UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-24391
TECHNISOURCE, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-2786227
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1901 CYPRESS CREEK ROAD, SUITE 202, 33309
FORT LAUDERDALE, FLORIDA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (954) 493-8601
Indicate by check make 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 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 ____.
Number of shares of common stock outstanding as of October 30, 1998 is
10,385,000.
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
----
Condensed Consolidated Balance Sheets as of
September 30, 1998 (Unaudited) and
December 31, 1997............................................... 1
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1998 and 1997
(Unaudited)..................................................... 2
Condensed Consolidated Combined Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997
(Unaudited)..................................................... 3
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................... 4-8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 9-14
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities........................................ 15
ITEM 6. Exhibits and Reports on Form 8-K............................. 15
Signature............................................................. 16
Index to exhibits..................................................... 17
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2) $ 19,217,114 $ 469,973
Trade accounts receivable, less allowance for doubtful
accounts of $558,933 and $425,000 at September 30, 1998
and December 31, 1997, respectively 13,659,237 8,743,630
Due from stockholders and employees 120,043 39,986
Prepaid expenses and other current assets 332,977 108,335
Deferred tax asset, current 295,966 --
------------ ------------
Total current assets 33,625,337 9,361,924
Property and equipment, net 2,164,455 1,229,658
Other assets 79,839 46,002
Deferred tax asset, noncurrent 201,774 --
------------ ------------
Total assets $ 36,071,405 $ 10,637,584
============ ===========-
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts $ -- $ 588,106
Accounts payable 392,360 529,961
Income tax payable 78,856 183,001
Accrued liabilities 2,533,277 1,873,004
Line of credit (Note 4) -- 223,460
------------ ------------
Total current liabilities 3,004,493 3,397,532
Due to related parties -- 10,000
Deferred tax liability 65,388 -
------------ ------------
Total liabilities 3,069,881 3,407,532
============ ============
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized,
10,385,000 and 7,200,000 issued and outstanding as of
September 30, 1998 and December 31, 1997, respectively 103,850 72,000
Additional paid-in capital 31,470,488 --
Deferred compensation (345,207) --
Retained earnings (Note 5) 1,772,393 7,158,052
------------ ------------
Total stockholders' equity 33,001,524 7,230,052
------------ ------------
Total liabilities and stockholders' equity $ 36,071,405 $ 10,637,584
============ ============
</TABLE>
See notes to condensed consolidated financial statements
1
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $27,531,685 $ 17,333,464 $ 75,467,140 $ 46,981,992
Cost of revenues 20,371,659 13,199,057 56,162,571 35,529,357
------------ ------------ ------------ ------------
Gross profit 7,160,026 4,134,407 19,304,569 11,452,635
Selling, general and
administrative expenses 5,077,640 3,111,637 14,264,741 8,167,000
------------ ------------ ------------ ------------
Operating income 2,082,386 1,022,770 5,039,828 3,285,635
Other income (expense):
Interest and other income 239,859 35,123 243,583 35,123
Interest expense -- (31,022) (125,163) (146,000)
------------ ------------ ------------ ------------
Income before taxes 2,322,245 1,026,871 5,158,248 3,174,758
Provision for income taxes
(including the $377,333 net
deferred tax asset related to C corp
conversion) 923,158 46,000 774,032 137,000
------------ ------------ ------------ ------------
Net income $ 1,399,087 $ 980,871 $ 4,384,216 $ 3,037,758
============ ============ ============ ============
Pro forma information (unaudited):
Income before taxes, as
reported $ 2,322,245 $ 1,026,871 $ 5,158,248 $ 3,174,758
Pro forma income tax
provision 923,158 412,000 2,070,564 1,271,000
------------ ------------ ------------ ------------
Proforma net income
(unaudited) $ 1,399,087 $ 614,871 $ 3,087,684 $ 1,903,758
============ ============ ============ ============
Net income per share - basic $ 0.14 $ 0.09 $ 0.37 $ 0.26
============ ============ ============ ============
Net income per share - diluted $ 0.13 $ 0.07 $ 0.37 $ 0.23
============ ============ ============ ============
Weighted average common shares
outstanding - basic 10,352,889 7,200,000 8,319,852 7,200,000
============ ============ ============ ============
Weighted average common shares
outstanding - diluted 10,519,737 8,353,743 8,462,268 8,353,743
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,384,216 $ 3,037,758
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 348,259 115,537
Income tax benefit from exercise of options 332,308 -
