<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of
the Commission only (as
Permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
PC SERVICE SOURCE, INC.
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(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act
Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how is was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the form or schedule and the
date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
November 24, 1998
Dear Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders of PC
Service Source, Inc. which will be held on December 18, 1998, at 10:00 a.m.,
Central Time, at the Company's corporate offices located at 2350 Valley View
Lane, Dallas, Texas. The official notice of the meeting together with a proxy
statement and proxy card are enclosed. Please give this information your careful
attention.
Whether or not you expect to attend the meeting in person, it is important that
your shares be voted at the meeting. I urge you to specify your choices by
marking the enclosed proxy card and returning it promptly. Sending in a signed
proxy will not affect your right to attend the Special Meeting and vote in
person. You may revoke your proxy at any time before it is voted at the Special
Meeting by giving written notice to the secretary of the Company.
Sincerely,
/s/ Avery More
Avery More
Chairman of the Board and Chief Executive Officer
YOUR VOTE IS IMPORTANT
Please Sign, Date, and Return Your Proxy Card
<PAGE> 3
-------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, DECEMBER 18, 1998
-------------------------
To Our Stockholders:
A Special Meeting of Stockholders of PC Service Source, Inc. will be held at the
Company's corporate offices at 2350 Valley View Lane, Dallas, Texas, on December
18, 1998, at 10:00 a.m., Central Time, for the following purpose as more fully
described on page 10 of the proxy statement, which is made a part of this
Notice:
To consider and vote on a proposal to amend the Company's Stock Option
Plan to increase the number of authorized shares thereunder from
1,000,000 to 1,750,000.
The Board of Directors has fixed the close of business on November 20, 1998, as
the record date for determining stockholders entitled to notice of and to vote
at the meeting. Only stockholders of record at the close of business on that
date will be entitled to notice of and to vote at the meeting.
You are cordially invited to attend the meeting in person. Whether or not you
expect to attend the meeting in person, you are urged to sign and date the
enclosed proxy card and return it promptly in the envelope provided for that
purpose. Sending in a signed proxy will not affect your right to attend the
Special Meeting and vote in person. You may revoke your proxy at any time before
it is voted at the Special Meeting by giving written notice to the secretary of
the Company.
By Order of the Board of Directors,
/s/ Robert J. Boutin
Robert J. Boutin
Senior Vice President, Chief Financial Officer and Secretary
Dallas, Texas
November 24, 1998
It is important that your stock be represented at the meeting regardless of the
number of shares you hold. Please complete, sign, date and mail the enclosed
Proxy Card in the accompanying envelope even if you intend to be present at the
meeting. Returning the Proxy Card will not limit your right to vote in person or
to attend the Special Meeting, but will insure your representation if you cannot
attend. If you have shares in more than one name, or if your stock is registered
in more than one way, you may receive more than one copy of the proxy material.
If so, please sign and return each copy of the proxy cards you receive so that
all of your shares may be voted. The Proxy is revocable at any time prior to its
use.
<PAGE> 4
PC SERVICE SOURCE, INC.
2350 VALLEY VIEW LANE
DALLAS, TEXAS 75234
----------
PROXY STATEMENT
FOR
SPECIAL MEETING
TO BE HELD ON
DECEMBER 18, 1998
----------
VOTING AT THE MEETING AND PROXIES
Commencing on November 24, 1998, PC Service Source, Inc., a Delaware
corporation ("PCSS" or the "Company"), will mail this Proxy Statement to
stockholders entitled to vote at the Company's Special Meeting of Stockholders
on December 18, 1998 (the "Special Meeting"). Stockholders of record at the
close of business on November 20, 1998, will be entitled to vote at the meeting
and will receive a copy of this Proxy Statement, furnishing information relating
to the business to be transacted at the Special Meeting, including any
adjournment or postponement of the Special Meeting. At the close of business on
November 20, 1998, the record date for determining stockholders entitled to
receive notice of and to vote at the Special Meeting, the Company's outstanding
voting securities consisted of 5,773,820 shares of the Company's common stock,
$0.01 par value per share (the "Common Stock"). Holders of Common Stock are
entitled to one vote per share in any matter that may be acted upon at the
Special Meeting. The Company's Certificate of Incorporation does not permit
cumulative voting.
A proxy card is enclosed for your use. YOU ARE SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF THE COMPANY (THE "BOARD") TO SIGN, DATE AND RETURN THE
PROXY CARD IN THE ACCOMPANYING ENVELOPE, which is postage-paid if mailed in the
United States.
