<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------
Commission file number 333-4691
SOURCE SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2690960
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5580 LBJ FREEWAY
SUITE 300
DALLAS, TEXAS 75240
(Address of principal executive offices) (zip-code)
Registrant's telephone number, including area code: (214) 385-3002
----------------------
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) had been subject to such
filing requirements in the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of September 29, 1996
9,091,794 shares of $.02 par value Common Stock
<PAGE> 2
SOURCE SERVICES CORPORATION
BALANCE SHEET
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 29, DECEMBER 31,
1996 1995
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $17,244 $ 1,388
Accounts receivable, less allowance for doubtful accounts
and fee adjustments of $ 1,749 and $ 1,357 respectively 33,406 25,299
Income tax receivable 641 0
Deferred tax asset, net 900 745
Prepaid expenses and other 344 405
------- -------
Total current assets 52,535 27,837
Property and equipment, net 6,035 2,780
Deferred tax asset, net 0 7
------- -------
Total assets $58,570 $30,624
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,647 $ 3,608
Accrued commissions and payroll 9,245 9,241
Accrued 401 (k) plan contribution 872 0
Accrued contribution to profit sharing plan 0 6
Income taxes payable 0 340
------- -------
Total current 12,764 13,195
Other liabilities 90 135
Deferred tax liability, net 77 0
------- -------
Total liabilities 12,931 13,330
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par, 2,000 shares authorized, no
shares issued and outstanding 0 0
Common stock, $.02 par; 100,000 shares authorized, 9,091,
and 7,153 shares outstanding, respectively 182 144
Capital in excess of par 25,707 1,655
Retained earnings 19,777 15,520
Cumulative translation adjustment (27) (25)
------- -------
Total stockholders' equity 45,639 17,294
------- -------
Total liabilities and stockholders' equity $58,570 $30,624
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
SOURCE SERVICES CORPORATION
STATEMENT OF REVENUES AND EXPENSES
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
------------------------------ -----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net service revenue $54,035 $37,015 $142,768 $101,375
Cost of sales, flexible staffing 24,443 16,592 63,716 45,223
------- ------- -------- --------
Gross profit 29,592 20,423 79,052 56,152
Operating expenses:
Selling 24,363 16,505 66,229 46,651
General and administrative 1,918 1,645 5,670 4,287
------- ------- -------- --------
Total operating expenses 26,281 18,150 71,899 50,938
------- ------- -------- --------
Operating income 3,311 2,273 7,153 5,214
Other income (expense):
Interest income 92 16 114 38
Interest expense (35) (16) (126) (17)
Other, net (64) (177) (259) (404)
------- ------- -------- --------
Income before income taxes 3,304 2,096 6,882 4,831
Income tax (expense) benefit:
Current (1,528) (820) (2,753) (1,917)
Deferred 165 44 46 130
------- ------- -------- --------
Net income $ 1,941 $ 1,320 $ 4,175 $ 3,044
======= ======= ======== ========
Net income per share $ 0.22 $ 0.18 $ 0.55 $ 0.42
======= ======= ======== ========
Weighted average shares outstanding 8,474 7,167 7,593 7,179
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
SOURCE SERVICES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Capital Cumulative Total
------------------ in Excess Retained Translation Stockholders'
Shares Amount of Par Earnings Adjustment Equity
------ ------ --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 7,153 $144 $1,655 $15,520 ($25) $17,294
Net income (unaudited) 802 802
Stock contribution to profit sharing
plan (unaudited) (72) 84 12
------ ---- ------- -------- ---- -------
Balance at March 31, 1996 (unaudited) 7,153 144 1,583 16,406 (25) 18,108
------ ---- ------- -------- ---- -------
Net income (unaudited) 1,430 1,430
Foreign currency translation
adjustment (unaudited) (8) (8)
Stock options exercised (unaudited) 72 72
------ ---- ------- -------- ---- -------
Balance at June 30, 1996 (unaudited) 7,153 144 1,655 17,836 (33) 19,602
====== ==== ======= ======== ==== =======
Net income (unaudited) 1,941 1,941
IPO proceeds (unaudited) 1,563 31 20,325 20,356
IPO costs (unaudited) (1,148) (1,148)
Underwriters overallotment
exercised (unaudited) 375 7 4,875 4,882
Foreign currency translation
adjustment (unaudited) 6 6
------ ---- ------- -------- ---- -------
Balance at September 29, 1996 (unaudited) 9,091 182 25,707 19,777 (27) 45,639
====== ==== ======= ======== ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
SOURCE SERVICES CORPORATION
STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
1996 1995
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,175 $ 3,044
