<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
X EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
- ---
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
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(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 November 1, 1998, there were 5,773,820 shares of the registrant's common
stock outstanding.
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PC SERVICE SOURCE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997 ................ 1
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1998
and 1997 ................................................ 2
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997 ... 3
Notes to Condensed Consolidated Financial Statements .... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ........................ 10
SIGNATURES ................................................................ 11
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 877 $ 717
Accounts receivable, net ....................................... 19,805 15,973
Inventories .................................................... 22,775 17,511
Other current assets ........................................... 4,549 2,956
-------- --------
Total current assets .................................... 48,006 37,157
Property and equipment, net ...................................... 14,563 13,526
Other assets, net ................................................ 4,468 4,475
-------- --------
Total assets ............................................. $ 67,037 $ 55,158
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 10,778 $ 8,864
Accrued liabilities ............................................ 6,973 3,403
Revolving line of credit ....................................... 13,830 --
Current installments of obligations under capital leases ....... 1,235 1,153
-------- --------
Total current liabilities ................................. 32,816 13,420
Long-term debt-revolving line of credit .......................... -- 5,535
Obligations under capital leases ................................. 3,209 3,160
Deferred income taxes ............................................ 687 709
Stockholders' equity:
Common stock .................................................... 59 59
Additional paid-in capital ...................................... 30,996 30,978
Retained earnings ............................................... 1,060 3,087
Less treasury stock, at cost .................................... (1,790) (1,790)
-------- --------
Total stockholders' equity ................................. 30,325 32,334
-------- --------
Total liabilities and stockholders' equity .............. $ 67,037 $ 55,158
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues ........................................... $ 42,865 $ 33,495 $ 119,671 $ 97,627
Cost of revenues ....................................... 30,516 23,579 84,785 69,253
--------- --------- --------- ---------
Gross margin ......................................... 12,349 9,916 34,886 28,374
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative .................. 10,705 8,756 33,729 24,260
Depreciation and amortization ........................ 1,130 943 3,305 2,487
--------- --------- --------- ---------
Total operating expenses ........................... 11,835 9,699 37,034 26,747
--------- --------- --------- ---------
Earnings (loss) from operations .................... 514 217 (2,148) 1,627
Interest expense, net .................................. 451 208 1,085 478
--------- --------- --------- ---------
Earnings (loss) before income taxes ................ 63 9 (3,233) 1,149
Income tax expense (benefit) ........................... 17 4 (1,206) 426
--------- --------- --------- ---------
Net earnings (loss) ................................ $ 46 $ 5 $ (2,027) $ 723
========= ========= ========= =========
Earnings (loss) per share:
Basic .............................................. $ 0.01 $ 0.00 $ (0.35) $ 0.13
========= ========= ========= =========
Diluted ............................................ $ 0.01 $ 0.00 $ (0.35) $ 0.12
========= ========= ========= =========
Weighted average common shares outstanding:
Basic .............................................. 5,760 5,751 5,760 5,747
========= ========= ========= =========
Diluted ............................................ 5,832 5,880 5,760 5,882
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PC SERVICE SOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ................................ $(2,027) $ 723
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization .................. 3,305 2,487
Deferred income taxes .......................... (1,033) 653
Other, net ..................................... 162 (1,444)
Changes in operating assets and liabilities:
Accounts receivable ............................ (3,832) (3,033)
Inventories .................................... (5,264) 5
Other current assets ........................... (582) (1,411)
Accounts payable ............................... 1,914 1,850
Accrued liabilities ............................ 3,570 1,909
------- -------
Net cash provided by (used in) operating activities (3,787) 1,739
------- -------
Cash flows from investing activities:
Capital expenditures ............................... (4,073) (3,990)
Acquisition of noncash net assets .................. (424) (1,817)
------- -------
Net cash used in investing activities ................ (4,497) (5,807)
------- -------
Cash flows from financing activities:
Net revolving line of credit borrowings ............ 8,295 1,545
Payments under capital lease obligations ........... (832) (692)
Proceeds from sale-leaseback transaction ........... 963 --
Proceeds from exercise of common stock options ..... 18 9
------- -------
Net cash provided by financing activities ............ 8,444 862
------- -------
Net increase (decrease) in cash and cash
equivalents ........................................ 160 (3,206)
Cash and cash equivalents at beginning of period ..... 717 3,650
------- -------
Cash and cash equivalents at end of period ........... $ 877 $ 444
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 6
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(1) BASIS OF PRESENTATION
These unaudited condensed consolidated financial statements of PC Service
Source, Inc. and its subsidiaries (the "Company"), for the three and nine
months ended September 30, 1998 and 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, 1997. 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 (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), Earnings per Share, in the fourth quarter of 1997, which
required companies to present basic earnings per share and diluted earnings
per share. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. The
Company has restated its earnings per share calculations for the three and
nine months ended September 30, 1997 to reflect the adoption of SFAS 128.