Deferred taxes, net (432,352) -
Deferred compensation 32,293 -
Changes in assets and liabilities:
Increase in accounts receivable (4,915,607) (1,954,259)
Increase in due from shareholders and employees (80,057) (28,835)
Increase in prepaid expenses and other assets (258,479) (457,301)
(Decrease) increase in accounts payable (137,601) 36,837
Increase in accrued liabilities 660,273 211,302
Decrease in income tax payable (104,145) -
------------ ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (170,892) 961,039
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,283,056) (537,665)
------------ ---------
NET CASH USED IN INVESTING ACTIVITIES (1,283,056) (537,665)
CASH FLOWS FROM FINANCING ACTIVITIES:
Paydown on note payable (10,000) -
Paydown on line of credit (223,460) (181,120)
Proceeds from public offering of common stock, net 30,781,854 -
Proceeds from issuance of common stock 10,676 -
Distribution to stockholders (9,769,875) (637,721)
Overdraft (588,106) 587,259
------------ ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 20,201,089 (231,582)
NET INCREASE IN CASH AND CASH EQUIVALENTS 18,747,141 191,792
------------ ---------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 469,973 174,204
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,217,114 $ 365,996
============ =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 125,163 $ 131,052
============ =========
Taxes paid $ 978,221 $ -
============ =========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1. General
BUSINESS
The accompanying unaudited condensed consolidated financial statements
include the accounts of Technisource, Inc. ("Technisource") its subsidiary,
Technisource of Florida, Inc. ("Technisource-Florida"), and its former
subsidiary, Technisource Midwest, Inc. ("Technisource-Midwest") (collectively,
the "Company"). All material intercompany balances and transactions have been
eliminated.
Technisource is an information technology ("IT") consulting and
staffing services ("IT services") firm, providing IT consultants principally on
a time-and-materials basis to organizations with complex IT needs. As of
September 30, 1998, the Company had 24 branch office locations.
Technisource was incorporated as a Florida corporation in 1987. In
1994, Technisource-Florida was incorporated as a Florida corporation in order to
offer IT services and administer the payroll and human resources activities
related to the Company's consultants. As of December 31, 1997, the Company's IT
services were principally provided by employees of Technisource-Florida.
The Company completed an initial public offering of its Common Stock,
par value $.01, on June 25, 1998 (the "IPO"). In connection with the IPO, all
outstanding shares of capital stock of Technisource-Florida, Inc. were
contributed to Technisource and Technisource-Midwest was dissolved.
INTERIM FINANCIAL DATA
The interim financial data as of September 30, 1998 and for the three
and nine months ended September 30, 1998 and 1997 is unaudited and has been
prepared in accordance with generally accepted accounting principles and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain
information and footnote disclosure normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The information
reflects all adjustments, consisting only of normal recurring entries, that, in
the opinion of management, are necessary to present fairly the financial
position and results of operations of the Company for the periods indicated.
Results of operations for the interim periods are not necessarily indicative of
the results of operations for the full fiscal year. These condensed consolidated
financial statements should be read in conjunction with the Company's Combined
Financial Statements
4
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
for the year ended December 31, 1997, included in the Company's Registration
Statement on Form S-1 (Registration No. 333-50803) originally filed with the
Securities and Exchange Commission on April 23, 1998, as amended. The Company's
management believes that the disclosures are sufficient for interim financial
reporting purposes.
2. Summary of Significant Accounting Policies
CASH AND CASH EQUIVALENTS
The Company considers all unrestricted highly liquid securities
(consisting principally of short-term money market investments and treasury
notes) with a maturity or redemption option of three months or less at the date
of purchase to be cash equivalents. Cash equivalents approximated $ 17,300,000
and $0 at September 30, 1998 and December 31, 1997, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, and SFAS No. 131,
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS No. 131
establishes standards of reporting by publicly-held business enterprises and
disclosure of information about operating segments in annual financial
statements and, to a lesser extent, in interim financial reports issued to
shareholders. SFAS Nos. 130 and 131 deal with financial disclosure. The Company
adopted these pronouncements effective January 1, 1998. The adoption of these
pronouncements did not have a significant impact on the Company's consolidated
financial position, results of operation or cash flows.
