemptive
rights of stockholders, and no person or entity (including any
holder of outstanding shares of capital stock of the Company
or its subsidiary) has any preemptive or other rights to
subscribe for any of the Shares.
(iv) All of the ____________ issued shares
of capital stock of the Company's subsidiary have been duly
authorized and validly issued, are fully paid and
nonassessable, and of such shares ____________ are owned
beneficially by the Company free and clear of all liens,
security interests, pledges, charges, encumbrances,
stockholders' agreements, voting trusts, defects, equities or
claims of any nature whatsoever and ___________ are owned
beneficially of record by Philip W. Wise. Other than Cyclix
Engineering Corporation, the Company does not own, directly or
indirectly, any capital stock or other equity securities of
any other corporation or any ownership interest in any
partnership, joint venture or other association except as
disclosed in the Prospectus.
(v) Except as disclosed in the Prospectus,
there are no outstanding (A) securities or obligations of the
Company or its subsidiary convertible into or exchangeable for
any capital stock of the Company or such subsidiary, (B)
warrants, rights or options to subscribe for or purchase from
the Company or such subsidiary any such capital stock or any
such convertible or exchangeable securities or obligations, or
(C) obligations of the Company or such subsidiary to issue any
shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or
options.
(vi) The Shares to be issued and sold by
the Company have been duly authorized and, when issued and
delivered against payment therefor as provided herein, will be
validly issued and fully paid and nonassessable and will
conform to the description of the Common Stock contained in
the Prospectus; the
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certificates evidencing the Shares comply with all applicable
requirements of Delaware law; the Shares have been listed on
the Nasdaq National Market.
(vii) Except as disclosed in the Prospectus,
there are no contracts, agreements or understandings known to
such counsel between the Company and any person granting such
person the right to require the Company to file a registration
statement under the Act with respect to any securities of the
Company owned or to be owned by such person or to require the
Company to include such securities in the securities
registered pursuant to the Registration Statement (unless any
such right has been effectively waived) or in any securities
being registered pursuant to any other registration statement
filed by the Company under the Act.
(viii) All offers and sales of the Company's
capital stock prior to the date hereof were at all relevant
times duly registered under the Act or exempt from the
registration requirements of the Act by reason of Sections
3(b), 4(2) or 4(6) thereof and were duly registered or the
subject of an available exemption from the registration
requirements of the applicable state securities or blue sky
laws.
(ix) Neither the Company nor its subsidiary
is, or with the giving of notice or passage of time or both,
would be, in violation of its Certificate of Incorporation or
Bylaws or in default under any material indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or
instrument to which the Company or such subsidiary is a party
or to which any of their respective properties or assets is
subject.
(x) The issue and sale of the Shares being
issued at such Time of Delivery and the performance of this
Agreement and the consummation of the transactions herein
contemplated will not conflict with, or (with or without the
giving of notice or the passage of time or both) result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument
to which the Company or such subsidiary is a party or to which
any of their respective properties or assets is subject, nor
will such action conflict with or violate any provision of the
Certificate of Incorporation or Bylaws of the Company or of
its subsidiary or any statute, rule or regulation or any
order, judgment or decree of any court or governmental agency
or body having jurisdiction over the Company or of its
subsidiary or any of their respective properties or assets.
(xi) Any material real property and
buildings held under lease by the Company or its subsidiary
are held by the Company or such subsidiary under valid,
subsisting and enforceable leases with such exceptions as are
disclosed in the Prospectus or are not material and do not
interfere with the use made and proposed to be made of such
property and buildings by the Company or such subsidiary.
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<PAGE> 22
(xii) No consent, approval, authorization,
order or declaration of or from, or registration,
qualification or filing with, any court or governmental agency
or body is required for the issue and sale of the Shares or
the consummation of the transactions contemplated by this
Agreement, except the registration of the Shares under the Act
and such as may be required under state securities or blue sky
laws in connection with the offer, sale and distribution of
the Shares by the Underwriters.
(xiii) To such counsel's knowledge and other
than as disclosed in or contemplated by the Prospectus, there
is no litigation, arbitration, claim, proceeding (formal or
informal) or investigation pending or threatened (or any basis
therefor) in which the Company or its subsidiary is a party or
of which any of their respective properties or assets is the
subject which, if determined adversely to the Company or such
subsidiary, would individually or in the aggregate have a
material adverse effect on the financial position, results of
operations or business of the Company and its subsidiary; and,
to such counsel's knowledge, neither the Company nor its
subsidiary is in violation of, or in default with respect to,
any statute, rule, regulation, order, judgment or decree,
except as described in the Prospectus, nor is the Company or
such subsidiary required to take any action in order to avoid
any such violation or default.
(xiv) This Agreement has been duly
authorized, executed and delivered by the Company.
(xv) The Registration Statement and the
Prospectus and each amendment or supplement thereto (other
than the financial statements and related schedules therein,
as to which such counsel need express no opinion), as of their
respective effective or issue dates, complied as to form in
all material respects with the requirements of the Act and the
rules and regulations thereunder. The descriptions in the
Registration Statement and the Prospectus of statutes, legal
and governmental proceedings or contracts and other documents
are accurate and fairly present the information required to be
shown; and such counsel do not know of any statutes or legal
or governmental proceedings required to be described in the
Registration Statement or Prospectus that are not described as
required or of any contracts or documents of a character
required to be described in the Registration Statement or
Prospectus or to be filed as exhibits to the Registration
Statement which are not described and filed as required.
(xvi) The Registration Statement is
effective under the Act; any required filing of the Prospectus
pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement or
any part thereof has been issued and, to such counsel's
knowledge, no proceedings for that purpose have been
instituted or threatened or are contemplated by the
Commission.