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings (loss) .................. $ 46 $ 5 $(2,027) $ 723
======= ======= ======= =======
Weighted average common shares
outstanding - basic ............... 5,760 5,751 5,760 5,747
Employee stock options and other ..... 72 129 -- 131
------- ------- ------- -------
Weighted average common shares
outstanding - diluted ............. 5,832 5,880 5,760 5,882
======= ======= ======= =======
Earnings (loss) per share:
Basic ........................... $ 0.01 $ 0.00 $ (0.35) $ 0.13
Diluted ......................... $ 0.01 $ 0.00 $ (0.35) 0.12
</TABLE>
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<PAGE> 7
The weighted average common shares outstanding-diluted computation for the
nine months ended September 30, 1998 excluded 95 employee stock options and
other common stock equivalents because this impact would be anti-dilutive.
(3) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), Reporting Comprehensive Income, in the first quarter of 1998,
which requires companies to disclose comprehensive income separately from
net income from operations. Comprehensive income is defined as the change
in equity during a period from transactions and other events and
circumstances from non-ownership sources. It includes all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners. Comprehensive income (loss) is equal to net
earnings (loss) as presented on the Condensed Consolidated Statements of
Operations for the three and nine months ended September 30, 1998 and 1997.
(4) 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,
-----------------
1998 1997
---- ----
<S> <C> <C>
Interest paid ................................... $ 962 $ 419
Income taxes paid, net............................ 19 749
</TABLE>
During the nine months ended September 30, 1998 and 1997, the Company
acquired $963 and $907 of assets through non-cash capital lease
transactions.
(5) SUBSEQUENT EVENTS
Pursuant to the Company's Stock Option Plan, incentive and nonstatutory
options may be granted to eligible employees for the purchase of an
aggregate of up to 1,000,000 shares of common stock, of which options to
acquire all 1,000,000 shares have previously been granted. Subject to
receiving stockholder approval of an amendment to increase the aggregate
number of shares subject to issuance under the Stock Option Plan by 750,000
shares (from 1,000,000 shares to 1,750,000 shares) the Stock Option
Committee of the Board of Directors conditionally granted in October 1998,
incentive options to acquire up to an additional 400,000 shares of common
stock to eligible employees of the Company. The amendment is subject to the
approval of the Company's stockholders.
In October 1998, the Board of Directors also approved a Stock Price
Appreciation Plan pursuant to which a total of 200,000 shares of the
Company's common stock will be available for issuance to selected members
of the Company's management if the closing per share price of the Company's
common stock on Nasdaq exceeds $15.00 per share for twenty consecutive
trading days prior to February 28, 2002.
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<PAGE> 8
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues ................................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues ............................................ 71.2 70.4 70.8 70.9
----- ----- ----- -----
Gross margin ...................................... 28.8 29.6 29.2 29.1
----- ----- ----- -----
Operating expenses:
Selling, general and administrative ............... 25.0 26.2 28.2 24.8
Depreciation and amortization ..................... 2.6 2.8 2.8 2.6
----- ----- ----- -----
Total operating expenses ........................ 27.6 29.0 31.0 27.4
----- ----- ----- -----
Earnings (loss) from operations .............. 1.2 0.6 (1.8) 1.7
Interest expense, net ....................................... 1.1 0.6 0.9 0.5
----- ----- ----- -----
Earnings (loss) before income taxes .......... 0.1 0.0 (2.7) 1.2
Income tax expense (benefit) ................................ 0.0 0.0 (1.0) 0.5
----- ----- ----- -----
Net earnings (loss) ............................. 0.1% 0.0% (1.7)% 0.7%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues were $42.9 million for the third quarter of 1998, representing an
increase of $9.4 million or a 28% increase over the third quarter of 1997.
