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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________.
Commission File Number: 0-23686
PC SERVICE SOURCE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-1703687
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2350 VALLEY VIEW LANE, DALLAS, TEXAS 75234
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(Address of principal executive offices) (Zip Code)
</TABLE>
(214) 406-8583
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of April 30, 1996, there were 4,035,469 shares of the registrant's common
stock outstanding.
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PC SERVICE SOURCE, INC. AND SUBSIDIARY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1996 (Unaudited)
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income for the Three Months Ended
March 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 5
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 8
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PC SERVICE SOURCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 957 $ 833
Accounts receivable, net ...................... 12,688 10,251
Inventories ................................... 18,293 13,202
Deferred income taxes ......................... 1,120 1,322
Income taxes receivable ....................... -- 80
Other ......................................... 774 712
------------ ------------
Total current assets ................... 33,832 26,400
Property and equipment, net ..................... 6,763 6,453
Other noncurrent assets ......................... 286 274
------------ ------------
Total Assets .................................. $ 40,881 $ 33,127
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 12,768 $ 8,876
Accrued liabilities ........................... 2,909 1,894
Current installments of obligations
under capital leases ....................... 330 320
Income taxes payable .......................... 312 --
------------ ------------
Total current liabilities .............. 16,319 11,090
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Long-term debt .................................. 12,012 10,165
Deferred income taxes ........................... 293 269
Stockholders' equity ............................ 12,257 11,603
------------ ------------
Total Liabilities and Stockholders' Equity .... $ 40,881 $ 33,127
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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PC SERVICE SOURCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1996 1995
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<S> <C> <C>
Net revenues .................................... $ 26,281 $ 16,782
Cost of revenues ................................ 18,708 12,156
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Gross margin .................................. 7,573 4,626
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Operating expenses:
Selling, general and administrative ........... 5,869 3,401
Depreciation and amortization ................. 434 293
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Total operating expenses .................... 6,303 3,694
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Earnings from operations .................... 1,270 932
Interest expense, net ........................... 229 7
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Earnings before income taxes ................ 1,041 925
Income taxes .................................... 387 361
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Net earnings ................................ $ 654 $ 564
========== ==========
Earnings per common share ....................... $ .15 $ .13
========== ==========
Weighted average common shares outstanding ...... 4,373 4,462
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
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PC SERVICE SOURCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net earnings .......................................... $ 654 $ 564
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization ..................... 434 293
Deferred income taxes ............................. 226 31
Other, net ........................................ (27) --
Changes in current assets and liabilities:
Accounts receivable ............................... (2,437) (1,688)
Inventories ....................................... (5,091) (1,513)
Other current assets .............................. (62) (281)
Income taxes ...................................... 392 --
Accounts payable .................................. 3,892 541
Accrued liabilities ............................... 1,015 440
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Net cash used in operating activities ......... (1,004) (1,613)
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Cash flows from investing activities:
Capital expenditures .................................. (729) (799)
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Net cash used in investing activities ................... (729) (799)
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Cash flows from financing activities:
Net long-term debt borrowings ......................... 1,926 300
Principal payments under capital lease obligation ..... (69) (13)
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Net cash provided by financing activities ............... 1,857 287
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Net increase (decrease) in cash and cash equivalents .... 124 (2,125)
Cash and cash equivalents at beginning of period ........ 833 2,332
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Cash and cash equivalents at end of period .............. $ 957 $ 207
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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PC SERVICE SOURCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
(1) GENERAL
These condensed interim consolidated financial statements, which include
the accounts of PC Service Source, Inc. and its majority-owned subsidiary
Cyclix Engineering Corporation (collectively, the "Company"), should be
read in conjunction with the consolidated financial statements and the
summary of significant accounting policies and notes thereto included in
the Company's 1995 Form 10-K. All significant intercompany balances and
transactions have been eliminated in consolidation. The information
furnished is unaudited but reflects all adjustments, consisting only of
normal recurring accruals, which are, in the opinion of management,
necessary to present a fair statement of the results for these interim
periods. Interim results are not necessarily indicative of results
expected for the full year. Certain prior year information has been
reclassified to confirm to the current year presentation.
(2) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
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<S> <C> <C>
Revolving bank credit facility .............. $ 10,860 $ 8,934
Obligations under capital leases ............ 1,482 1,551
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12,342 10,485
Less current installments of obligations
under capital leases ...................... 330 320
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Total long-term debt ........................ $ 12,012 $ 10,165
========== ==========
</TABLE>
(3) SUPPLEMENTAL CASH FLOW INFORMATION
Net cash flow from operating activities reflects cash payments for
interest and income taxes as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1996 1995
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<S> <C> <C>
Interest paid ........................ $ 191 $ 10
Income taxes paid (refunded), net .... (247) 272
</TABLE>
4
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PC SERVICE SOURCE, INC. AND SUBSIDIARY
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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.