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<PAGE> 23
(xvii) The Company is not, and will not be as
a result of the consummation of the transactions contemplated
by this Agreement, an "investment company," or a company
"controlled" by an "investment company," within the meaning of
the Investment Company Act of 1940.
Such counsel shall also state that they have no reason to believe that
the Registration Statement, or any further amendment thereto made prior to such
Time of Delivery, on its effective date and as of such Time of Delivery,
contained or contains any untrue statement of a material fact or omitted or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus, or any
amendment or supplement thereto made prior to such Time of Delivery, as of its
issue date and as of such Time of Delivery, contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading (provided that such
counsel need express no belief regarding the financial statements and related
schedules and other financial data contained in the Registration Statement, any
amendment thereto, or the Prospectus, or any amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
application of laws of any jurisdiction other than the states of Delaware and
Texas or the United States, to the extent satisfactory in form and scope to
counsel for the Underwriters, upon the opinion of local counsel, provided that
such counsel states such counsel believes that the Underwriters are justified
in relying upon such opinion and copies of such opinion are delivered to the
Representatives and counsel for the Underwriters.
(d) The Representatives shall have received an opinion, dated such
Time of Delivery, of [SAYLES & LIDJI, P.C.], counsel for each of the Selling
Stockholders in form and scope satisfactory to the Representatives and counsel
for the Underwriters, to the effect that:
(i) A Custody Agreement and Power of Attorney has
been duly executed and delivered by such Selling Stockholder, each of
which is enforceable against such Selling Stockholder in accordance
with its terms subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws relating
to or affecting the enforcement of creditors' rights generally and to
general equitable principles.
(ii) This Agreement has been duly executed and
delivered by or on behalf of such Selling Stockholder; the sale of the
Shares to be sold by such Selling Stockholder at such Time of Delivery
and the performance of this Agreement and the Custody Agreement and
Power of Attorney and the consummation of the transactions herein and
therein contemplated will not conflict with, or (with or without the
giving of notice or the passage of time or both) result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, the Certificate of Incorporation and Bylaws of such
Selling Stockholder, if such Selling Stockholder is a corporation, or
any indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which
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<PAGE> 24
such Selling Stockholder is a party or to which any of such Selling
Stockholder's properties or assets is subject, nor will such action
conflict with or violate any statute, rule or regulation or any order,
judgment or decree of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or any of such Selling
Stockholder's properties or assets.
(iii) No consent, approval, authorization, order or
declaration of or from, or registration, qualification or filing with,
any court or governmental agency or body is required for the issue and
sale of the Shares being sold by such Selling Stockholder or the
consummation of the transactions contemplated by this Agreement or the
Custody Agreement and Power of Attorney, except the registration of
such Shares under the Act and such as may be required under state
securities or blue sky laws in connection with the offer, sale and
distribution of such Shares by the Underwriters.
(iv) Such Selling Stockholder has, and immediately
prior to such Time of Delivery such Selling Stockholder will have,
good and valid title to the Shares to be sold by such Selling
Stockholder hereunder, free and clear of all liens, security
interests, pledges, charges, encumbrances, defects, stockholders'
agreements, voting trusts, equities or claims of any nature
whatsoever; and, upon delivery of such Shares against payment therefor
as provided herein, good and valid title to such Shares, free and
clear of all liens, security interests, pledges, charges,
encumbrances, defects, stockholders' agreements, voting trusts,
equities or claims of any nature whatsoever, will pass to the several
Underwriters.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of responsible
officers of the Company, the Selling Stockholders and public officials and, as
to matters involving the application of laws of any jurisdiction other than the
states of Delaware and Texas or the United States, to the extent satisfactory
in form and scope to counsel for the Underwriters, upon the opinion of local
counsel, provided that such counsel states such counsel believes that the
Underwriters are justified in relying upon such opinion and copies of such
opinion are delivered to the Representatives and counsel for the Underwriters.
(e) The Representatives shall have received from KPMG Peat Marwick
LLP letters dated, respectively, the date hereof (or, if the Registration
Statement has been declared effective prior to the execution and delivery of
this Agreement, dated such effective date and the date of this Agreement) and
each Time of Delivery, in form and substance satisfactory to the
Representatives. In the event that the letters referred to in this Section
7(e) set forth any changes, decreases or increases in amounts reflected in the
financial statements included in the Prospectus, it shall be a further
condition to the obligations of the Underwriters that (i) such letters shall be
accompanied by a written explanation by the Company as to the significance
thereof, unless the Representatives deem such explanation unnecessary, and (ii)
such changes, decreases or increases do not, in the sole judgment of the
Representatives, make it impracticable or inadvisable to proceed with the
purchase, sale and delivery of the Shares being delivered at such Time of
Delivery as contemplated by the Registration Statement, as amended as of the
date of such letter.
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<PAGE> 25
(f) Since the date of the latest audited financial statements
included in the Prospectus, neither the Company nor its subsidiary shall have
sustained (i) any loss or interference with their respective businesses from
fire, explosion, flood, hurricane or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order or
decree, otherwise than as disclosed in or contemplated by the Prospectus, or
(ii) any change, or any development involving a prospective change (including
without limitation a change in management or control of the Company), in or
affecting the position (financial or otherwise), results of operations, net
worth or business prospects of the Company and its subsidiary, otherwise than
as disclosed in or contemplated by the Prospectus, the effect of which, in
either such case, is in the sole judgment of the Representatives so material
and adverse as to make it impracticable or inadvisable to proceed with the
purchase, sale and delivery of the Shares being delivered at such Time of
Delivery as contemplated by the Registration Statement, as amended as of the
date hereof.
