<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
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)
DELAWARE 52-1703687
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2350 VALLEY VIEW LANE, DALLAS, TEXAS 75234
- ------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(972) 481-4000
(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 October 31, 1997, there were 5,752,320 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>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1997 (Unaudited) and December 31, 1996 ................. 1
Condensed Consolidated Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 1997 and 1996 .............. 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1997 and 1996 ........................ 3
Notes to Condensed 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...................................... 9
SIGNATURES ............................................................................... 10
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PC SERVICE SOURCE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 444 $ 3,650
Accounts receivable, net ....................................... 16,011 12,978
Inventories .................................................... 19,585 19,590
Income taxes receivable ........................................ 990 --
Deferred income taxes .......................................... 371 866
Other current assets ........................................... 1,158 763
------- -------
Total current assets .................................... 38,559 37,847
Property and equipment, net ...................................... 12,961 10,418
Other assets, net ................................................ 5,025 1,909
------- -------
Total Assets ................................................... $56,545 $50,174
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 9,671 $ 7,821
Accrued liabilities ............................................ 4,509 2,600
Income taxes payable ........................................... -- 38
Revolving line of credit ....................................... 4,598 3,053
Current installments of obligations under capital leases ....... 1,059 841
------- -------
Total current liabilities ............................... 19,837 14,353
Obligations under capital leases ................................. 3,056 3,059
Deferred income taxes ............................................ 724 566
Stockholders' equity ............................................. 32,928 32,196
------- -------
Total Liabilities and Stockholders' Equity ..................... $56,545 $50,174
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
PC SERVICE SOURCE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues ........................... $33,495 $28,478 $97,627 $81,545
Cost of revenues ....................... 23,579 20,490 69,253 57,668
------- ------- ------- -------
Gross margin ......................... 9,916 7,988 28,374 23,877
------- ------- ------- -------
Operating expenses:
Selling, general and administrative .. 8,756 7,122 24,260 19,359
Depreciation and amortization ........ 943 570 2,487 1,502
------- ------- ------- -------
Total operating expenses ........... 9,699 7,692 26,747 20,861
------- ------- ------- -------
Earnings from operations ........... 217 296 1,627 3,016
Interest expense, net .................. 208 31 478 502
------- ------- ------- -------
Earnings before income taxes ....... 9 265 1,149 2,514
Income tax expense ..................... 4 86 426 922
------- ------- ------- -------
Net earnings ....................... $ 5 $ 179 $ 723 $ 1,592
======= ======= ======= =======
Earnings per common share .............. $ .00 $ .03 $ .12 $ .31
======= ======= ======= =======
Weighted average common shares
outstanding ....................... 5,880 5,991 5,882 5,095
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
PC SERVICE SOURCE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings .......................................................... $ 723 $ 1,592
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization ..................................... 2,487 1,502
Deferred income taxes ............................................. 653 583
Other, net ........................................................ (1,444) (75)
Changes in operating assets and liabilities:
Accounts receivable ............................................... (3,033) (2,550)
Inventories ....................................................... 5 (5,900)
Other current assets .............................................. (383) (158)
Accounts payable .................................................. 1,850 (603)
Accrued liabilities ............................................... 1,909 1,236
Income taxes receivable/payable ................................... (1,028) 184
-------- --------
Net cash provided by (used in) operating activities ................... 1,739 (4,189)
-------- --------
Cash flows from investing activities:
Capital expenditures ............................................... (3,990) (2,736)
Payment for acquisition of business ................................ (1,485) --
Payment for purchase of equity interest ............................ (332) --
-------- --------
Net cash used in investing activities ................................... (5,807) (2,736)
-------- --------
Cash flows from financing activities:
Net revolving line of credit borrowings (repayments) ................ 1,545 (8,934)
Principal payments under capital lease obligations .................. (692) (333)
Net proceeds from public offering ................................... -- 18,521
Proceeds from exercise of common stock options ...................... 9 177
-------- --------
Net cash provided by financing activities ............................... 862 9,431
-------- --------
Net increase (decrease) in cash and cash equivalents .................... (3,206) 2,506
Cash and cash equivalents at beginning of period ........................ 3,650 833
-------- --------
Cash and cash equivalents at end of period .............................. $ 444 $ 3,339
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
PC SERVICE SOURCE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
(1) BASIS OF PRESENTATION
These unaudited condensed consolidated financial statements of PC
Service Source, Inc. and Cyclix Engineering Corporation, its majority
owned subsidiary (collectively, the "Company"), for the quarter ended
September 30, 1997, have been prepared in accordance with generally
accepted accounting principles for interim financial reporting.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1996. All
significant intercompany balances and transactions have been eliminated
in consolidation. In the opinion of management, all adjustments,
(consisting only of normal recurring adjustments) considered necessary
for a fair presentation of the interim financial information have been
included. The results of operations for any interim period are not
necessarily indicative of the results of operations for a full year.
(2) EARNINGS PER COMMON SHARE
Earnings per common share are calculated based on the weighted average
number of common shares and the dilutive effect of common equivalent
shares, to the extent they are material.