For purposes of determining whether a proposal has received a majority
vote, abstentions will be included in the vote totals, with the result that an
abstention will have the same effect as a negative vote for all proposals. If a
broker indicates that it is prohibited from exercising discretionary authority
with respect to shares held of record by such broker, including shares held for
beneficial holders that have not returned proxies (so-called "broker
non-votes"), those shares will not be included in the vote totals and,
therefore, will have no effect on the outcome of the vote with respect to that
matter. Abstentions and broker non-votes will, however, be treated as present
for quorum purposes and may be entitled to vote on other matters.
You may revoke your proxy at any time before it is actually voted at the
Special Meeting by (i) delivering written notice of revocation to the Secretary
of the Company, (ii) submitting a subsequently dated proxy, or (iii) attending
the Special Meeting and withdrawing the proxy. You may also be represented by
another person present at the Special Meeting through executing a form of proxy
designating such person to act on your behalf. Each unprovoked proxy card
properly executed and received prior to the close of the voting will be voted as
indicated. Where specific instructions are not indicated, the proxy will be
voted for the amendment to the Company's Stock Option Plan and for all proposals
recommended by the Board.
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<PAGE> 5
The holders of a majority of the voting power of the issued and
outstanding stock of the Company entitled to vote at the Special Meeting,
present in person or represented by proxy, shall constitute a quorum for the
transaction of business at the Special Meeting. If a quorum is not present or
represented by proxy at the Special Meeting, the stockholders entitled to vote
at the meeting, present in person or represented by proxy, shall have the power
to adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present or represented by proxy. At such
adjourned meeting at which a quorum shall be present or represented by proxy,
any business may be transacted which might have been transacted at the Special
Meeting as originally called. If the adjournment is for more than thirty days,
or, if after the adjournment a new record date is set, a notice of adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting. The affirmative vote of a majority of the outstanding voting power of
the Common Stock is requested to amend the Stock Option Plan. Absentees will not
be counted as affirmative votes.
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<PAGE> 6
OWNERSHIP OF COMMON STOCK BY
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of November 1, 1998, by
(i) each director and director nominee who beneficially owns Common Stock and
certain of the Company's executive officers, (ii) all of the Company's directors
and executive officers as a group and (iii) each person known by the Company to
be the beneficial owner of more than 5% of the Company's Common Stock as of
November 18, 1998.
The number of shares of the Company's Common Stock beneficially owned by
each individual set forth below is determined under the rules of the Securities
and Exchange Commission and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which an individual has sole or shared
voting power or investment power and any shares that an individual presently, or
within 60 days, has the right to acquire through the exercise of any stock
option or other right. However, such shares are not deemed to be outstanding for
the purpose of computing the percentage of outstanding shares beneficially owned
by any other person. Unless otherwise indicated, each individual has sole voting
and investment power (or shares such powers with their spouse) with respect to
the shares of the Company's Common Stock set forth in the table below:
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER
- ------------------------
DIRECTORS (INCLUDING THOSE WHO ARE ALSO
EXECUTIVE OFFICERS): NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY OWNED OUTSTANDING SHARES
------------------ ------------------
<S> <C> <C>
Avery More .............................. 1,356,300(1) 23.5%
Mark Hilz ............................... 194,500(2) 3.3%
Jay Haft ................................ 43,500 *
Robert J. Boutin ........................ 31,700 *
Robert S. Leff .......................... 27,000 *
Edward C. Raymund ....................... 17,500(3) *
Morti Tenenhaus ......................... 10,000(4) *
All Directors and Executive Officers as a
Group (7) persons ....................... 1,680,500(5) 28.4%
OTHER:
Wellington Management Company, LLP ...... 569,300(6) 9.9%
Victor Morgenstern ...................... 382,800(7) 6.6%
Katun Corporation ....................... 338,750(8) 5.9%
Joseph A. Cohen ......................... 298,000(9) 5.2%
</TABLE>
- ------------------------------
* Indicates less than 1%.
(1) The business address of Mr. More is 2350 Valley View Lane,
Dallas, Texas 75234. The shares of Common Stock listed in Mr.
More's name above are owned by Eureka Venture Partners I, Ltd.