(g) Subsequent to the date hereof there shall not have occurred
any of the following: (i) any suspension or limitation in trading in securities
generally on the New York Stock Exchange, or any setting of minimum prices for
trading on such exchange, or in the Common Stock by the Commission or the
Nasdaq National Market; (ii) a moratorium on commercial banking activities in
New York declared by either federal or state authorities; or (iii) any outbreak
or escalation of hostilities involving the United States, declaration by the
United States of a national emergency or war or any other national or
international calamity or emergency if the effect of any such event specified
in this clause (iii) in the sole judgment of the Representatives makes it
impracticable or inadvisable to proceed with the purchase, sale and delivery of
the Shares being delivered at such Time of Delivery as contemplated by the
Registration Statement, as amended as of the date hereof.
(h) The Company shall have furnished to the Representatives at
such Time of Delivery certificates of officers of the Company and certificates
of the Selling Stockholders, satisfactory to the Representatives and counsel to
the Underwriters, as to the accuracy of the representations and warranties of
the Company and such Selling Stockholders herein at and as of such Time of
Delivery, as to the performance by the Company and such Selling Stockholders of
all of their respective obligations hereunder to be performed at or prior to
such Time of Delivery, and as to such other matters as the Representatives may
reasonably request, and the Company shall have furnished or caused to be
furnished certificates as to the matters set forth in subsections (a) and (f)
of this Section 7, and as to such other matters as the Representatives may
reasonably request.
(i) The Shares shall be listed on the Nasdaq National Market.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement made by the Company in Section
1(a) of this Agreement; (ii) any untrue statement or alleged untrue statement
of any material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary
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<PAGE> 26
Prospectus or the Prospectus or any amendment or supplement thereto, or (B) any
application or other document, or any amendment or supplement thereto, executed
by the Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the Shares under the
securities or blue sky laws thereof or filed with the Commission or any
securities association or securities exchange (each an "Application"); or (iii)
the omission or alleged omission to state in the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment
or supplement thereto, or any Application a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating, defending against or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or any amendment thereto, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto or any Application in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives expressly for use
therein. The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or proceeding (or related cause
of action or portion thereof) in respect of which indemnification may be sought
hereunder (whether or not such Underwriter is a party to such claim, action,
suit or proceeding), unless such settlement, compromise or consent includes an
unconditional release of such Underwriter from all liability arising out of
such claim, action, suit or proceeding (or related cause of action or portion
thereof).
(b) Each Selling Stockholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement made by such Selling
Stockholder in Section 1(b) of this Agreement; or (ii) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or any Application or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action; provided,
however, that no such Selling Stockholder shall be liable in any such case to
the extent that any such loss, claim, damage, liability or action arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto or any Application in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives expressly for use therein. No Selling Stockholder will,
without the prior written consent of each Underwriter, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim,
action,
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<PAGE> 27
suit or proceeding (or related cause of action or portion thereof) in respect
of which indemnification may be sought hereunder (whether or not such
Underwriter is a party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of such
Underwriter from all liability arising out of such claim, action, suit or
proceeding (or related cause of action or portion thereof).
(c) Each Underwriter, severally but not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder against
any losses, claims, damages or liabilities to which the Company or any Selling
Stockholder may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or any Application or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by
such Underwriter through the Representatives expressly for use therein; and
will reimburse the Company and each Selling Stockholder for any legal or other
expenses reasonably incurred by the Company or such Selling Stockholder in
connection with investigating or defending any such loss, claim, damage,
liability or action.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party); provided, however, that if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to it or other indemnified parties which are different
from or additional to those available to the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such
action on behalf of such indemnified party and such indemnified party shall
have the right to select separate counsel to defend such action on behalf of
such indemnified party. After such notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
or (ii) the indemnifying party has authorized the employment of counsel
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<PAGE> 28
for the indemnified party at the expense of the indemnifying party. Nothing in
this Section 8(d) shall preclude an indemnified party from participating at its
own expense in the defense of any such action so assumed by the indemnifying
party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Selling Stockholders on
the one hand and the Underwriters on the other from the offering of the Shares.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (d) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company and the Selling Stockholders on the one
hand and the Underwriters on the other in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and commissions received
by the Underwriters. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Stockholders on
the one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Selling Stockholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (e) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this subsection (e). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
their respective underwriting obligations and not joint.
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<PAGE> 29
(f) The obligations of the Company and the Selling Stockholders
under this Section 8 shall be in addition to any liability which the Company or
such Selling Stockholders may otherwise have and shall extend, upon the same
terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company within the meaning of the Act.