Revenues are generated by providing a variety of service and repair logistics
services. These are comprised of general parts distribution, sourcing, service
provider alliances, original equipment manufacture outsourcing arrangements, as
well as repair and remanufacturing. The Company saw a shift in revenue mix
during the third quarter from general parts distribution to service provider
alliances, mainly due to increased service logistics outsourcing agreements,
which contributed primarily to the increase in revenues.
Gross margin as a percentage of net revenues decreased in the third quarter of
1998 to 28.8% from 29.6% in the same period in 1997. The Company's gross margin
on each of its service offerings varies; therefore, any change in the services
and repair logistics provided by the Company will impact the gross margin from
quarter to quarter. During the third quarter of 1998, gross margin as a
percentage of revenue declined due primarily to a higher mix of lower margin
service logistics outsourcing business.
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<PAGE> 9
Selling, general and administrative expenses ("SG&A") as a percentage of net
revenues decreased to 25.0% in the third quarter of 1998 compared to 26.2%
incurred in the third quarter of 1997. The decrease as a percentage of net
revenues was primarily attributable to better freight management and lower
telephone expense.
Depreciation and amortization increased by $187,000 for the quarter ended
September 30, 1998, compared with the same period in 1997. Depreciation and
amortization as a percentage of net revenues, however, declined to 2.6% for the
third quarter of 1998 compared to 2.8% in the same period of 1997 due to the
fact that revenues increased faster than capital expenditures in 1998.
Interest expense, net as a percentage of net revenues increased to 1.1% during
the third quarter of 1998 from 0.6% during the same period of 1997 due to a
higher average outstanding balance on the Company's revolving line of credit
during the third quarter of 1998.
In the third quarter, the Company underwent certain management changes including
the appointment of Avery More, the Company's largest shareholder and Chairman of
the Board, as Chief Executive Officer. Mr. More will be actively involved in the
day-to-day business operations of the Company. The new management initiated a
review of the Company's strategies and business focus. As a result, a process of
reviewing existing policies, procedures and methodologies utilized for the
valuation of assets and liabilities recorded in the balance sheet, including
inventory, accounts receivable and intangible assets was initiated. The outcome
of this analysis has not yet been completed but is expected to be completed by
the end of 1998. The results of this analysis could have a material adverse
impact through non-cash charges on the financial position and the results of
operations of the Company.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues were $119.7 million for the first nine months of 1998, representing
an increase of $22.0 million or a 22.6% increase over the first nine months of
1997. The increase was primarily attributed to the increase in service logistics
outsourcing agreements with the Company's service provider alliances.
Gross margin as a percentage of net revenues increased in the first nine months
of 1998 to 29.2% from 29.1% in the same period in 1997. The Company's gross
margin on each of its service offerings varies; therefore, any change in the mix
of services and repair logistics provided by the Company will impact the gross
margin from quarter to quarter.
SG&A as a percentage of net revenues increased to 28.2% in the nine months ended
September 30, 1998, compared to 24.8% in the same period of 1997. The increase
as a percentage of revenue was principally due to three factors. The first
factor was an increase in employee expenses resulting from new employees hired
and trained to handle an OEM repair contract, and overtime and temporary workers
to assist in the conversion to the Company's automated warehouse management
system. The second factor was a non-recurring charge related to the termination
of an unprofitable warranty processing program with an OEM customer with whom
the Company has other successful programs pending. The third factor was an
increase in freight expense resulting from deficiencies in freight monitoring,
control and billing processes. These deficiencies were identified in the second
quarter of 1998 in connection with the warehouse management system conversion
and management believes that proper controls are now in place.
Depreciation and amortization increased as a percentage of net revenues to 2.8%
in the first nine months of 1998 compared to 2.6% in the same period of 1997.
The increase was due to a higher asset base in 1998 resulting from the
significant capital expenditures made by the Company during 1997.