("Partners I"), the sole general partner of which is Eureka
Venture Management, Inc. ("Eureka Venture"). Mr. More holds more
than a fifty percent (50%) limited partnership interest in
Partners I and more than fifty percent (50%) of the outstanding
common stock of Eureka Venture. Various parties, including a
trust for the benefit of Mr. More's minor children and Mr. Jay
Haft, a director of the Company, have made investments in
Partners I, and in connection therewith have been issued options
from Partners I to acquire stock of other companies in which
Partners I has an interest, including PCSS. If all of those
options to acquire PCSS Common Stock were exercised, a total of
144,284 shares of PCSS Common Stock would be acquired by those
parties from Partners I. Further, the shares shown as
beneficially owned by Mr. More also include 15,000 shares owned
by him individually and 10,000 shares held by Rosetta Stone
Holdings, LLC, the managing member of which is Mr. More. Mr.
More disclaims beneficial ownership of those shares.
-3-
<PAGE> 7
(2) Includes 145,500 shares issuable upon the exercise of options
exercisable at or within 60 days and 3,000 shares held by the
minor children of Mr. Hilz. Mr. Hilz disclaims beneficial
ownership of those shares.
(3) Includes 6,000 shares held by the Raymund Family Partnership
(the "Partnership"), 2,000 shares held by the Raymund Family
Trust and 500 shares owned by Mr. Raymund's wife. Mr. Raymund
may be deemed to beneficially own Partnership shares because he
is the Partnership's general partner. Mr. Raymund disclaims
beneficial ownership of the shares owned by his wife.
(4) Includes 10,000 shares held by trusts for the benefit of the
minor children of Mr. Tenenhaus as to which he disclaims
beneficial ownership.
(5) Includes 145,500 shares issuable upon the exercise of options
exercisable at or within 60 days.
(6) The business address of Wellington Management Company, LLP is 75
State Street, Boston, Massachusetts.
(7) The business address of Mr. Morgenstern is Harris Associates
L.P., Two North LaSalle Street, Chicago, Illinois 60602.
Includes 193,600 shares held by various family trusts as to
which Mr.
Morgenstern disclaims beneficial ownership.
(8) The business address of Katun Corporation is 10951 Bush Lake
Road, Bloomington, Minnesota 55438.
(9) The business address of Mr. Cohen is The Garnet Group, 825 Third
Avenue, 40th Floor, New York, New York 10022.
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<PAGE> 8
EXECUTIVE COMPENSATION
The following table summarizes the compensation earned by the Company's
Chief Executive Officer and its four other most highly compensated executive
officers (whose compensation exceeded $100,000 in 1997) and one additional
individual for whom disclosures would have been provided had the individual been
serving as an executive officer as of December 31, 1997, collectively, the
"Named Officers," for services rendered in all capacities to the Company during
the fiscal years ended December 31, 1997, 1996, and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Securities
Annual Compensation Underlying
------------------- Options/ All Other
Salary Bonus SARs Compensation
Name and Principal Positions Year ($) ($) (#) ($)(A)
---------------------------- ---- ------ ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Mark T. Hilz(D) ............... 1997 180,000 -- -- 6,369
President and 1996 175,615 -- 30,000 6,403
Chief Executive Officer 1995 129,577 -- -- 6,157
Philip Wise(B) ................ 1997 146,575 -- -- 3,243
President, 1996 150,000 -- -- 3,243
PCSS Repair Services 1995 72,115 -- -- 1,615
Stephen R. Grimmer ............ 1997 109,636 30,129 -- 5,591
Vice President, OEM Services 1996 96,500 36,392 5,000 5,316
1995 93,719 -- 5,000 3,749
James "Zeke" Zoccoli(B) ....... 1997 110,000 15,000 -- 2,500
Senior Vice President, 1996 52,212 -- 20,000 --
Logistics and Chief
Information Officer 1995 -- -- -- --
Paul Klotz(C) ................. 1997 111,459 19,031 20,000 4,123
Vice President, Marketing and 1996 -- -- -- --
Electronic Commerce 1995 -- -- -- --
Danny G. Hair(B) .............. 1997 135,542 -- 60,000 2,769
Senior Vice President, Chief 1996 -- -- -- --
Financial Officer and 1995 -- -- -- --
Secretary
</TABLE>
- -----------------------------------
(A) Represents amounts paid by the Company to each executive officer's
account under the Company's 401(k) plan.
(B) The 1995 annual compensation for Mr. Wise, the 1996 annual
compensation for Mr. Zoccoli and the 1997 compensation of Mr. Hair
reflects less than a full year. Mr. Wise resigned as the President of
PCSS Repair Services in August 1998. In February 1998, Mr. Hair
resigned as Senior Vice President, Chief Financial Officer and
Secretary of the Company and was replaced by Garold E. Swan. Mr. Swan
resigned from his position with the Company in August 1998 and was
replaced by Robert J. Boutin.