BUSINESS RISKS AND CONCENTRATION
The Company's operations depend upon, among other things, the Company's
ability to attract, develop, and retain a sufficient number of highly skilled
professional employees. In addition, the Company's revenue is generated from a
limited number of clients in specific industries. Future operations may be
affected by the Company's ability to retain these clients and employees and the
cyclical and economic factors that could have an impact on those industries.
Additionally, the Company maintained $19.7 million at September 30, 1998 in one
financial institution which is in excess of the FDIC insured limits.
5
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INCOME TAXES
The Company provides for income taxes in accordance with SFAS 109,
ACCOUNTING FOR INCOME TAXES. SFAS 109 is an assets and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
combined financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than the enactment of changes in the law or rates.
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare their combined
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from the Company's estimates.
3. Initial Public Offering
On June 25, 1998 the Company completed an initial public offering
("IPO") of 3,100,000 shares of Common Stock at the price per share of $11.00.
After the underwriting discounts, commissions, and other expenses, net proceeds
to the Company from the IPO were approximately $30.8 million of which
approximately $9.8 million represents the distributed S corporation earnings to
existing shareholders (Note 5).
4. Line of Credit
As of September 30, 1998, the Company maintained a revolving line of
credit with a bank which provides for maximum borrowings of up to $8,000,000.
The line of credit expires on November 30, 1998 and is secured by the Company's
accounts receivable and equipment and guaranteed by two of the Company's
stockholders. As of September 30, 1998 and December 31, 1997, the outstanding
principal balance under this line of credit was $0 and $1,723,402, respectively.
Interest is payable monthly at a variable rate of 0.5% over the bank's prime
rate (8.75% as of September 30, 1998).
5. S Corporation Distribution and Termination of S Corporation Election
The Company's S corporation status for federal income tax purposes
terminated on June 24, 1998 in connection with the IPO and the Company converted
to C Corporation status and made a final distribution ("the Distribution") to
its existing shareholders in an aggregate amount representing substantially all
of the Company's
6
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
undistributed earnings through the closing of the IPO of approximately $9.8
million. Purchasers of the Company's Common Stock in the IPO did not receive any
portion of the Distribution.
6. Pro forma Earnings per Share
The Company has adopted SFAS No. 128, EARNINGS PER SHARE. This
Statement requires the presentation of basic and dilutive earnings per share
("EPS"). Basic EPS is computed by dividing net income by the weighted average
number of common shares outstanding. Diluted EPS reflects the dilutive effect of
potential common shares issuable pursuant to securities such as stock options.
Pro forma net income per share was computed based on the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares are calculated using the treasury stock method
and represent incremental shares issuable upon the exercise of outstanding stock
options. In accordance with SEC Staff Accounting Bulletin No. 1.B.3, weighted
average shares for all periods prior to the IPO also include those shares which
would have had to have been issued (at the initial public offering price of $11
per share, less the underwriting discount) to generate sufficient cash to fund
the portion of the S corporation distribution that was in excess of the net
income for the period ended June 24, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Proforma:
Net income per share:
Net income available to common shareholders $ 1,395,088 $614,871 $3,087,684 $1,903,758
Weighted average common shares outstanding 10,352,889 7,200,000 8,319,852 7,200,000
----------- --------- ---------- ----------
$0.14 $0.09 $0.37 $0.26
=========== ========== =========== ===========
Net income per share-assuming dilution:
Net income available to common shareholders $ 1,395,088 $614,871 $3,087,684 $1,903,758
Weighted average common shares outstanding 10,352,889 7,200,000 8,319,852 7,200,000
Dilutive effect of options 263,276 304,099 92,660 304,099
Effect of assumed IPO shares for distribution 849,644 849,644
----------- --------- ---------- ----------
10,616,165 8,353,743 8,412,512 8,353,743
----------- --------- ---------- ----------
$0.13 $0.07 $0.37 $0.23
=========== ========== =========== ===========
</TABLE>
7. Income Taxes
Historically, the Company had elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code which provide that, in lieu of
corporate federal and some state income taxes, the shareholders are taxed on
their proportionate share of the Company's taxable income. In connection with
the IPO, the Company elected to change its tax status from an S corporation to a
C corporation. As a result of the
7
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Company's Subchapter S election, the accompanying consolidated statements of
income do not include an income tax provision for federal and most state income
taxes during the periods of the S Corporation election. The provision for income
taxes for periods prior to the conversion related to certain states that do not
recognize S Corporation status. The provision for income taxes for the period
following the conversion reflects the estimated current provision for federal
and state income taxes and the $377,333 net deferred income tax asset resulting
from the conversion. Pro forma net income is based on the assumption that the
Company's S corporation status was terminated at the beginning of each period
and reflects a pro forma income tax provision based on applicable tax rates as
if the Company was a C corporation taxpayer for all periods presented.