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<PAGE> 10
Interest expense, net as a percentage of net revenues increased to 0.9% during
the first nine months of 1998 from 0.5% during the same period of 1997 due to a
higher average outstanding balance on the Company's revolving line of credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently maintains a $20 million revolving bank credit facility
which matures in June 1999. During the second quarter and again in the third
quarter of 1998, the Company exceeded an agreed upon ratio which triggered a
total borrowing base availability calculation (asset-based calculation), which
is based upon defined percentages of eligible accounts receivable and inventory.
As a result, the amount currently available under the Company's credit facility
is limited to the lesser of $20.0 million or calculated availability based on
the asset-based calculation. The Company's available credit facility at
September 30, 1998 was $20.0 million. The Company intends to renegotiate or
replace the credit facility in the fourth quarter of 1998.
The Company was not in compliance with certain financial performance covenants
at September 30, 1998. The Company has received a waiver from its lenders with
respect to the covenants and intends to renegotiate or replace the facility. The
inability of the Company to replace the facility or to obtain similar alternate
financing sources could have a material adverse impact on the liquidity and
capital resources of the Company.
The Company has historically been a net user of cash from operating activities
and has financed its capital expenditure requirements from revolving credit,
lease financing agreements and equity financing. Cash used in operating
activities during the first nine months of 1998 was $3.8 million as compared
with cash used in operating activities of $1.7 million for the first nine months
of 1997. The change in cash used in operations was primarily due to the change
in net earnings (loss) for the period as well as the increase in inventory and
accounts receivable that was necessary to support higher revenues of the
Company.
Capital expenditures totaled $4.1 million for the first nine months of 1998
compared with $4.0 million in 1997. Expenditures in the 1998 period were
primarily related to the Company's new warehouse management system.
YEAR 2000 COMPLIANCE
The Company's management recognizes the need to ensure that its operations and
relationships with vendors, customers and other third parties will not be
adversely impacted by the Year 2000 issue. The Year 2000 problem is a result of
computer programs being written using two digits rather than four to define the
applicable year. Based on its assessment, the Company determined a portion of
its software and certain hardware will require modification or replacement so
that those systems will properly utilize dates beyond December 31, 1999.
Although, the Company's assessment indicated that the significant information
technology systems would not be affected, that assessment however, indicated
that the software and hardware used in the Company's telephone equipment would
be at risk. The affected systems are the Company's primary sources of receiving
customer orders. With modification or replacement, the Company believes the Year
2000 issue can be mitigated. However, if such modifications or replacements are
not made, or not completed timely, the Year 2000 issue could have a significant
adverse impact on the operations of the Company.
The Company has also established a program to review its product line and
identify date-sensitive parts and the level of Year 2000 compliance that the
part supports. This program is to ensure that customers receive products that
are Year 2000 compliant, or at a minimum, are made aware of products that are
not compliant.
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<PAGE> 11
The Company also depends on the systems of its suppliers and customers.
Consequently, the Company is in the process of receiving adequate assurances
from its suppliers and customers that those systems on which the Company relies
are or will be Year 2000 compliant before the end of 1999.
To the extent possible, the Company will develop and implement contingency plans
designed to allow continued operations in the event of failure of the Company's
or third party systems to be Year 2000 compliant. These contingency plans have
not yet been developed, but are expected to be developed and implemented by the
end of 1999.
Management estimates that the total cost of the above initiatives to be $500,000
and is being funded through operating cash flows. The Company is expensing all
costs associated with these systems changes as the costs are incurred. As of
September 30, 1998, approximately $100,000 has been expensed.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. Should the
critical applications fail to perform properly in response to the Year 2000
issue, the Company could be unable to receive and ship a substantial number of
orders received by their telephone systems. The amount of potential lost revenue
cannot be reasonably estimated at this time. Further, the failure of the Company
or third parties upon which the Company relies, to identify Year 2000 issues and
successfully and timely resolve them could have a material adverse impact on the
operations of the Company.
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; the quality of the Company's
plans and strategies and the ability of the Company to execute such plans and
strategies; and the Company's, as well as its vendors, customers and other third
parties ability to become Year 2000 compliant.
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 generally does not plan to
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.