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 759 423
PSP stock contributions 12 0
Deferred compensation 0 401
Deferred tax asset, net (148) 188
Deferred tax liability, net 77 0
Loss on asset sales 13 17
Decrease (increase) in assets:
Accounts receivable (8,107) (5,157)
Income tax receivable (641) 0
Prepaid expense 61 (84)
Investments 0 147
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (959) 69
Accrued commissions and payroll 4 4,397
Accrued 401 (k) plan contribution 872 0
Accrued contribution to profit sharing plan (6) (334)
Income taxes payable (340) (1,914)
Other liabilities (51) (86)
------- --------
Net cash provided by (used in)
operating activities (4,279) 1,111
------- --------
Cash flows from investing activities:
Expenditures for property and equipment (4,354) (1,260)
Proceeds from sales of property and equipment 327 132
------- --------
Net cash (used in)
investing activities (4,027) (1,128)
------- --------
Cash flows from financing activities:
Borrowings from revolving line of credit 44,437 13,745
Repayments of revolving line of credit (44,437) (13,745)
Proceeds from exercision of stock options 72 0
Proceeds from Initial Public Offering 20,356 0
Costs associated with Initial Public Offering (1,148) 0
Exercision of underwriters' overallotment option 4,882 0
Repurchase treasury stock from PSP 0 (7)
------- --------
Net cash provided by (used in)
financing activities 24,162 (7)
------- --------
Net increase (decrease) in cash and cash equivalents 15,856 (24)
Cash and cash equivalents at beginning of period 1,388 2,211
------- --------
Cash and cash equivalents at end of period $17,244 $ 2,187
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
SOURCE SERVICES CORPORATION
STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
1996 1995
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Supplemental Cash Flows Information
Cash paid during the period for:
Interest $ 63 $ 17
=========== ===========
Income Taxes $ 3,553 $ 2,553
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
SOURCE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 29, 1996
(UNAUDITED)
NOTE A --- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Source Services Corporation (the Company), which operates in a single
business segment for generally accepted accounting principle reporting
purposes, places experienced personnel in the fields of information technology,
accounting, finance, engineering, law and health care through its divisions:
Source Edp, Source Finance, Source Engineering, Source Manufacturing, Source
Consulting, Source Temps, Source HealthCare and Source Legal.
Interim Financial Information
The financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in
management's opinion, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of results for such
interim periods. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules or
regulations; however, the Company believes that the disclosures made are
adequate to make the information presented not misleading.
Revenue Recognition
Revenue for the placement of personnel on a permanent basis is recognized
on the date the employer and individual mutually agree to an offer and
acceptance of employment. If the individual fails to continue employment for a
period of time as specified in the placement agreement (guarantee period),
generally a thirty- to ninety-day period, the Company is not entitled to
collect the placement fee. Revenue from permanent placements is shown on the
Statement of Revenues and Expenses net of amounts written off for adjustments
due to placed candidates not remaining in employment for the guarantee period.
Revenue derived from flexible staffing is recognized as services are performed
by the Company's employees and contractors. Revenue from flexible staffing on
the Statement of Revenues and Expenses represents gross billings less amounts
written off. The Company maintains an allowance for potential fee adjustments
and uncollectible accounts for both flexible staffing and permanent placements.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and in banks and overnight
investments.
Property and equipment
Furniture and equipment is stated at cost and is depreciated on a
straight-line basis over estimated useful lives, ranging from five to seven
years. Leasehold improvements are stated at cost and are amortized on a
straight-line basis over the shorter of the lease term or the estimated useful
life of the improvements.
Income Taxes
The Company accounts for income taxes under the principles of FAS 109,
"Accounting for Income Taxes." FAS 109 requires an asset and liability
approach to the recognition of deferred tax assets and liabilities for the
expected future tax consequences of differences between the carrying amounts
and the tax bases of other assets and liabilities.