(C) In February 1998, Mr. Klotz was named Vice President, Marketing and
Electronic Commerce.
(D) Mr. Hilz resigned as the Chief Executive Officer of the Company in
August 1998. Mr. More, the Company's Chairman of the Board, was named
Chief Executive Officer in August 1998.
-5-
<PAGE> 9
OPTION GRANTS IN 1997 TO THE COMPANY'S EXECUTIVE OFFICERS
The following table provides information regarding the stock options
granted by the Company to Named Officers in 1997.
1997 OPTION GRANTS
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------
Potential Realizable
Value at Assumed Annual
Number of Percent of Rates of
Securities Total Exercise Stock Price Appreciation
underlying Options of Base for
Option/SARs Granted to Price Expiration Option Term (A)
Name Granted (#) Employees ($/Sh) Date 5% ($) 10% ($)
---- ----------- --------- ----- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Paul Klotz 20,000(C) 6.8% 9.00 1/28/07 64,500 208,500
Danny G. Hair(B) 40,000(C) 13.5% 9.00 (B) 226,800 572,400
20,000(C) 6.8% 9.00 (B) 76,725 227,925
</TABLE>
- -----------------------
(A) The potential realizable values set forth under these columns result from
calculations assuming 5% and 10% growth rates as set by the Securities
and Exchange Commission and are not intended to forecast future price
appreciation of the Company's Common Stock. The amounts reflect potential
future value based upon growth at these prescribed rates. The Company did
not use an alternative formula for a grant date valuation, an approach
which would state gains at present, and therefore lower, value. The
Company is not aware of any formula which will determine with reasonable
accuracy a present value based on future unknown or volatile factors.
Actual gains, if any, on stock option exercises are dependent on the
future performances of the Company's Common Stock. There can be no
assurance that the amounts reflected in this table will be achieved.
(B) In February 1998, Mr. Hair resigned as Senior Vice President, Chief
Financial Officer and Secretary of the Company. Mr. Hair's stock options
were cancelled in connection with his resignation.
(C) One-fifth (1/5) of these options were to become exercisable over the next
five years. In April 1998, these options were replaced by options to
acquire 12,000 shares at an exercise price of $4.75 per share.
AGGREGATE OPTION EXERCISES IN 1997 BY THE COMPANY'S EXECUTIVE OFFICERS
The following table provides information as to options exercised, if
any, by each of the Named Officers in 1997 and the value of options held by
those officers at year-end measured in terms of the last reported sale price for
the shares of the Company's Common Stock on December 31, 1997 ($4.94 as reported
on Nasdaq).
AGGREGATED OPTION EXERCISES IN 1997 AND YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying in-the-Money
Unexercised Options Options at
Shares at December 31, December 31, 1997
Acquired on Value 1997(#) (A)($)
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark T. Hilz -- -- 187,500 88,000 377,835 64,560
Philip Wise(B) -- 25,000 -- -- --
Stephen R. Grimmer -- -- 9,000 11,000 -- --
James "Zeke" Zoccoli -- -- 4,000 16,000 -- --
Paul Klotz -- -- -- 20,000 -- --
Danny G. Hair(C) -- -- -- 60,000 -- --
</TABLE>
- --------------------------------
(A) Market value of shares covered by in-the-money options on December 31,
1997, less option exercise price. Options are in-the-money if the market
value of the shares covered thereby is greater than the option exercise
price.
(B) Mr. Wise resigned as the President of PCSS Repair Services in August 1998.
(C) In February 1998, Mr. Hair resigned as Senior Vice President, Chief
Financial Officer and Secretary of the Company. Mr. Hair's stock options
were cancelled in connection with his resignation.
-6-
<PAGE> 10
REPORT OF COMPENSATION COMMITTEE ON ANNUAL EXECUTIVE COMPENSATION
The Compensation Committee met informally several times during 1997 and
met during three of the regular meetings of the Board. The policy of the
Compensation Committee is to provide executive officers of the Company and its
remanufacturing subsidiary, PC Service Source Repair Services ("PCSS Repair
Services;" formerly known as Cyclix Engineering Corporation), with fair
compensation based on their responsibilities, and on the performance of the
Company as a whole. Regarding the executive officers of PCSS Repair Services,
however, their compensation is based on the performance of PCSS Repair Services
as a whole.
The Compensation Committee believes generally that performance goals
enhance teamwork and help focus management's attention on the performance of the
companies rather than the performance of particular areas in the companies.
Additionally, particular areas may in the future need separate performance
goals, but the Compensation Committee does not believe that is currently
required.