9. DEFAULT OF UNDERWRITERS. (a) If any Underwriter defaults in
its obligation to purchase Shares at a Time of Delivery, the Representatives
may in their discretion arrange for the Representatives or another party or
other parties to purchase such Shares on the terms contained herein. If within
thirty-six (36) hours after such default by any Underwriter the Representatives
do not arrange for the purchase of such Shares, the Company and the Selling
Stockholders shall be entitled to a further period of thirty-six (36) hours
within which to procure another party or other parties satisfactory to the
Representatives to purchase such Shares on such terms. In the event that,
within the respective prescribed periods, the Representatives notify the
Company and the Selling Stockholders that the Representatives have so arranged
for the purchase of such Shares, or the Company and the Selling Stockholders
notify the Representatives that they have so arranged for the purchase of such
Shares, the Representatives or the Company and the Selling Stockholders shall
have the right to postpone a Time of Delivery for a period of not more than
seven days in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus that in the opinion of the
Representatives may thereby be made necessary. The cost of preparing, printing
and filing any such amendments shall be paid for by the Underwriters. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by the
Representatives and the Company and the Selling Stockholders as provided in
subsection (a) above, the aggregate number of such Shares which remains
unpurchased does not exceed one-eleventh of the aggregate number of Shares to
be purchased at such Time of Delivery, then the Company and the Selling
Stockholders shall have the right to require each non-defaulting Underwriter to
purchase the number of Shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have
not been made, but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. TERMINATION. (a) This Agreement may be terminated with
respect to the Firm Shares or any Optional Shares in the sole discretion of the
Representatives by notice to the Company given prior to the First Time of
Delivery or any Subsequent Time of Delivery, respectively, in the event that
(i) any condition to the obligations of the Underwriters set forth in
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<PAGE> 30
Section 7 hereof has not been satisfied, or (ii) the Company or the Selling
Stockholders shall have failed, refused or been unable to deliver the Shares or
to perform all obligations and satisfy all conditions on their respective parts
to be performed or satisfied hereunder at or prior to such Time of Delivery, in
either case other than by reason of a default by any of the Underwriters. If
this Agreement is terminated pursuant to this Section 10(a), the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including counsel fees and disbursements) that shall have been incurred by
them in connection with the proposed purchase and sale of the Shares. Neither
the Company nor any Selling Stockholder shall in any event be liable to any of
the Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by the
Representatives and the Company and the Selling Stockholders as provided in
Section 9(a), the aggregate number of such Shares which remains unpurchased
exceeds one-eleventh of the aggregate number of Shares to be purchased at such
Time of Delivery, or if the Company and the Selling Stockholders shall not
exercise the right described in Section 9(b) to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to a Subsequent Time of Delivery, the
obligations of the Underwriters to purchase and of the Company and the Selling
Stockholders to sell the Optional Shares) shall thereupon terminate, without
liability on the part of any non-defaulting Underwriter, the Company or the
Selling Stockholders, except for the expenses to be borne by the Company, the
Selling Stockholders and the Underwriters as provided in Section 6 hereof and
the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
11. SURVIVAL. The respective indemnities, agreements,
representations, warranties and other statements of the Company, its officers,
the Selling Stockholders and the several Underwriters, as set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person referred to in Section 8(e) or the
Company, any Selling Stockholder or any officer or director or controlling
person of the Company or any Selling Stockholder referred to in Section 8(e),
and shall survive delivery of and payment for the Shares. The respective
agreements, covenants, indemnities and other statements set forth in Sections 6
and 8 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
12. NOTICES. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be mailed, delivered or
telegraphed and confirmed in writing to the Representatives in care of The
Robinson- Humphrey Company, Inc., 3333 Peachtree Road, N.E., Atlanta, Georgia
30326, Attention: Corporate Finance Department (with a copy to Powell,
Goldstein, Frazer & Murphy, 191 Peachtree Street, Atlanta, Georgia 30303,
Attention: G. William Speer); if to any Selling Stockholder shall be sufficient
in all respects if delivered or sent by registered mail to such Selling
Stockholder at its address set forth in the Prospectus; and if sent to the
Company, shall be mailed, delivered or telegraphed and confirmed in writing to
the Company at 2350 Valley View Lane, Dallas, Texas 75234, Attention:
President (with a copy to
30
<PAGE> 31
Sayles and Lidji, P.C., 4400 Renaissance Tower, 1201 Elm Street, Dallas, Texas
75270, Attention: Brian M. Lidji].
13. REPRESENTATIVES. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this
Agreement, and any action under this Agreement taken by the Representatives
jointly or by The Robinson-Humphrey Company, Inc. will be binding upon all the
Underwriters.
14. BINDING EFFECT. This Agreement shall be binding upon, and
inure solely to the benefit of, the Underwriters, the Company and the Selling
Stockholders and to the extent provided in Sections 8 and 10 hereof, the
officers and directors and controlling persons referred to therein and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Shares from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
15. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia without giving
effect to any provisions regarding conflicts of laws.
16. COUNTERPARTS. This Agreement may be executed by any one or
more of the parties hereto in any number of counterparts, each of which shall
be deemed to be an original, but all such counterparts shall together
constitute one and the same instrument.
31
<PAGE> 32
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and
upon the acceptance hereof by The Robinson-Humphrey Company, Inc., on behalf of
each of the Underwriters, this letter will constitute a binding agreement among
the Underwriters, the Company and the Selling Stockholders. It is understood
that the acceptance by the Representatives of this letter on behalf of each of
the Underwriters is pursuant to the authority set forth in the Master Agreement
among Underwriters, a copy of which shall be submitted to the Company for
examination, upon request, but without warranty on the part of the
Representatives as to the authority of the signers thereof.
Very truly yours,
PC SERVICE SOURCE, INC.
By:
-----------------------------------
Mark T. Hilz
President and Chief
Executive Officer
AVERY MORE
COMPUCOM SYSTEMS, INC.
JAY HAFT
By:
----------------------------------
Name:
----------------------------
Attorney-in-Fact
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above at
Atlanta, Georgia.
THE ROBINSON-HUMPHREY COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
COMVEST PARTNERS, INC.
By: The Robinson-Humphrey Company, Inc.
By:
-----------------------------------------
(Authorized Representative)
On behalf of each of the Underwriters
32
<PAGE> 33
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Optional
Shares to Be
Total Purchased if
Number of Firm Maximum
Shares to be Option
Underwriter Purchased Exercised
- ----------- ----------------- --------------------
<S> <C>
The Robinson-Humphrey Company, Inc.
Rauscher Pierce Refsnes, Inc.
ComVest Partners, Inc.