8
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Technisource is a national provider of IT consulting and staffing
services through 24 offices in the United States and Canada, utilizing over
1,000 highly trained consultants. The Company has achieved a compound annual
revenue growth rate of 60% over the past five years. This growth rate has been
generated internally, without the benefit of acquisitions.
The Company's revenues grew from $10.3 million in 1993 to $67.3 million
in 1997. The Company's revenue growth is driven primarily by increases in the
number of consultants placed with existing and new clients. The number of
consultants utilized by the Company grew from 126 as of December 31, 1993 to 812
as of December 31, 1997, and to 1,040 as of September 30, 1998. For each of
1995, 1996, and 1997, clients from the previous year generated at least 85% of
the Company's revenues. The Company generates substantially all of its revenues
from fees for the provision of IT consulting and staffing services, most of
which are billed at contracted hourly rates. Clients are typically billed and
consultants are paid on a weekly basis. The Company recognizes revenues as
services are performed.
The Company's most significant cost is its personnel expense, which
consists primarily of salaries, fees and benefits of the Company's consultants.
To date, the Company has generally been able to maintain its gross profit margin
by offsetting increases in consultant salaries and fees with increases in the
hourly billing rates charged to clients. However, there can be no assurance that
the Company will continue to be able to offset increases in the Company's cost
of revenues by increasing the amounts the Company bills to its clients. The
Company attempts to control overhead and indirect expenses, which are not passed
through to its clients, by controlling the rate of its branch office expansion
and by maintaining centralized operations and back-office infrastructure.
In anticipation of the Company's growth, the Company has made
investments in its infrastructure, including: (i) the Company's proprietary
project and consultant TSRC Database; (ii) a national recruiting and training
center; (iii) the development and continued refinement of the Technisource
Growth Model, which is Technisource's recruiting model and consists of two to
three recruiters and an account manager and utilizes the process of replicating
Development Triangles; and (iv) a network of 24 branch offices in the United
States and Canada. The Company believes that investment in a centralized
infrastructure will help keep the Company in a position for possible further
expansion.
To support anticipated growth, the Company has invested in the
expansion of its proprietary TSRC Database of over 100,000 potential consultants
and their qualifications to ensure that IT professionals with the appropriate
skill sets are quickly deployed to respond to client needs and are placed on
assignments that utilize their technical skills
9
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
and optimize their billing rates. The Company has also established a formal
two-week recruiting and training program designed to train recruiting
professionals in the Company's culture and operating procedures and teach them
the Company's proprietary techniques and technical skills. The Company increased
its administrative, sales, recruiting and training professionals from 99
employees at December 31, 1996 to 190 employees at December 31, 1997, and 264 at
September 30, 1998.
Over the last ten years, the Company has developed and refined the
Technisource Growth Model, which is focused on facilitating rapid internal
growth through the replication of Development Triangles. Development Triangles
are Technisource recruiting models generally consisting of three recruiters and
an account manager. The Company has grown from four Development Triangles as of
December 31, 1993 to 33 Development Triangles as of December 31, 1997, and to 48
Development Triangles as of September 30, 1998. The Company invested in the
creation of 15 Development Triangles since December 31, 1997. Although the
Company's operating margins may be adversely affected during periods following
relatively large increases in the number of the Company's Development Triangles,
the Company leverages its initial investment in infrastructure as Development
Triangles mature. The Company expects sales and recruiting personnel to achieve
greater levels of productivity with the maturing of Development Triangles.