The Compensation Committee sets target earnings levels for the Company
and PCSS Repair Services, and provides a bonus target to each executive officer.
The bonus target is a percentage of that executive's base salary. The
Compensation Committee then sets target levels pursuant to which an executive
who is employed at the time of the bonus award can receive all or a portion of
the designated bonus target based on the Company's or PCSS Repair Services'
earnings performance, as the case may be. If the earnings target is not met, an
executive may receive some portion of his bonus based on the percentage of the
earnings target achieved. In addition, if the earnings target is exceeded, the
executives may receive, based on a formula, up to twice the executive's bonus
target. The earnings target is set by the Compensation Committee prior to the
commencement of each fiscal year and is believed by the Compensation Committee
to be aggressive, but achievable.
The Compensation Committee believes that its earnings and bonus targets
are confidential and disclosure of those targets would adversely effect the
Company. The report of the Compensation Committee will not be deemed to be
incorporated by reference into any filing by the Company under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to the extent that
the Company specifically incorporates that report by reference.
-7-
<PAGE> 11
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000
shares of Common Stock and 5,000,000 shares of preferred stock, par value $0.01
per share (the "Preferred Stock"). To date, no Preferred Stock has been issued.
As of November 1, 1998, 5,773,820 shares of Common Stock were issued and
outstanding. All outstanding shares of the Company's Common Stock are fully paid
and nonassessable. None of the shares of Common Stock or Preferred Stock has
preemptive rights.
Holders of Common Stock are subject to a potential pro rata decrease in
equity ownership of the Company to the extent that shares of Common Stock or
Preferred Stock are issued in the future. Under the Delaware General Corporation
Law (the "DGC"), the Board is not required to seek stockholder approval to issue
additional shares of Common Stock or Preferred Stock. However, under the Nasdaq
Listing Requirements, a company may not issue common stock under certain
circumstances without prior stockholder approval. The Common Stock is listed for
trading on the Nasdaq National Market and, accordingly, the Company is subject
to the Nasdaq Listing Requirements.
COMMON STOCK
Each share of Common Stock entitles its holder to one vote on all
matters submitted to a vote of stockholders. The holders of Common Stock are
entitled to receive ratably such dividends, if any, as are declared by the
Company's Board of Directors out of funds legally available for that purpose,
subject to the rights of holders of Preferred Stock. In the event of the
Company's liquidation, dissolution or winding up, the holders of Common Stock
would be entitled to share ratably in all assets of the Company available for
distribution to holders of Common Stock, subject to the preferential rights of
holders, if any, of shares of Preferred Stock. See "Description of Capital
Stock--Preferred Stock" below.
The Company's Certificate of Incorporation provides that if the Company
in any manner subdivides (by stock split, stock dividend or otherwise) or
combines (by reverse stock split or otherwise) the outstanding shares of the
Common Stock, the outstanding shares of the other such class shall be
proportionately subdivided or combined, as the case may be.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Company's Board of
Directors to issue shares of Preferred Stock in one or more series and to fix
and state the designations, powers, preferences, qualifications, limitations,
restrictions and relative rights of the shares of each such series. The Board of
Directors may determine, without any vote or action by the holders of Common
Stock, among other things, the payment and rates of dividends, if any, whether
dividends are to be cumulative or noncumulative, whether the Preferred Stock is
to be subject to redemption and, if so, the manner of redemption and the
redemption price, the preference of any series of Preferred Stock over any other
series of Preferred Stock or Common Stock on liquidation, dissolution,
distribution of assets or winding up of the Company, any sinking fund or other
retirement provisions for the Preferred Stock and any conversion or exchange
rights or other privilege of the holders to acquire shares of any other series
of Preferred Stock or Common Stock. The Board of Directors may also determine
the number of shares in each series of Preferred Stock, the voting rights of
each such series (subject to any requirements of applicable law) and any stated
value applicable to the shares of any series of Preferred Stock.
WARRANTS
In connection with the 1994 initial public offering of the Company's
Common Stock, the Company issued a five-year warrant originally to purchase
100,000 shares of Common Stock at an exercise price of $10.80 per share to the
representative of the underwriters in that offering. As of the date hereof,
33,317 shares of Common Stock are available to be acquired under the terms of
that warrant. The warrant exercise
-8-
<PAGE> 12
price and the number of shares of Common Stock covered by the warrant is subject
to adjustment in order to protect the holders against dilution in certain
events. The warrant may be exercised for all or any lesser number of shares of
the Common Stock. The underwriter's warrant also contains a net exercise
provision. Holders of a majority of the shares issued or issuable under the
warrant may obtain registration of such shares for resale under the Securities
Act.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation and Bylaws contain
provisions described below that may reduce the likelihood of a change in
management or voting control of the Company without the consent of the Board.