(3) SUPPLEMENTAL CASH FLOW INFORMATION
Net cash flow from operating activities reflects cash payments for
interest and income taxes as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1997 1996
------- ------
<S> <C> <C>
Interest paid, net .............................. $ 419 $ 477
Income taxes paid, net ........................... 749 150
</TABLE>
During the first nine months of 1997 and 1996, the Company acquired
$907 and $1,910 of assets through non-cash capital lease transactions.
4
<PAGE> 7
PC SERVICE SOURCE, INC. AND SUBSIDIARY
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table displays the Company's statements of operations as a
percentage of net revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues ............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues ......................... 70.4 72.0 70.9 70.7
----- ----- ----- -----
Gross margin ......................... 29.6 28.0 29.1 29.3
----- ----- ----- -----
Operating expenses:
Selling, general and administrative... 26.2 25.0 24.8 23.8
Depreciation and amortization ........ 2.8 2.0 2.6 1.8
----- ----- ----- -----
Total operating expenses ............ 29.0 27.0 27.4 25.6
----- ----- ----- -----
Earnings from operations ............ .6 1.0 1.7 3.7
Interest expense, net .................... .6 .1 .5 .6
----- ----- ----- -----
Earnings before income taxes ............. .0 .9 1.2 3.1
Income tax expense ....................... .0 .3 .5 1.1
----- ----- ----- -----
Net earnings .................... 0.0% .6% .7% 2.0%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net revenues increased by $5.0 million, or 17.6%, from $28.5 million for the
quarter ended September 30, 1996 to $33.5 million for the quarter ended
September 30, 1997. The increase in revenues was primarily due to increased
sales to existing customers.
The gross margin percentage increased in the third quarter of 1997 to 29.6% from
28.0% in the same period in 1996. The Company's gross margin on each computer
spare part in its inventory is different; therefore, any change in the mix of
parts sold affects the Company's gross margin for a particular period. The
increase in gross margin for the third quarter of 1997 was largely due to
favorable variations in the mix of parts sold during that period coupled with
price increases on products which are offered by the Company, but not readily
available in the marketplace.
5
<PAGE> 8
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Selling, general and administrative expenses ("SG&A") as a percentage of net
revenues increased to 26.2% in the third quarter of 1997 compared to 25.0% for
the same period of 1996. The increase in SG&A, as a percentage of net revenues,
was primarily attributable to higher personnel related expenses incurred by the
Company during the third quarter of 1997. This increase included one-time
charges relating to a ten percent (10%) reduction in the Company's workforce at
the end of the third quarter of 1997, which included the elimination of
positions added after September 1996. Management effected the workforce
reduction in response to the delay in obtaining significant anticipated revenues
from new original equipment manufacturer outsourcing arrangements. Charges
relating to the reduction in workforce had a $0.02 negative impact on earnings
for the third quarter of 1997.
Depreciation and amortization increased as a percentage of net revenues to 2.8%
in the third quarter of 1997 compared to 2.0% in the same period of 1996. The
increase was due to a higher asset base in 1997 resulting from an increased
level of capital expenditures incurred by the Company relating largely to
hardware and software for internet, purchasing and distribution applications.
Interest expense (net) as a percentage of net revenues increased to .6% during
the third quarter of 1997 from .1% during the same period of 1996 due to higher
average outstanding balances on the Company's revolving line of credit during
the third quarter of 1997.
The Company recorded net earnings of $5,000, or $.00 per common share, on
5,880,000 shares for the third quarter of 1997, compared with net earnings of
$179,000, or $.03 per common share, on 5,991,000 shares for the same period in
1996. Cyclix adversely impacted earnings in the third quarter of 1997 with a
$300,000 loss compared to a $68,000 loss in the 1996 period. Cyclix's loss was
primarily a result of lower than anticipated business volumes from new original
equipment manufacturer outsourcing arrangements. This loss combined with the
other items discussed above constitutes the reduction in net earnings from 1996
to 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net revenues increased by $16.1 million, or 19.7%, from $81.5 million for the
first nine months of 1996, to $97.6 million for the first six months of 1997.
The increase in revenues for the first nine months of 1997 is attributable to
the reasons set forth above in the three month discussion.
The gross margin percentage decreased in the first nine months of 1997 to 29.1%
from 29.3% in the same period in 1996. As discussed above, fluctuations in gross
margins are attributable to ongoing changes in product mix.
SG&A as a percentage of net revenues increased to 24.8% in the first nine months
of 1997 compared to 23.8% in the same period of 1996. The increase in SG&A for
the first nine months is due to the same reasons discussed above.
Depreciation and amortization increased as a percentage of net revenues to 2.6%
in the first nine months of 1997 compared to 1.8% in the same period of 1996.
The increase was due to a higher asset base in 1997 resulting from an increased
level of capital expenditures incurred by the Company relating largely to
hardware and software for internet, purchasing and warranty system applications.
6
<PAGE> 9
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Interest expense (net) as a percentage of net revenues decreased to .5% during
the first nine months of 1997 from .6% during the same period of 1996.