----------------- --------------------
Total. . . . . . . . . . . . . . . . . ================= -------------------
</TABLE>
33
<PAGE> 34
SCHEDULE II
<TABLE>
<CAPTION>
Total Total
Number of Firm Number of Optional
Shares to be Shares to be
Sold Sold
--------------- ------------------
<S> <C> <C>
The Company
[Names of Selling Stockholders]
</TABLE>
34
<PAGE> 35
SCHEDULE III
[LIST OF DIRECTORS, OFFICERS AND OTHER PERSONS SUBJECT TO LOCK-UP]
35
<PAGE> 1
EXHIBIT 10.4
PC SERVICE SOURCE, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I
PURPOSE
1.01. Purpose. The 1996 PC Service Source, Inc. Employee Stock
Purchase Plan (the "Plan") is intended to provide a method whereby employees of
PC Service Source, Inc. and its subsidiary corporations (hereinafter referred
to, unless the context otherwise requires, as "PCSS" or the "Company") will
have an opportunity to acquire a proprietary interest in the Company through
the purchase of up to a total of 100,000 shares of the common stock of the
Company ("Common Stock"). It is the intention of the Company that the Plan
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan
shall be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
ARTICLE II
DEFINITIONS
2.01. Base Pay. "Base Pay" shall mean regular straight-time earnings
excluding payments for overtime, shift premium, bonuses and other special
payments, commissions and other marketing incentive payments.
2.02. Committee. "Committee" shall mean the individuals described
in Article XI.
2.03. Employee. "Employee" means any person who is customarily
employed on a full-time basis by the Company, which shall mean that such person
is regularly scheduled to work not less than 20 hours per week.
2.04. Subsidiary Corporation. "Subsidiary Corporation" shall mean
any present or future corporation which (i) would be a "subsidiary corporation"
of PCSS as that term is defined in Section 424 of the Code and (ii) is
designated as a participant in the Plan by the Committee.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.01. Initial Eligibility. Any employee who has been employed by the
Company continuously since December 31, 1995, or, if not so employed, who
shall have completed one year of employment and shall be employed by the
Company on the date his participation in the Plan is to become effective, other
than any employee who is, or has been within the preceding one-year period,
both a member of the Board of Directors of the Company and an officer of the
Company or an important Subsidiary Corporation, shall be eligible to
participate in Stock Purchase Periods under the Plan which commence on or after
such one-year period has concluded. Notwithstanding the foregoing, the
Committee shall have the right to waive the requirement of employment since
December 31, 1995 or for a one-year period prior to the effective date of
participation in the Plan in any particular case.
3.02. Leave of Absence. For purposes of participation in the Plan, a
person on leave of absence shall be deemed to be an employee for the first 90
days of such leave of absence and such employee's employment shall be deemed to
have terminated at the close of business on the 90th day of such leave of
absence unless such employee shall have returned to regular full-time or
part-time employment (as the case may be) prior to the close of business on
such 90th day. Termination by the Company of any employee's leave of absence,
other than termination of such leave of absence on return to full time or part
time employment, shall terminate an employee's employment for all purposes of
the Plan and shall terminate such employee's participation in the Plan and
right to exercise any option.
3.03. Restrictions on Participation. Notwithstanding any provisions
of the Plan to the contrary, no employee shall be granted an option to
participate in the Plan:
<PAGE> 2
(a) if, immediately after the grant, such employee would own
stock, and/or hold outstanding options to purchase stock,
possessing 5 percent or more of the total combined voting
power or value of all classes of stock of the Company or any
Subsidiary Corporation (for purposes of this paragraph, the
rules of Section 424(d) of the Code shall apply in determining
stock ownership of any employee); or
(b) which permits his rights to purchase stock under all employee
stock purchase plans of the Company to accrue at a rate which
exceeds $25,000 in fair market value of the stock (determined
at the time such option is granted) for each calendar year in
which such option is outstanding.
3.04. Commencement of Participation. An eligible employee may become
a participant by completing an authorization for a payroll deduction on the
form provided by the Company and filing it with the office of the Controller of
the Company on or before the date set therefor by the Committee. Payroll
deductions for a participant shall commence when his authorization for a
payroll deduction becomes effective and shall end on the Termination Date of
the Stock Purchase Period to which such authorization is applicable unless
sooner terminated by the participant as provided in Article VIII.
ARTICLE IV
STOCK PURCHASE PERIODS
4.01. Stock Purchase Periods. The Plan will be implemented by such
number of offers to purchase the Company's Common Stock as the Committee shall
determine, each beginning on such date as the Committee shall determine and
continuing for so long as the Committee shall determine, but in no event longer
than 24 months (such periods being referred to herein as "Stock Purchase
Periods"). As used in the Plan, "Commencement Date" means the date on which
the particular Stock Purchase Period begins, and "Termination Date" means the
date on which the particular Stock Purchase Period terminates.
ARTICLE V
PAYROLL DEDUCTIONS
5.01. Amount of Deduction. At the time a participant files his
authorization for payroll deduction, he shall elect the number of shares of
Common Stock that he wishes to purchase, up to the number offered to him for
the particular Stock Purchase Period. The Company will deduct the purchase
price of the number of shares that each participant elects to purchase from the
participant's paychecks in equal amounts for each pay period between the
election to purchase and the applicable Termination Date.
5.02. Participant's Account. All payroll deductions made for a
participant shall be credited to his account under the Plan. A participant may
not make any separate cash payment into such account except when on leave of
absence and then only as provided in Section 5.04. The Company shall provide
quarterly statements of account balances to each participant.
5.03. Changes in Payroll Deductions. A participant may discontinue
his participation in the Plan as provided in Article VIII, but no other change
can be made during an Stock Purchase Period and, specifically, a participant
may not alter the amount of his payroll deductions for that Stock Purchase
Period.
5.04. Leave of Absence. If a participant goes on a leave of absence,
such participant shall have the right to elect: (a) to withdraw the balance in
his or her account pursuant to Section 7.03, (b) to discontinue contributions
to the Plan but remain a participant in the Plan, or (c) to remain a
participant in the Plan during such leave of absence, authorizing deductions to
be made from payments by the Company to the participant during such leave of
absence and undertaking to make cash payments to the Plan at the end of each
payroll period to the extent that amounts payable by the Company to such
participant are insufficient to meet such participant's authorized Plan
deductions.