<PAGE> 8
Foreign currency translation
Foreign currency translation adjustments arise primarily from activities
of the Company's Canadian operations. Results of operations are translated
using the average exchange rates during the period, while assets and
liabilities are translated into U.S. dollars using current rates. Resulting
foreign currency translation adjustments are recorded in stockholders' equity.
NOTE B ---EQUITY
On July 29, 1996, the Company effected an initial public offering (the
Offering) in which 2,500,000 shares of common stock were offered; 1,563,431
shares by the Company and 936,569 shares by certain stockholders of the
Company. The offering price was $14.00 per share, of which the Company
received $13.02, after application of underwriting discounts, resulting in net
proceeds of $20,355,872. The Company did not receive any proceeds from the
sale of shares sold by existing stockholders
In addition, the Company granted the underwriters of the Offering, a
30-day option to purchase up to an aggregate of 375,000 additional shares of
Common Stock at the initial public offering price less the underwriting
discount solely to cover over-allotments, if any. The Underwriters exercised
their over-allotment option in full on August 13, 1996. Upon exercising the
option, total proceeds to the Company from the Offering increased to
$25,238,372.
Contemporaneous with the Offering, the Company issued stock options to
certain key employees. The total number of shares granted in these options was
338,750 at the Offering price of $14.00 per share. These options are generally
exercisable in the following cumulative installments: First installment - Up
to one-third of the total optioned shares at any time on or after two years
from the date of grant; Second installment - Up to an additional one-third of
the total optioned shares at any time after three years from the date of grant;
and Third installment - Up to an additional one-third of the total optioned
shares at any time after four years from the date of grant. These options
terminate on July 25, 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three- and Nine-Month Periods Ended September 29, 1996, compared to the Three-
and Nine-Month Periods Ended September 30, 1995.
Net Service Revenue. Net service revenues for the three month period
ended September 29, 1996 increased 45.9% to $ 54.0 million, from $37.0 million
for the three month period ended September 30, 1995. Net service revenues
increased 40.8% to $ 142.8 million for the nine month period ended September
29, 1996, from $101.4 million for the nine month period ended September 30,
1995. The increase in net service revenue is primarily the result of an
increase in the number of sales associates, and the Company's continued
emphasis on expanding the number of service offerings in its existing markets.
Net service revenues from flexible staffing services grew 49.6% to $ 33.8
million for the three months ended September 29, 1996, from $ 22.6 million for
the three months ended September 30, 1995. Net service revenue from flexible
staffing services grew 42.8% to $ 88.4 million for the nine month period ended
September 29, 1996, from $ 61.9 million for the nine month period ended
September 30, 1995. The growth in flexible staffing net service revenue is
primarily due to an increase in the hours billed and an increase in the average
billing rates. Permanent placement net service revenue increased 40.3% to $
20.2 million for the three month period ended September 29, 1996, from $14.4
million for the three month period ended September 30, 1995. Permanent
placement net service revenue increased 37.5% to $ 54.3 million for the nine
month period ended September 29, 1996, from $ 39.5 million for the nine month
period ended September 30, 1995. The growth in permanent placement net service
revenue is primarily the
<PAGE> 9
result of an increase in the number of permanent placements and, to a lesser
extent, an increase in the average placement fees.
Gross profit. Gross profit increased 44.9% to $ 29.6 million for the three
month period ended September 29, 1996, from $20.4 million for the three month
period ended September 30, 1995. Gross profit as a percentage of net service
revenues decreased slightly to 54.8% for the three month period ended September
29, 1996, from 55.2% for the three month period ended September 30, 1995.
Gross profit increased 40.8% to $ 79.1 million for the nine month period ended
September 29, 1996, from $56.2 million for the nine month period ended
September 30, 1995. Gross profit as a percentage of net service revenues
stayed constant at 55.4% for the nine month periods ended September 30, 1995
and 1996. The increase in gross profit was primarily a result of the factors
described above relating to net service revenues.
Operating expenses. Operating expenses increased 44.5% to $ 26.3 million
for the three months ended September 29, 1996, from $18.2 million for the three
months ended September 30, 1995. Operating expenses as a percentage of net
service revenues decreased slightly to 48.6% for the three months ended
September 29, 1996, from 49.0% for the three months ended September 30, 1995.