These provisions could have the effect of delaying, deterring or preventing
tender offers or takeover attempts that some or a majority of the Company's
stockholders might consider to be in their best interests, including offers or
attempts that might result in a premium over the market price for the Common
Stock, and may have the effect of depressing the market price investors are
willing to pay for the Common Stock.
The Board is divided into three classes, the terms of which will expire
at the 1999, 2000, and 2001 annual meetings of stockholders, respectively.
Directors of the Company are elected by the affirmative vote of a plurality of
the shares cast at a meeting at which a quorum is present. The Board has the
right to change the number of directors and to fill vacancies on the Board. The
classification of the Board may have the effect of deterring or delaying a
takeover of the Company because it may take at least two years to gain control
of the Board.
The Company's Certificate of Incorporation permits the Board to issue
at any time, without stockholder approval, Preferred Stock with super-voting
rights or other features that would deter or delay a takeover by reducing the
ability of a potential acquiror to acquire the necessary voting shares to obtain
control. See "Description of Capital Stock -- Preferred Stock."
-9-
<PAGE> 13
PROPOSAL: APPROVAL OF AMENDMENT TO THE COMPANY'S STOCK OPTION PLAN
The Board of Directors proposes that the Company's Stock Option Plan be
amended 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 "Amendment"). As of November 1, 1998, the Company had granted incentive and
nonstatutory stock options to purchase shares of Common Stock issuable under the
Stock Option Plan, which had been exercised as to 232,500 shares, and which were
outstanding as to 767,500 shares. The closing bid price per share of the Common
Stock on Nasdaq was $3.56 on November 18, 1998.
THE STOCK OPTION PLAN
Subject to stockholder approval, the Board of Directors has adopted the
Amendment to the Stock Option Plan. The purpose of the Stock Option Plan is to
strengthen the ability of the Company to attract and retain well-qualified
executive and managerial personnel, to furnish additional incentive to those
persons responsible for the successful management of the Company, and thereby to
enhance stockholder value.
The Stock Option Plan requires that the exercise price for each
incentive stock option must not be less than the greater of (a) the par value
per share of the Common Stock or (b) 100% of the fair market value per share of
the Common Stock at the time the option is granted. The Stock Option Plan
requires that the exercise price for each nonstatutory stock option must not be
less than the fair market value per share of the Common Stock at the time the
option is granted. No incentive stock option, however, may be granted to an
employee who owns more than 10% of the total combined voting power of all
classes of outstanding stock of the Company unless the option price is at least
110% of the fair market value of the Common Stock at the date of grant and the
option period is not more than five years from the date of grant. No employee
may be granted incentive stock options that first become exercisable during a
calendar year to purchase Common Stock, or stock of any affiliate (or a
predecessor of the Company or an affiliate), with an aggregate fair market value
(determined as of the date of grant of each option) in excess of $100,000. An
incentive stock option counts against the annual limitation only in the year it
first becomes exercisable. Incentive stock options may be granted only to
employees of the Company.
The option period may not be more than ten years from the date the
option is granted. Options may be exercised in annual installments as specified
by the Stock Option Committee. All installments that become exercisable are
cumulative and may be exercised at any time after they become exercisable until
the option expires. Options are not assignable or transferable other than by
will or the laws of descent and distribution.
Full payment for shares purchased upon exercise of an option must be
made at the time of exercise. No shares may be issued until full payment is
made. The Stock Option Plan provides that an option agreement may permit an
optionee to tender previously owned shares of Common Stock in partial or full
payment for shares to be purchased on exercising an option. Unless sooner
terminated by action of the Board of Directors, the Stock Option Plan will
terminate in August 2002.
The Board of Directors has retained the right to amend or terminate the
Stock Option Plan as it deems advisable. However, no amendment shall be made to
increase the number of shares of stock which may be optioned under the Stock
Option Plan, change the class of executive officers and other key employees
eligible under the Stock Option Plan or materially increases the benefits which
may accrue to participants under the Stock Option Plan without submitting such
amendments to stockholders for approval. In addition, no amendments to, or
termination of, the Stock Option Plan shall impair the rights of any individual
under options previously granted without such individual's consent.