<PAGE> 3
ARTICLE VI
GRANTING OF OPTION
6.01. Number of Option Shares. On the Commencement Date of each
Stock Purchase Period, each participating employee shall be deemed to have been
granted an option to purchase a maximum number of shares of the stock of the
Company equal to a certain percentage of the employee's base pay during the
period of the Stock Purchase Period, divided by the option price of the stock
of the Company for such Stock Purchase Period determined as provided in Section
6.02 below. The applicable percentage of base pay shall be determined by the
Committee with respect to each Stock Purchase Period and may vary from one
Stock Purchase Period to another, but shall in no event exceed 10 percent. An
employee's base pay during a Stock Purchase Period shall be determined by
multiplying his normal weekly rate of pay (as in effect on the last day prior
to the Commencement Date of the particular Stock Purchase Period) by 52 or the
hourly rate by 2,080, provided that, in the case of a part time hourly
employee, the employee's base pay during a Stock Purchase Period shall be
determined by multiplying such employee's hourly rate by the number of
regularly scheduled hours of work for such employee during such Stock Purchase
Period.
6.02. Option Price. The option price of stock purchased with payroll
deductions made during such Stock Purchase Period for a participant therein
shall be such price as the Committee shall determine; provided, however, that
such price shall not be lower than 85 percent of the mean of the bid and asked
prices of the stock on the Commencement Date or the nearest prior business day
on which trading occurred on the Nasdaq National Market System. If the Common
Stock of the Company is not admitted to trading on the aforesaid date for which
the closing price of the stock is to be determined, then reference shall be
made to the fair market value of the stock on that date, as determined on such
basis as shall be established or specified for the purpose by the Committee.
ARTICLE VII
EXERCISE OF OPTION
7.01. Automatic Exercise. Unless a participant gives written notice
to the Company as hereinafter provided, his option for the purchase of stock
with payroll deductions made during any Stock Purchase Period will be deemed to
have been exercised automatically on the Termination Date applicable to such
period, for the purchase of the number of full shares of stock which the
accumulated payroll deductions in his account at that time will purchase at the
applicable option price (but not in excess of the number of shares for which
options have been granted to the employee pursuant to Section 6.01), and any
excess funds in his account at that time will be returned to him.
7.02. Early Exercise. At any time after the determination of the
option price for a given Stock Purchase Period and prior to the applicable
Termination Date, a participant may, by written notice to the Company, elect to
exercise all or any part of the options granted to such participant in such
Stock Purchase Period. In the event of such an exercise, the purchase price
for the Common Stock purchased pursuant thereto shall be paid first out of the
participant's accumulated payroll deductions, with any balance payable by the
participant. If a participant pays any portion of the option price in a manner
other than by payroll deduction, the payroll deductions scheduled to be made
with respect to such participant for the period after the early exercise by the
participant and prior to the Termination Date shall be reduced ratably by the
amount of the participant's payment by such other means in connection with the
early exercise of the participant's option.
7.03. Withdrawal of Account. By written notice to the Controller of
the Company, at any time prior to the Termination Date applicable to any Stock
Purchase Period, a participant may elect to withdraw all or any part of the
accumulated payroll deductions in his account at such time. In the case of a
participant's withdrawal of a portion of the payroll deductions credited to his
account under the Plan, the funds remaining in his account on the Termination
Date shall be applied to purchase stock as provided in Section 7.01.
7.04. Fractional Shares. Fractional shares will not be issued under
the Plan and any accumulated payroll deductions which would have been used to
purchase fractional shares will be returned to any employee promptly following
the termination of an Stock Purchase Period, without interest.
<PAGE> 4
7.05. Transferability of Option. During a participant's lifetime,
options held by such participant shall be exercisable only by that participant.
7.06. Delivery of Stock. As promptly as practicable after the
Termination Date of each Stock Purchase Period, the Company will deliver to
each participant, as appropriate, the stock purchased upon exercise of his
option.
ARTICLE VIII
WITHDRAWAL
8.01. In General. As indicated in Section 7.03, a participant may
withdraw payroll deductions credited to his account under the Plan at any time
by giving written notice to the Controller of the Company. All of the
participant's payroll deductions credited to his account, or such part as is
indicated in the written notice from the participant, will be paid to him
promptly after receipt of his notice of withdrawal, and no further payroll
deductions will be made from his pay during such Stock Purchase Period. The
Company may, at its option, treat any attempt to borrow by an employee on the
security of his accumulated payroll deductions as an election, under Section
7.03, to withdraw such deductions.
8.02. Effect on Subsequent Participation. A participant's withdrawal
from any Stock Purchase Period will not have any effect upon his eligibility to
participate in any succeeding Stock Purchase Period or in any similar plan
which may hereinafter be adopted by the Company.
8.03. Termination of Employment. Upon termination of the
participant's employment for any reason, including retirement (but excluding
death while in the employ of the Company or continuation of a leave of absence
for a period beyond 90 days), then, unless the period during which options may
be exercised is extended beyond termination of employment by the Committee in
any particular case, which extension shall in no event be for more than 90 days
after termination of employment, the payroll deductions credited to his account
will be returned to him, or, in the case of his death subsequent to the
termination of his employment, to the person or persons entitled thereto under
Section 12.01.