The Company anticipates that each new branch office will require an
investment of approximately $100,000 to $150,000 in order to begin operations
and fund operating losses for an initial ten to twelve month period of
operations, which is the amount of time management believes should generally be
required for a new office to achieve profitability. However, there can be no
assurance that new Development Triangles or branch offices will be profitable
within projected time-frames, or at all. The Company expenses the costs of
opening a new office as such expenses are incurred.
The following table, set forth for the periods indicated, depicts the percentage
of gross revenues of certain items reflected in the Company's statements of
income:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1998
<S> <C> <C>
Revenues ................................... 100.0% 100.0%
Costs of revenues .......................... 76.1% 74.0%
----- -----
Gross profit ............................... 23.9% 26.0%
Selling, general and administrative expenses 18.0% 18.4%
----- -----
Operating income ........................... 5.9% 7.6%
Interest and other income .................. 0.2% 0.9%
Interest expense ........................... 0.2% 0.0%
----- ----
Income before income taxes ................. 5.9% 8.5%
Income taxes ............................... 0.3% 2.5%
----- -----
Net income ................................. 5.6% 6.0%
Pro forma provision for income taxes ....... 2.4% 3.4%
----- -----
Pro forma net income ....................... 3.5% 5.1%
===== =====
</TABLE>
10
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1997
REVENUES. Revenues increased $10.2 million, or 59%, to $27.5 million
for the three months ended September 30, 1998 as compared to $17.3 million for
the three months ended September 30, 1997. This increase resulted primarily from
increased sales in existing offices, and to a lesser extent, the addition of
five new development triangles. The total number of client divisions and
business units billed increased from 246 during the quarter ended September 30,
1997 to 400 during the quarter ended September 30, 1998, and the number of IT
consultants working for the Company increased from 737 as of September 30, 1997
to 1,040 as of September 30, 1998.
GROSS PROFIT. Gross profit consists of revenues less cost of revenues.
The Company's cost of revenues consists primarily of compensation, benefits and
expenses for the Company's consultants and other direct costs associated with
providing services to clients. Gross profit increased $3.0 million, or 73%, to
$7.1 million, for the three months ended September 30, 1998 as compared to $ 4.1
million for the three months ended September 30, 1997. The increase is primarily
attributable to higher value-added service offerings and an increase in the
number of salaried consultants working for the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $2.0 million, or 63%, to $5.1
million for the three months ended September 30, 1998, as compared to $3.1
million for the three months ended September 30, 1997. The increase primarily
resulted from increases in corporate and administrative staff and start-up costs
associated with the addition of five Development Triangles.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30,1997
REVENUES. Revenues increased $28.5 million, or 60.6%, to $75.5 million
for the nine months ended September 30, 1998 as compared to $47 million for the
nine months ended September 30, 1997. This increase resulted primarily from
increased sales in existing offices, and to a lesser extent, the addition of
eight new branch offices. The total number of client divisions and business
units billed increased from 246 during the nine months ended September 30, 1997
to 400 during the nine months ended September 30, 1998, and the number of IT
consultants working for the Company increased from 737 as of September 30, 1997
to 1,040 as of September 30, 1998.
GROSS PROFIT. Gross profit increased $7.8 million, or 68.6%, to $19.3
million, for the nine months ended September 30, 1998 as compared to $11.5
million for the nine
11
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
months ended September 30, 1997. The increase is primarily attributable to
higher value-added service offerings and an increase in the number of salaried
consultants working for the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $6.1 million, or 74.7%, to $14.3
million for the nine months ended September 30, 1998, as compared to $8.2
million for the nine months ended September 30,1997. This increase primarily
resulted from increases in corporate staff and start-up costs associated with
the addition of seven branch offices and a net of fifteen Development Triangles,
compared to nine months ended September 30, 1997, when the company had opened
seven offices and added twelve Development Triangles.