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<PAGE> 14
FEDERAL INCOME TAX CONSEQUENCES
No tax obligation will arise for the optionee or the Company upon the
granting of either incentive stock options or non-qualified stock options under
the Stock Option Plan. Upon exercise of a non-qualified stock option, an
optionee will recognize ordinary income in an amount equal to the excess, if
any, of the fair market value, on the date of exercise, of the stock acquired
over the exercise price of the option. Thereupon, the Company will be entitled
to a tax deduction in an amount equal to the ordinary income recognized by the
optionee. Any additional gain or loss realized by an optionee on disposition of
the shares generally will be capital gain or loss to the optionee and will not
result in any additional tax deduction to the Company. The taxable event arising
from exercise of non-qualified stock options by officers of the Company subject
to Section 16(b) of the Securities Exchange Act of 1934 occurs on the later of
the date on which the option is exercised or the date six months after the date
the option was granted unless the optionee elects, within 30 days of the date of
exercise, to recognize ordinary income as of the date of exercise. The income
recognized at the end of any deferred period will include any appreciation in
the value of the stock during that period and the capital gain holding period
will not begin to run until the completion of such period.
Upon the exercise of an incentive stock option, an optionee recognizes
no immediate taxable income. The tax cost is deferred until the optionee
ultimately sells the shares of stock. If the optionee does not dispose of the
option shares within two years from the date the option was granted and within
one year after the exercise of the option, and the option is exercised no later
than three months after the termination of the optionee's employment, the gain
on the sale will be treated as long term capital gain. Subject to the
limitations in the Stock Option Plan, certain of these holding periods and
employment requirements are liberalized in the event of the optionee's death or
disability while employed by the Company. The Company is not entitled to any tax
deduction, except that if the stock is not held for the full term of the holding
period outlined above, the gain on the sale of such stock, being the lesser of
(i) the fair market value of the stock on the date of exercise minus the option
price, and (ii) the amount realized on disposition minus the option price, will
be taxed to the optionee as ordinary income and the Company will be entitled to
a deduction in the same amount. Any additional gain or loss realized by an
optionee upon disposition of shares prior to the expiration of the full term of
the holding period outlined above generally will be capital gain or loss to the
optionee and will not result in any additional tax deduction to the Company. The
"spread" upon exercise of an incentive stock option constitutes a tax preference
item within the computation of the "alternative minimum tax" under the Internal
Revenue Code. The tax benefits which might otherwise accrue to an optionee may
be affected by the imposition of such tax if applicable to the optionee's
individual circumstances.
GRANT OF OPTIONS
Pursuant to the terms of the Stock Option Plan, as proposed to be
amended by the Amendment, incentive and nonstatutory options may be granted to
eligible individuals for the purchase of an aggregate of up to 1,750,000 shares
of Common Stock, of which options to acquire approximately 1,300,000 shares have
already been granted to 52 individuals, which include the Company's executive
officers and employees, as well as certain non-employee directors. Subject to
stockholder approval of the Amendment, of the 750,000 shares covered by the
proposed Amendment, 325,000 have been conditionally granted to the following
executive officers of the Company:
Name and Position Options
----------------- -------
Avery More, Chairman and Chief Executive Officer 250,000
Morti Tenenhaus, Vice Chairman 50,000
Robert J. Boutin, Senior Vice President, Chief 25,000
Financial Officer and Secretary
TOTAL 325,000*
=======
If the Amendment is approved, the remaining 425,000 shares will be utilized for
future grants of options.
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<PAGE> 15
REQUIRED AFFIRMATIVE VOTE
Approval of the Amendment requires the affirmative vote of the holders
of a majority of the shares of Common Stock present in person or by proxy at the
December 18, 1998 Special Meeting.
THE BOARD OF DIRECTORS BELIEVES THAT THE PROPOSAL IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR APPROVAL OF THE AMENDMENT TO THE STOCK OPTION PLAN.
-12-
<PAGE> 16
STOCK PERFORMANCE GRAPH
The following performance graph compares the performance of the
Company's Common Stock, the Standard & Poor's 500 Index and an index of peer
companies selected by the Company (the "Company's Peer Group Index") since March
1994 (which is when the Company's Common Stock first traded publicly on the
National Association of Securities Dealers, Inc. Automated Quotation System).
The graph assumes that the value of the investment in the shares of the
Company's Common Stock and in each index was $100 on April 1, 1994, and that all
dividends were reinvested.
The Company's Peer Group Index shown on the performance graph (which is
weighted on the basis of market capitalization) consists of the Company and the
following companies which are engaged primarily in the computer replacement and
spare parts business: The Cerplex Group, Inc. and Aurora Electronics, Inc. On
April 30, 1998, The Cerplex Group, Inc. and Aurora Electronics, Inc. were
merged.