The following table displays the Company's statements of operations as a
percentage of net revenues:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1996 1995
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<S> <C> <C>
Net revenues ................................ 100.0% 100.0%
Cost of revenues ............................ 71.2 72.4
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Gross margin ............................ 28.8 27.6
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Operating expenses:
Selling, general and administrative ..... 22.3 20.3
Depreciation and amortization ........... 1.7 1.7
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Total operating expenses ........... 24.0 22.0
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Earnings from operations ............ 4.8 5.6
Interest expense, net ....................... .8 --
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Earnings before income taxes ........ 4.0 5.6
Income taxes ................................ 1.5 2.2
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Net earnings ........................ 2.5% 3.4%
====== ======
</TABLE>
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 Trace, Inc. ("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 general parts distribution
operations grew by approximately $4.6 million, or 42%. 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
and services provided during the period and the fact that Cyclix Engineering
Corporation, the Company's recently established remanufacturing subsidiary, had
slightly higher margins than the remainder of the Company's business.
5
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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.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATIONS
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, equity financing and internally generated
funds.
Cash used in operating activities was $1.0 million compared with $1.6 million
for the first quarter of 1995. The decrease in cash used in operating
activities resulted largely from a $90,000 increase in net earnings, which
occurred despite $141,000 of higher depreciation and amortization expense, and
an increase of $210,000 from working capital activities. The increase from
working capital activities resulted from favorable activity in accounts payable
and accrued liabilities which substantially offset higher inventory levels
required to support the Company's growth and higher accounts receivable levels
resulting from increased revenues. The Company's cash outflows from investing
activities was relatively flat compared with the first quarter of 1995 as
capital expenditure levels were comparable. Cash provided by financing
activities rose as a result of increased long-term borrowings.
OTHER CAPITAL RESOURCES
The Company currently maintains a revolving bank line of credit which provides
for borrowings up to a maximum of $12 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 $10.9 million in borrowings, leaving $1.1 million available under the line
of credit.
In April 1996, the Company entered into a financing agreement that will allow
for the acquisition of up to $1 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 believes that its balances of cash and cash equivalents, its
long-term financing capability and its equipment financing agreement will be
sufficient to meet its 1996 working capital and capital expenditure
requirements.
CAPITAL EXPENDITURES
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
6
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capital expenditures of approximately $1.8 million for assets acquired through
leases. These capital expenditures will be primarily for a new enhanced high
capacity computer-telephony integration system for handling order processing
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.
7
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PC SERVICE SOURCE, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
11 . . . . . . . . . . Computation of Earnings Per Common Share
27 . . . . . . . . . . Financial Data Schedule
</TABLE>
B. REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Registrant during the
three (3) months ended March 31, 1996.
8
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PC SERVICE SOURCE, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PC SERVICE SOURCE, INC.
---------------------------------------
(Registrant)
May 13, 1996 By: /s/ Avery More
-----------------------------------
Avery More, Chairman of the Board,
Chief Financial Officer and
Director
May 13, 1996 By: /s/ Bernard W. Rohde
-----------------------------------
Bernard W. Rohde, Vice President,
Finance and Chief Accounting
Officer
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INDEX TO EXHBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<S> <C>
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
</TABLE>
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PC SERVICE SOURCE, INC. AND SUBSIDIARY
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE
- - ---------------------------------
Net earnings ........................................ $ 654 $ 564
======== ========
Average common shares outstanding ................... 3,974 3,893
Average common share equivalents resulting
from assumed conversion of options and warrants ... 399 498
-------- --------
Average number of common shares and
common share equivalents outstanding .............. 4,373 4,391
======== ========
Primary earnings per common share ................... $ .15 $ .13
======== ========
FULLY DILUTED EARNINGS PER COMMON SHARE
- - ---------------------------------------
Average number of common shares outstanding ......... 3,974 3,893
Average common share equivalents resulting from
assumed conversion of options and warrants
assuming full dilution ........................... 399 569
-------- --------
Average number of common shares and
common share equivalents outstanding
assuming full dilution ........................... 4,373 4,462
======== ========
Fully diluted earnings per common share ............. $ .15 $ .13
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1996 (UNAUDITED) AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 957
<SECURITIES> 0
<RECEIVABLES> 12,997
<ALLOWANCES> (309)
<INVENTORY> 18,293
<CURRENT-ASSETS> 33,832
<PP&E> 8,956
<DEPRECIATION> (2,193)
<TOTAL-ASSETS> 40,881
<CURRENT-LIABILITIES> 16,319
<BONDS> 12,012
<COMMON> 40
0
0
<OTHER-SE> 12,217
<TOTAL-LIABILITY-AND-EQUITY> 40,881
<SALES> 25,399
<TOTAL-REVENUES> 26,281
<CGS> 17,769
<TOTAL-COSTS> 25,011
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 229
<INCOME-PRETAX> 1,041
<INCOME-TAX> 387
<INCOME-CONTINUING> 654
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 654
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
<FN>
<F1>PROVISION FOR DOUBTFUL ACCOUNTS AND INVENTORY PROVISION INCLUDED IN TOTAL
COSTS.
</FN>
</TABLE>