-9-
<PAGE> 12
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
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>
3.1+ Restated Certificate of Incorporation of the Company
3.2++ Amended and Restated Bylaws of the Company
10.1+++ Credit Agreement among the Company, certain lenders and
NationsBank, N.A., as administrative lender
10.2+v Stock Option Plan, including form of Stock Option Agreements, as
amended
10.3+v Director Compensation Plan
10.4v Employee Stock Purchase Plan
10.5* Waiver and Third Amendment to Credit Agreement among the Company,
certain lenders and NationsBank, N.A., as administrative lender
27.1* Financial Data Schedule
27.2* Restated Financial Data Schedule
- --------------
</TABLE>
+ 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, 1994, filed with the Securities and Exchange
Commission on March 31, 1995.
+++ Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1997, filed with the Securities and Exchange
Commission on March 31, 1998.
+v 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.
v Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, Registration Number 333-03977, initially filed with the
Securities and Exchange Commission on May 17, 1996, and declared effective
on May 28, 1996.
* Filed herewith.
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, 1998.
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<PAGE> 13
PC SERVICE SOURCE, INC. AND SUBSIDIARIES
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 16, 1998 /s/ Avery More
-----------------------
Avery More
Chairman and Chief Executive Officer
/s/ Robert J. Boutin
-----------------------
Robert J. Boutin
Chief Financial Officer
(Principal Accounting Officer)
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1+ Restated Certificate of Incorporation of the Company
3.2++ Amended and Restated Bylaws of the Company
10.1+++ Credit Agreement among the Company, certain lenders and
NationsBank, N.A., as administrative lender
10.2+v Stock Option Plan, including form of Stock Option Agreements, as
amended
10.3+v Director Compensation Plan
10.4v Employee Stock Purchase Plan
10.5* Waiver and Third Amendment to Credit Agreement among the Company,
certain lenders and NationsBank, N.A., as administrative lender
27.1* Financial Data Schedule
27.2* Restated Financial Data Schedule
- --------------
</TABLE>
+ 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, 1994, filed with the Securities and Exchange
Commission on March 31, 1995.
+++ Previously filed as an exhibit to the Company's report on Form 10-K for the
year ended December 31, 1997, filed with the Securities and Exchange
Commission on March 31, 1998.
+v 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.
v Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, Registration Number 333-03977, initially filed with the
Securities and Exchange Commission on May 17, 1996, and declared effective
on May 28, 1996.
* Filed herewith.
<PAGE> 1
EXHIBIT 10.5
WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT
THIS WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT (this "Third
Amendment"), dated as of September 30, 1998, is entered into by and among PC
SERVICE SOURCE, INC., a Delaware corporation, (the "Borrower"), HI-TEK SERVICES,
INC., a California corporation ("Hi-Tek"), CYCLIX ENGINEERING CORPORATION, a
Texas corporation ("Cyclix") (Hi-Tek and Cyclix being sometimes referred to
herein singularly as a "Guarantor" and collectively as the "Guarantors"),
NATIONSBANK, N.A. (formerly known as NationsBank of Texas, N.A.) and NATIONAL
CITY BANK OF KENTUCKY, in their respective capacities as lenders under the
Credit Agreement (as such term is hereinafter defined) (collectively, the
"Lenders"), and NATIONSBANK, N.A. (formerly known as NationsBank of Texas,
N.A.), in its capacity as Administrative Lender under the Credit Agreement (the
"Administrative Lender").
BACKGROUND
A. The Borrower, the Lenders and the Administrative Lender are parties to
a certain Credit Agreement dated as of June 20, 1997 (said Credit Agreement, as
amended, supplemented, modified and/or restated, being referred to herein as the
"Credit Agreement"); the terms defined in the Credit Agreement and not otherwise
defined herein shall be used herein as defined in the Credit Agreement and, to
the extent appropriate, as amended hereby.
B. The Guarantors have heretofore guaranteed all of the indebtedness,
obligations and liabilities of the Borrower to the Lenders under, or in
connection with, the Credit Agreement.
C. The Borrower has advised the Administrative Lender and the Lenders
that as of September 30, 1998, the Borrower is not in compliance with the
financial covenants contained in Sections 7.1, 7.2 and 7.3 of the Credit
Agreement (such noncompliance being referred to herein as the "Financial
Covenant Deficiencies").