8.04. Termination of Employment Due to Death. Upon termination of
the participant's employment because of his death, his beneficiary (as defined
in Section 12.01) shall have the right to elect, by written notice given to the
Controller of the Company prior to the earlier of the Termination Date or the
expiration of a period of sixty (60) days commencing with the date of the death
of the participant, either:
(a) to withdraw all of the payroll deductions credited to the
participant's account under the Plan, or
(b) to exercise the participant's option for the purchase of stock
on the Termination Date next following the date of the
participant's death for the purchase of the number of full
shares of stock which the accumulated payroll deductions in
the participant's account at the date of the participant's
death will purchase at the applicable option price, and any
excess in such account will be returned to said beneficiary,
without interest.
In the event that no such written notice of election shall be duly received by
the office of the Controller of the Company, the beneficiary shall
automatically be deemed to have elected, pursuant to paragraph (a), to withdraw
all amounts in the participant's account.
8.05. Leave of Absence. A participant on leave of absence shall,
subject to the election made by such participant pursuant to Section 5.04,
continue to be a participant in the Plan so long as such participant is on
continuous leave of absence. A participant who has been on leave of absence
for more than 90 days and who therefore is not an employee for the purpose of
the Plan shall not be entitled to participate in any Stock Purchase Period
commencing after the 90th day of such leave of absence. Notwithstanding any
other provisions of the Plan, unless a participant on leave of absence returns
to regular full time or part time employment with the Company at the earlier
of: (a) the termination of such leave of absence or (b) three months from the
90th day of such leave of absence, such participant's participation in the Plan
shall terminate on whichever of such dates first occurs.
<PAGE> 5
ARTICLE IX
INTEREST
9.01. Interest. No interest shall accrue on the payroll deductions
of a participant in the Plan.
ARTICLE X
STOCK
10.01. Maximum Shares. The maximum number of shares which shall be
issued under the Plan, subject to adjustment upon changes in capitalization of
the Company as provided in Section 12.04, shall not exceed the number of shares
set forth in Section 10.01 hereof.
10.02. Participant's Interest in Option Stock. The participant will
have no interest in stock covered by his option until such option has been
exercised.
10.03. Registration of Stock. Stock to be delivered to a participant
under the Plan will be registered in the name of the participant.
10.04. Restrictions on Exercise. The Committee may, in its
discretion, require as conditions to the exercise of any option that the shares
of Common Stock reserved for issuance upon the exercise of the option shall
have been duly listed, upon official notice of issuance, upon a stock exchange,
and that either:
(a) a Registration Statement under the Securities Act of 1933, as
amended, with respect to said shares shall be effective, or
(b) the participant shall have represented at the time of
purchase, in form and substance satisfactory to the Company,
that it is his intention to purchase the shares for investment
and not for resale or distribution.
10.05 Restriction on Transfer of Stock. Any shares of Common Stock
issued pursuant to the exercise of options granted under the Plan shall not be
transferable by the participant, other than by will or the laws of descent and
distribution, for the longer of (i) one year following the transfer of such
stock to the participant or (ii) two years after the Commencement Date on which
the options to purchase such shares were granted. Every certificate evidencing
stock subject to the foregoing restriction shall bear a legend reflecting such
restriction.
ARTICLE XI
ADMINISTRATION
11.01. Appointment of Committee. The Stock Option Committee of the
Board of Directors, as composed from time to time, shall be the committee (the
"Committee") that administers the Plan. No member of the Committee shall be
eligible to purchase stock under the Plan.
11.02. Authority of Committee. Subject to the express provisions of
the Plan, the Committee shall have plenary authority in its discretion to
interpret and construe any and all provisions of the Plan, to adopt rules and
regulations for administering the Plan, and to make all other determinations
deemed necessary or advisable for administering the Plan. The Committee's
determination on the foregoing matters shall be conclusive.
11.03. Rules Governing the Administration of the Committee. The
Committee may select one of its members as its Chairman and shall hold its
meetings at such times and places as it shall deem advisable and may hold
telephonic meetings. A majority of its members shall constitute a quorum. All
determinations of the Committee shall be made by a majority of its members.
The Committee may correct any defect or omission or reconcile any inconsistency
in the Plan, in the manner and to the extent it shall deem desirable. Any
decision or determination reduced to writing and signed by a majority of the
members of the Committee shall be as fully effective as if it had been made by
a majority
<PAGE> 6
vote at a meeting duly called and held. The Committee may appoint a secretary
and shall make such rules and regulations for the conduct of its business as it
shall deem advisable.
ARTICLE XII
MISCELLANEOUS
12.01. Designation of Beneficiary. A participant may file a written
designation of a beneficiary who is to receive any stock and/or cash. Such
designation of beneficiary may be changed by the participant at any time by
written notice to the Controller of the Company. Upon the death of a
participant and upon receipt by the Company of proof of identity and existence
at the participant's death of a beneficiary validly designated by him under the
Plan, the Company shall deliver such stock and/or cash to such beneficiary. In
the event of the death of a participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such
participant's death, the Company shall deliver such stock and/or cash to the
executor or administrator of the estate of the participant, or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such stock and/or cash to the
spouse or to any one or more dependents of the participant as the Company may
designate. No beneficiary shall, prior to the death of the participant by whom
he has been designated, acquire any interest in the stock or cash credited to
the participant under the Plan.
12.02. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option
or to receive stock under the Plan may be assigned, transferred, pledged, or
otherwise disposed of in any way by the participant other than by will or the
laws of descent and distribution. Any such attempted assignment, transfer,
pledge or other disposition shall be without effect, except that the Company
may treat such act as an election to withdraw all funds in accordance with
Section 7.03.
12.03. Use of Funds. All payroll deductions received or held by the
Company under this Plan may be used by the Company for any corporate purpose
and the Company shall not be obligated to segregate such payroll deductions.