The Company recorded net earnings of $723,000 or $.12 per common share, on
5,882,000 shares for the first nine months of 1997 compared with net earnings of
$1,592,000 or $.31 per common share, on 5,095,000 shares for the same period in
1996. Cyclix experienced a $610,000 loss during the first nine months of 1997,
compared to a loss of $246,000 in the comparable 1996 period as a result of
lower than anticipated business volumes from new service arrangements. High SG&A
expenses in addition to the loss incurred by Cyclix significantly impacted net
earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently maintains a revolving bank line of credit, which provides
a borrowing capacity of $20 million. At September 30, 1997, the Company had $4.6
million outstanding, leaving $15.4 million unused and available. Further, the
Company currently has financing agreements in place for 1997 that allow for the
acquisition of $2.5 million of capital assets through leasing arrangements.
During the first six months of 1997, the Company acquired $.9 million through
these capital lease arrangements.
The Company has historically financed its working capital requirements and its
capital expenditures from its revolving bank credit facility, financing
agreements, equity financing and internally generated funds. Cash provided by
operating activities was $1.7 million for the first nine months of 1997 compared
with cash used by operating activities of $4.2 million. The increase in cash
provided by operations in the 1997 period was primarily due to lower working
capital requirements as a result of improved operating efficiencies experienced
through inventory management.
During January 1997, the Company acquired a 19.5% equity interest in a service
parts and logistics company in the United Kingdom for approximately $332,000.
During August 1997, Cyclix acquired Hi-Tek Services, Inc. of Hayward, California
for approximately $1.5 million. Hi-Tek Services, Inc. provides the Company a
repair and remanufacturing presence close to many of its customers in the
Silicon Valley.
Capital expenditures, including capital assets acquired through leasing
arrangements, totaled $4.9 million for the first nine months of 1997 compared
with $4.6 million in 1996. Expenditures in the 1997 period were primarily used
for improvements and modifications to the Company's information systems.
The Company believes the cash generated from operations, its revolving bank
credit facility and equipment financing agreements will be sufficient to meet
its 1997 working capital and capital expenditure requirements.
7
<PAGE> 10
PC SERVICE SOURCE, INC. AND SUBSIDIARY
EFFECTS OF INFLATION
The Company believes that the effects of inflation on its operations have not
been material during the past two years.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
The Company occasionally makes forward-looking statements concerning its plans,
goals, product and service offerings, and anticipated financial performance.
These forward-looking statements may generally be identified by introductions
such as "outlook" for an upcoming period of time, or words and phrases such as
"should", "expect", "hope", "plans", "projected", "believes", "forward-looking"
(or variants of those words and phrases) or similar language indicating the
expression of an opinion or view concerning the future.
These forward-looking statements are subject to risks and uncertainties based on
a number of factors and actual results or events may differ materially from
those anticipated by such forward-looking statements. These factors include, but
are not limited to: the growth rate of the Company's revenue and market share;
the consummation of new and the non-termination of existing OEM outsourcing
arrangements and service provider alliances; the Company's ability to
effectively manage its business functions while growing the Company's business
in a rapidly changing environment; the ability of the Company to adapt and
expand its services in such an environment; the effective and efficient
purchasing of parts and processing of sales orders; and the quality of the
Company's plans and strategies, and the ability of the Company to execute such
plans and strategies.
In addition, forward-looking statements concerning the Company's expected
revenue or earnings levels are subject to many additional uncertainties
applicable to competitors generally and to general economic conditions over
which the Company has no control. The Company does not plan to generally
publicly update prior forward-looking statements for unanticipated events or
otherwise and, accordingly, prior forward-looking statements should not be
considered to be "fresh" simply because the Company has not made additional
comments on those forward-looking statements.
8
<PAGE> 11
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:
EXHIBIT
NO. DESCRIPTION
------- -----------
27 Financial Data Schedule
B. REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Registrant during the
three (3) months ended September 30, 1997.
9
<PAGE> 12
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)
November 12, 1997 /S/ DANNY G. HAIR
---------------------------------------
Danny G. Hair
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
10
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 (UNAUDITED) AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 444
<SECURITIES> 0
<RECEIVABLES> 16,492
<ALLOWANCES> (481)
<INVENTORY> 19,585
<CURRENT-ASSETS> 38,559
<PP&E> 19,086
<DEPRECIATION> (6,125)
<TOTAL-ASSETS> 56,545
<CURRENT-LIABILITIES> 19,837
<BONDS> 3,056
0
0
<COMMON> 59
<OTHER-SE> 32,869
<TOTAL-LIABILITY-AND-EQUITY> 56,545
<SALES> 92,079
<TOTAL-REVENUES> 97,627
<CGS> 64,758
<TOTAL-COSTS> 69,253
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 478
<INCOME-PRETAX> 1,149
<INCOME-TAX> 426
<INCOME-CONTINUING> 723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 723
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
<FN>
<F1>PROVISION FOR DOUBTFUL ACCOUNTS AND INVENTORY PROVISION INCLUDED IN TOTAL
COSTS.
</FN>
</TABLE>