D. The Borrower and the Guarantors have requested that the Administrative
Lender and the Lenders waive, for a limited period of time, the Events of
Default that would otherwise exist under the Credit Agreement and/or the other
Loan Documents by virtue of the existence, as of September 30, 1998, of the
Financial Covenant Deficiencies, and, subject to the terms, conditions and
limitations set forth herein, the Administrative Lender and the Lenders are
prepared to do so. The Borrower, the Guarantors, the Lenders and the
Administrative Lender also desire to amend the Credit Agreement in certain
respects.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, the Borrower, the
Guarantors, the Lenders and the Administrative Lender covenant and agree as
follows:
1. AMENDMENTS.
1.1 Article I of the Credit Agreement is hereby amended by adding
thereto the following additional defined terms:
<PAGE> 2
"`Third Amendment' means that certain Waiver and Third Amendment to
Credit Agreement, dated as of September 30, 1998, among the Borrower,
the Guarantors, the Administrative Lender and the Lenders."
"`Third Amendment Pricing Period' means the period from and including
the effective date of the Third Amendment to and including the Third
Amendment Rate Adjustment Date."
"`Third Amendment Rate Adjustment Date' means the date which is two
Business Days following the date that the Lenders receive the
financial statements for the fiscal quarter ended December 30, 1998,
required to be delivered pursuant to Section 6.2 or 6.3 hereof,
together with the Compliance Certificate in connection therewith,
required to be delivered pursuant to Section 6.4 hereof."
1.2 The definition of "Applicable Margin" set forth in Article I
of the Credit Agreement is hereby amended to read as follows:
"`Applicable Margin'" means the following per annum percentages,
applicable in the following situations:
<TABLE>
<CAPTION>
Applicable
Margin with Applicable
respect to Margin with
LIBOR respect to Base
Advances Rate Advances
----------- ---------------
<S> <C> <C>
(a) Third Amendment Pricing Period 3.00% 1.50%
(b) Subsequent Pricing Period
(1) The Funded Debt to EBITDA less CapEx Ratio is greater 2.25% 0.75%
than or equal to 4.50 to 1.00
(2) The Funded Debt to EBITDA less CapEx Ratio is 1.75% 0.25%
less than 4.50 to 1.00 but greater than or equal to
3.50 to 1.00
(3) The Funded Debt to EBITDA less CapEx Ratio is 1.50% 0.00%
less than 3.50 to 1.00 but greater than or equal to
2.50 to 1.00
(4) The Funded Debt to EBITDA less CapEx Ratio is 1.25% 0.00%
less than 2.50 to 1.00 but greater than or equal to
1.50 to 1.00
(5) The Funded Debt to EBITDA less CapEx Ratio is 1.00% 0.00%
less than 1.50 to 1.00
</TABLE>
-2-
<PAGE> 3
The Applicable Margin payable by the Borrower on the Advances outstanding
hereunder shall be subject to reduction or increase, as applicable and as set
forth in the table above, on a quarterly basis according to the performance of
the Borrower as tested by using the Funded Debt to EBITDA less CapEx Ratio
calculated as of the end of each fiscal quarter during the Subsequent Pricing
Period; provided, that each adjustment in the LIBOR Basis or the Base Rate Basis
shall be effective with respect to Advances (i) made following receipt by the
Administrative Lender of the financial statements required to be delivered
pursuant to Section 6.2 or 6.3 hereof, as applicable, for each such fiscal
quarter, and the corresponding Compliance Certificate required pursuant to
Section 6.4 hereof, on the date of making such Advance and (ii) outstanding on
the date of receipt of such financial statements and Compliance Certificate
referred to in clause (i) immediately preceding, on the date which is two
Business Days following the date of receipt of such financial statements and
Compliance Certificate. If such financial statements and Compliance Certificate
are not received by the Administrative Lender by the date required, effective as
of the first Business Day following notification thereof from the Administrative
Lender to the Borrower, the Applicable Margin with respect to LIBOR Advances and
the Applicable Margin with respect to Base Rate Advances shall be the highest
per annum percentage specified above for each such type of Advance until such
time as such financial statements and Compliance Certificate are received."