12.04. Adjustment Upon Changes in Capitalization.
(a) If, while any options are outstanding, the outstanding shares of
Common Stock of the Company have increased, decreased, changed into, or been
exchanged for a different number or kind of shares or securities of the Company
through reorganization, merger, recapitalization, reclassification, stock
split, reverse stock split or similar transaction, appropriate and
proportionate adjustments may be made by the Committee in the number and/or
kind of shares which are subject to purchase under outstanding options and on
the option exercise price or prices applicable to such outstanding options. In
addition, in any such event, the maximum number of shares that may be offered
under the Plan as set forth in Section 10.01 hereof shall also be
proportionately adjusted. No adjustments shall be made for stock dividends.
For the purposes of this Paragraph, any distribution of shares to shareholders
in an amount aggregating 20 percent or more of the outstanding shares shall be
deemed a stock split and any distributions of shares aggregating less than 20
percent of the outstanding shares shall be deemed a stock dividend.
(b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon a sale of substantially all of the property or stock of the Company to
another corporation, the holder of each option then outstanding under the Plan
will thereafter be entitled to receive at the next Termination Date upon the
exercise of such option for each share as to which such option shall be
exercised, as nearly as reasonably may be determined, the cash, securities
and/or property which a holder of one share of the Common stock was entitled to
receive upon and at the time of such transaction. The Board of Directors shall
take such steps in connection with such transactions as the Board shall deem
necessary to assure that the provisions of this Section 12.04 shall thereafter
be applicable, as nearly as reasonably may be determined, in relation to the
said cash, securities and/or property as to which such holder of such option
might thereafter be entitled to receive.
12.05. Amendment and Termination. The Board of Directors shall have
complete power and authority to terminate or amend the Plan; provided, however,
that the Board of Directors shall not, without the approval of the
<PAGE> 7
stockholders of the Corporation (i) increase the maximum number of shares that
may be issued under the Plan (except pursuant to Section 12.04), (ii) amend the
requirements as to the class of employees eligible to purchase stock under the
Plan, or (iii) permit the members of the Committee to purchase stock under the
Plan. No termination, modification, or amendment of the Plan may, without the
consent of an employee then having an option under the Plan to purchase stock,
adversely affect the rights of such employee under such option.
12.06. Effective Date. The Plan shall become effective as of
February 21, 1996, subject to approval by the holders of the majority of the
Common Stock present and represented at a special or annual meeting of the
shareholders held on or before February 21, 1997. If the Plan is not so
approved, the Plan shall not become effective.
12.07. No Employment Rights. The Plan does not, directly or
indirectly, create any right for the benefit of any employee or class of
employees to purchase any shares under the Plan, or create in any employee or
class of employees any right with respect to continuation of employment by the
Company, and it shall not be deemed to interfere in any way with the Company's
right to terminate, or otherwise modify, an employee's employment at any time.
12.08. Effect of Plan. The provisions of the Plan shall, in
accordance with its terms, be binding upon, and inure to the benefit of, all
successors of each employee participating in the Plan, including, without
limitation, such employee's estate and the executors, administrators or
trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy
or representative of creditors of such employee.
12.09. Governing Law. The law of the State of Texas will govern all
matters relating to this Plan except to the extent it is superseded by the laws
of the United States.
<PAGE> 1
EXHIBIT 11
PC SERVICE SOURCE, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-----------------
1993 1994 1995 1995 1996
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Primary earnings per common share:
Net earnings (loss).......................... $ 960 $1,895 $(1,505) $ 564 $ 654
Interest expense, net of income tax
benefit.................................... 68 -- -- -- --
------ ------ ------- ------ ------
$1,028 $1,895 $(1,505) 564 654
====== ====== ======= ====== ======
Average common shares outstanding............ 2,890 3,631 3,900 3,893 3,974
Average common shares equivalents:
Options(1)................................... 295 294 -- 309 210
Warrants(1).................................. 188 178 -- 189 189
------ ------ ------- ------ ------
Average number of common shares and common
share equivalents outstanding.............. 3,373 4,103 3,900 4,391 4,373
====== ====== ======= ====== ======
Primary earnings (loss) per common share..... $ .30 $ .46 $ (.39) $ .13 $ .15
====== ====== ======= ====== ======
Fully diluted earnings per common share:
Average number of common shares and common
share equivalents outstanding.............. 3,373 4,103 3,900 4,391 4,373
Additional shares issuable................... 2 20 -- 71 --
------ ------ ------- ------ ------
Average number of common shares assuming full
dilution................................... 3,375 4,123 3,900 4,462 4,373
====== ====== ======= ====== ======
Fully diluted earnings (loss) per common
share...................................... $ .30 $ .46 $ (.39) $ .13 $ .15
====== ====== ======= ====== ======
</TABLE>
- ---------------
(1) Common stock equivalents are not included for the year ended December 31,
1995 as the exercise of options and warrants would be antidilutive.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
PC Service Source, Inc.:
The audits referred to in our report dated February 16, 1996 included the
related financial statement schedule for each of the years in the three-year
period ended December 31, 1995, included in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to the use of our reports included herein and to the references
to our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
KPMG Peat Marwick LLP
Dallas, Texas
May 17, 1996
2
<PAGE> 1
Exhibit 23.3
CONSENT TO BE NAMED IN REGISTRATION STATEMENT
As a director nominee of PC Service Source, Inc. (the "PCSS"). I hereby
consent to the inclusion in the Registration Statement on Form S-1 (the
"Registration Statement") pertaining to the offering of PCSS common stock filed
in May 1996, and any amendments thereto, of my name as a nominee to become a
director of the PCSS. I also consent to the inclusion of my signature which will
appear in typed form within the electronic filing of such Registration Statement
to be filed with the Securities and Exchange Commission through its Edgar filing
system and all amendments thereto.
Dated: May 15, 1996 Signature
/s/ JAY HAFT
-------------------------------
Print Name: Jay Haft
-------------------