Operating expenses increased 41.1% to $$ 71.9 million for the nine months ended
September 29, 1996, from $50.9 million for the nine months ended September 30,
1995. Operating expenses as a percentage of net service revenues increased
slightly to 50.4% for the nine months ended September 29, 1996, from 50.2% for
the nine months ended September 30, 1995. This increase in operating expense
as a percentage of net service revenues resulted primarily from continued
investment in opening service lines in existing markets and growing the sales
force by 30% over the last year.
Other (income) expense. Other (income) expense decreased to $ 0.007
million of expense for the three months ended September 29, 1996, from $ 0.18
million of expense for the three months ended September 30, 1995. Other
(income) expense decreased to approximately $0.27 million of expense for the
nine months ended September 29, 1996 from approximately $0.38 million of
expense for the nine months ended September 30, 1995. The decreases in other
(income) expense are primarily due to interest income earned on the proceeds
from the Company's initial public offering effective July 29, 1996.
Income Before Taxes. Income before taxes increased 57.6% to $ 3.3 million
for the three month period ended September 29, 1996, from $ 2.1 million for the
three month period ended September 30, 1995. Income before taxes increased
43.7% to $ 6.9 million for the nine month period ended September 29, 1996, from
$ 4.8 million for the nine month period ended September 30, 1995. The increase
in income before taxes is primarily a result of the factors described above.
Income Taxes. The effective tax rate increased to 41% for the three
months ended September 29, 1996, and 39% for the nine months ended September
29, 1996, compared to 37% for both the three and nine months ended September
30, 1995.
Net Income. Net income increased to $ 1.9 million for the three months
ended September 29, 1996, and $ 4.2 million for the nine months ended September
29, 1996, from $1.3 million for the three months ended September 30, 1995, and
$3.0 million for the nine months ended September 30, 1995. The increase was
primarily a result of the factors described above relating to net service
revenues.
Liquidity and Capital Resources
As of September 29, 1996 the Company's sources of liquidity included
approximately $ 39.8 million in net working capital. In addition, as of
September 29, 1996, $ 10.0 million was available for borrowing under the
Company's line of credit.
During the first nine months of 1996, cash flow used by operations was
approximately $ 4.3 million, resulting primarily from an increase in
accounts receivable and income taxes receivable, an increase in 401-K plan
contribution and a decrease in accounts payable and accrued expenses.
During the first nine months of 1996, cash flow used by investing
activities was approximately $ 4.0 million, resulting primarily from
expenditures for property, plant and equipment.
<PAGE> 10
As a result of the Offering, the Company received total proceeds of $25.2
million. At September 29, 1996, after underwriting commissions and other costs
of the Offering were paid amounting to approximately $ 3.0 million, $3.6
million had been used to repay short-term borrowings, $ 3.9 million had been
used for capital improvements, and the remainder was invested in money market
instruments.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports:
None
<PAGE> 11
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 hereunto duly authorized.
Source Services Corporation
(Registrant)
By: Richard Dupont
----------------------------------------------------
Richard Dupont, Chief Financial Officer
and Secretary
Date: November 12, 1996
<PAGE> 12
EXHIBIT INDEX
Exhibit Method of Filing
- ------- ----------------
27. Financial Data Schedule . . . . . . Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF REVENUES AND EXPENSES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 17,244
<SECURITIES> 0
<RECEIVABLES> 35,155
<ALLOWANCES> 1,749
<INVENTORY> 0
<CURRENT-ASSETS> 52,535
<PP&E> 10,149
<DEPRECIATION> 4,133
<TOTAL-ASSETS> 58,570
<CURRENT-LIABILITIES> 12,764
<BONDS> 89
0
0
<COMMON> 182
<OTHER-SE> 45,457
<TOTAL-LIABILITY-AND-EQUITY> 58,570
<SALES> 142,768
<TOTAL-REVENUES> 142,768
<CGS> 63,716
<TOTAL-COSTS> 63,716
<OTHER-EXPENSES> 71,899
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126
<INCOME-PRETAX> 6,882
<INCOME-TAX> 2,707
<INCOME-CONTINUING> 4,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,175
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