1.3 The definition of "Subsequent Pricing Period" set forth in
Article I of the Credit Agreement is hereby amended to read as follows:
"`Subsequent Pricing Period' means the period from and including the
date which is the first day following the end of the Third Amendment
Initial Pricing Period to and including the Maturity Date."
1.4 Section 2.4(a) of the Credit Agreement is hereby deleted in its
entirety and the following is hereby substituted in lieu thereof:
"(a) Commitment Fee. Subject to Section 11.9 hereof, the Borrower
agrees to pay to the Administrative Lender, for the ratable account of
the Lenders, a commitment fee equal to 0.250 percent per annum
[provided, however, that such commitment fee shall be equal to 0.500
percent per annum during the Third Amendment Pricing Period and such
commitment fee shall be equal to 0.375 percent per annum during any
period(s) of time (other than during the Third Amendment Pricing
Period) that the Funded Debt to EBITDA less CapEx Ratio is greater
than or equal to 4.50 to 1.00) (the "Commitment Fee"] on the daily
average Unused Portion during the period commencing on the Agreement
Date and ending on the Maturity Date. The Commitment Fee shall be (i)
payable in arrears on each Quarterly Date and on the Maturity Date,
(ii) fully earned when due and, subject to Section 11.9 hereof,
nonrefundable when paid and (iii) subject to Section 11.9 hereof,
computed on the basis of a year of 365 or 366 days, as appropriate,
for the actual number of days elapsed."
2. LIMITED WAIVER. The Lenders and the Administrative Lender hereby waive
any and all Events of Default that may exist under the Credit Agreement and/or
any of the other Loan Documents as of the effective date of this Third Amendment
by virtue of the Financial Covenant Deficiencies with respect to the fiscal
quarter of the Borrower ended September 30, 1998; provided, however, that the
foregoing waiver shall only be effective for the period of time from the
effective date of this Third Amendment through, and including, December 30, 1998
and if any of the Financial Covenant Deficiencies exist, or continue to exist,
-3-
<PAGE> 4
on December 31, 1998, at the election of the Lenders, an Event of Default shall
be deemed to exist under the Credit Agreement and the other Loan Documents as of
such date. It is the express intent of the parties hereto that the foregoing
limited waiver by the Lenders and the Administrative Lender be, constitute and
be construed as a limited waiver, effective only for the aforesaid period of
time and expiring on December 30, 1998, of the Events of Default that would
otherwise exist under the Credit Agreement and/or the other Loan Documents by
virtue of the occurrence of the Financial Covenant Deficiencies.
3. ADDITIONAL COVENANTS; REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF
DEFAULT. By its execution and delivery hereof, the Borrower and each Guarantor
covenants, agrees, represents and warrants that, as of the date hereof and after
giving effect to the amendments contemplated by the foregoing Section 1:
(a) Neither the execution and delivery of this Amendment nor the
consummation of the transactions contemplated hereby shall terminate, limit or
otherwise reduce the obligations and/or liabilities of either Guarantor under,
or in connection with, such Guarantor's guaranty of the Obligations or any other
Loan Document executed by such Guarantor, all of which obligations and
liabilities are hereby ratified and confirmed by each Guarantor;
(b) No event has occurred and is continuing which constitutes a Default or
an Event of Default;
(c) Borrower has full power and authority to execute and deliver this
Third Amendment and this Third Amendment, and the Credit Agreement, as amended
hereby, constitute the legal, valid and binding obligations of Borrower,
enforceable in accordance with their respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
or similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law);
(d) Each Guarantor has full power and authority to execute and deliver
this Third Amendment and this Third Amendment constitutes the legal, valid and
binding obligations of such Guarantor, enforceable in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at law); and
(e) No authorization, approval, consent, or other action by, notice to, or
filing with, any governmental authority or other Person (other than the consent
of the respective Board of Directors of each of Borrower and each Guarantor), is
required for the execution, delivery or performance by Borrower or either
Guarantor of this Third Amendment.