TOTAL RETURN TO STOCKHOLDERS
[CHART]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN ANALYSIS
3/31/94 12/30/94 12/29/95 12/31/96 12/31/97
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PC SERVICE SOURCE INC. $ 100 $ 100 $ 100 $ 86 $ 55
- ------------------------------------------------------------------------------------------------------------------
PEER GROUP $ 100 $ 58 $ 64 $ 11 $ 8
- ------------------------------------------------------------------------------------------------------------------
NASDAQ COMPOSITE (US) $ 100 $ 101 $ 142 $ 174 $ 213
- ------------------------------------------------------------------------------------------------------------------
Source: Carl Thompson Associates www.ctaonline.com (303) 494-5472. Data from Bloomberg Financial Markets
</TABLE>
The stock price performance depicted in the graph above is not
necessarily indicative of future price performance. The graph will not be deemed
to be incorporated by reference in any filing by the Company under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that the Company specifically incorporates same by reference.
-13-
<PAGE> 17
COSTS OF SOLICITATION
The cost of soliciting proxies, which also includes the preparation,
printing, and mailing of this Proxy Statement, will be borne by the Company.
Solicitation will be made by the Company primarily through the mail, but certain
employees of the Company, who will receive no compensation for their services
other than their regular remuneration, may also solicit proxies by telephone,
telecopy, or personal interview. The Company will request brokers and nominees
to obtain voting instructions of beneficial owners of stock registered in the
names of such brokers and nominees and other "street names" and will reimburse
them for any expenses incurred in connection therewith. The Company's transfer
agent, Harris Trust and Savings Bank, will assist the Company in the
solicitation of proxies from brokers and nominees. The fees for the services of
the transfer agent are included in the monthly fees paid by the Company.
However, the Company will reimburse the transfer agent for its reasonable
out-of-pocket expenses incurred in connection with providing solicitation
services.
APPRAISAL RIGHTS
Under Delaware law and the Company's Certificate of Incorporation, no
apprisal rights are available to dissenting stockholders in regard to the
proposed Amendment.
OTHER MATTERS
The Company knows of no items of business that are expected to be
presented for consideration at the Special Meeting and that are not enumerated
herein. However, if other matters properly come before the Special Meeting, it
is intended that the persons named in the accompanying proxy will vote thereon
in accordance with their best judgment.
DEADLINE FOR STOCKHOLDER PROPOSALS
As stated in the proxy statement distributed in connection with the
Company's 1998 annual meeting of stockholders, proposals of stockholders
intended to be present at the Company's 1999 annual meeting of stockholders, and
otherwise eligible, must be submitted to the Company no later than December 24,
1998, to be included in the Company's 1999 proxy materials.
PLEASE DATE, SIGN AND RETURN THE PROXY CARD AT YOUR EARLIEST
CONVENIENCE IN THE ENCLOSED RETURN ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES. A PROMPT RETURN OF YOUR PROXY CARD WILL BE APPRECIATED AS IT
WILL SAVE THE EXPENSE OF FURTHER MAILINGS.
By Order of the Board of Directors,
/s/ Robert J. Boutin
Dallas, Texas Robert J. Boutin,
November 24, 1998 Senior Vice President, Chief Financial
Officer and Secretary
-14-
<PAGE> 18
APPENDIX A
PROXY
PC SERVICE SOURCE, INC.
SOLICITED ON BEHALF OF THE COMPANY AND APPROVED BY THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Avery More and Robert J. Boutin,
and each of them, as attorneys and proxies of the undersigned, with full power
of substitution, for and in the name, place and stead of the undersigned, to
appear at the Special Meeting of Stockholders of PC Service Source, Inc. to be
held on the 18th day of December, 1998 (pursuant to the Notice of Special
Meeting dated November 1998, and accompanying proxy statement) and at any
postponement or adjournment thereof, and to vote all of the shares of PC Service
Source, Inc. that the undersigned is entitled to vote with all the powers and
authority the undersigned would possess if personally present in accordance with
the following instructions.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR:
APPROVAL OF THE AMENDMENT TO THE STOCK OPTION PLAN TO INCREASE THE NUMBER OF
SHARES RESERVED FOR ISSUANCE THEREUNDER FROM 1,000,000 TO 1,750,000.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Please sign exactly as name appears
below. When shares are held by joint
tenants, both should sign. When signing
as attorney, executor, administrator,
trustee, or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by President
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
Dated:_______________________, 1998
----------------------------------------
(Signature)
----------------------------------------
(Signature if held jointly)