4. CONDITIONS OF EFFECTIVENESS. Subject to the satisfaction of the
following conditions precedent, this Third Amendment shall be effective as of
September 30, 1998; provided, however, that the amendments set forth herein to
the definition of "Applicable Margin" and to Section 2.4(a) of the Credit
Agreement shall be effective as of November 13, 1998:
(a) the Administrative Lender shall have received multiple counterparts of
this Third Amendment executed by each Lender;
(b) the Administrative Lender shall have received multiple counterparts of
this Third Amendment executed by the Borrower and by each Guarantor;
-4-
<PAGE> 5
(c) the Administrative Lender shall have received certified resolutions of
the respective board of directors of each of the Borrower and each Guarantor
authorizing the execution, delivery and performance of this Third Amendment; and
(d) the Administrative Lender shall have received, in form and substance
satisfactory to the Administrative Lender, such other documents, certificates
and instruments as the Administrative Lender shall require.
5. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this Third Amendment, each reference in the
Credit Agreement to "this Agreement", "hereunder", "herein", or words of like
import shall mean and be a reference to the Credit Agreement, as affected and
amended hereby.
(b) The Credit Agreement, as amended by the amendments referred to above,
and all other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
6. COSTS, EXPENSES AND TAXES. The Borrower agree to pay on demand all
reasonable costs and expenses of the Administrative Lender in connection with
the preparation, reproduction, execution and delivery of this Third Amendment
and the other instruments and documents to be delivered hereunder (including the
reasonable fees and out-of-pocket expenses of counsel for the Administrative
Lender with respect thereto and with respect to advising the Administrative
Lender as to its rights and responsibilities under the Credit Agreement, as
hereby amended).
7. EXECUTION IN COUNTERPARTS. This Third Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same
instrument.
8. GOVERNING LAW; BINDING EFFECT. This Third Amendment shall be governed
by and construed in accordance with the laws of the State of Texas and shall be
binding upon the Borrower, each Guarantor, each Lender and the Administrative
Lender and their respective successors and assigns.
9. HEADINGS. Section headings in this Third Amendment are included herein
for convenience of reference only and shall not constitute a part of this Third
Amendment for any other purpose.
10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS THIRD
AMENDMENT, AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS OF THE PARTIES.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment
as of the date first above written.
PC SERVICE SOURCE, INC.
By: /s/
------------------------------
Name:
------------------------------
Title:
------------------------------
HI-TEK SERVICES, INC.
By: /s/
------------------------------
Name:
------------------------------
Title:
------------------------------
CYCLIX ENGINEERING CORPORATION
By: /s/
------------------------------
Name:
------------------------------
Title:
------------------------------
NATIONSBANK, N.A. (formerly known as
NationsBank of Texas, N.A.), as
Administrative Lender and as a Lender
By: /s/
------------------------------
Name:
------------------------------
Title:
------------------------------
NATIONAL CITY BANK OF KENTUCKY,
as a Lender
By: /s/
------------------------------
Name:
------------------------------
Title:
------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at September 30, 1998 (Unaudited) and the
Consolidated Statement of Operations for the Nine Months Ended September 30,
1998 (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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 877
<SECURITIES> 0
<RECEIVABLES> 20,836
<ALLOWANCES> (1,031)
<INVENTORY> 22,775
<CURRENT-ASSETS> 48,006
<PP&E> 24,629
<DEPRECIATION> (10,066)
<TOTAL-ASSETS> 67,037
<CURRENT-LIABILITIES> 32,816
<BONDS> 13,830
0
0
<COMMON> 59
<OTHER-SE> 30,266
<TOTAL-LIABILITY-AND-EQUITY> 67,037
<SALES> 111,520
<TOTAL-REVENUES> 119,671
<CGS> 78,994
<TOTAL-COSTS> 84,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 1,085
<INCOME-PRETAX> (3,233)
<INCOME-TAX> (1,206)
<INCOME-CONTINUING> (2,027)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,027)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
<FN>
<F1>Provision for doubtful accounts and inventory provision included in total
costs.
</FN>
</TABLE>
<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>
<RESTATED>
<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> .13
<EPS-DILUTED> .12
<FN>
<F1>Provision for doubtful accounts and inventory provision included in total
costs.
</FN>
</TABLE>