LIQUIDITY AND CAPITAL RESOURCES
Through September 30, 1998, the Company's primary sources of liquidity
have been cash flow from operations and available borrowings under its line of
credit. On June 30, 1998, the Company completed an initial public offering of
its Common Stock, which resulted in net proceeds to the Company of approximately
$31.0 million. Cash and cash equivalents and working capital totaled $19.2
million and $30.8 million, respectively, as of September 30, 1998. The Company
anticipates that it has sufficient working capital to fund its operations for at
least the next twelve months.
The Company maintains a revolving line of credit with Nations Bank
N.A., which provides for maximum borrowings of up to $8 million through November
30, 1998. The line of credit is secured by the Company's accounts receivable and
equipment and is guaranteed by the Company's controlling shareholders. Interest
is payable monthly at a variable rate of 0.5% over the prime rate, which was
8.75% as of September 30, 1998. As of September 30, 1998, the company did not
have an outstanding balance under the line of credit.
The Company anticipates that its primary uses of working capital in
future periods will be for the internal development of new offices, investments
in its management information systems, possible acquisitions and the funding of
increases in accounts receivable. The Company continually reviews and evaluates
acquisition candidates to complement and expand its business. The Company's
ability to grow through acquisitions is dependent on the availability of
suitable acquisition candidates and the terms on which such candidates may be
acquired, which may be adversely affected by competition for such acquisitions.
The Company cannot predict to what extent new offices will be added through
acquisitions as compared to internal development. The Company currently has no
agreement, understanding, or commitments with respect to any potential
acquisitions.
12
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000
The "Year 2000 Issue" exists because many computer systems and
applications use only the last two digits to refer to a year. Because of the
"Year 2000 Issue," these computer programs do not properly recognize a year that
begins with "20" instead of the familiar "19." If not corrected, many computer
programs could fail or create erroneous results.
The majority of the Company's internal systems are purchased from
outside vendors. The Company has performed an initial assessment of the impact
of the "Year 2000 Issue" on its reporting systems and operations and will be
required to modify or replace a portion of its software/hardware so that its
computer systems will properly utilize dates beyond December 31, 1999. Those
installed systems which are not currently able to fully function in the Year
2000 either have new versions available which are Year 2000 compliant, or the
vendor has committed to a Year 2000 compliant release in sufficient time to
allow installation and testing prior to critical cutover dates. The Company
is also in the process of completing its inventory of computer information
technology and non-information technology hardware systems to assess Year 2000
compliance. In addition to the Company's internal systems and hardware, the
Company is preparing to assess the Year 2000 readiness of its vendors. As part
of this assessment, the Company will ask each major vendor to inform the Company
of its (the vendor's) Year 2000 readiness and initiatives. To the extent that
the Company's vendors do not provide the Company with satisfactory evidence of
their readiness for the "Year 2000 Issue," contingency plans will be developed.
The cost of modifying or replacing portions of its software has been expensed
as incurred and primarily consists of software version upgrades.
There can be no assurance, however, that the Company's systems are
"Year 2000" compliant or that the systems of other companies on which the
Company's systems and operations rely, or companies with whom the Company
conducts business, will be timely converted to address the "Year 2000 Issue," or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company's business, operations, results and financial position.
For this reason, the Company continues to work towards ensuring that all systems
associated with the processes of the Company are Year 2000 compliant by the end
of 1999.
NEW ACCOUNTING POLICIES
In June 1997, the FASB issued Statement of Financial Accounting
Standard (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, and SFAS No. 131,
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS No. 131
establishes standards of reporting by publicly-held business enterprises and
disclosure of information about operating segments in annual financial
statements and, to a lesser extent, in interim financial reports issued to
shareholders. SFAS Nos. 130 and 131 deal with financial disclosure. The company
adopted these pronouncements on January 1, 1998. The
13
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
ITEM 2. MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(CONTINUED)
adoption of these pronouncements did not have a significant impact on the
Company's consolidated financial position, results of operations or cash flows.
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this Form 10-Q, including this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that are not related to historical results, including statements
relating to the Company's continued expansion, the productivity levels for the
Company's sales and recruiting personnel, the expenses, timing and profitability
of new branch offices, the Company's use of its working capital, and the
sufficiency of the Company's working capital are forward-looking statements.
Further, certain forward-looking statements are based upon assumptions of future
events that may not prove to be accurate. These forward-looking statements
involve risks and uncertainties, including but not limited to the Company's
ability to attract and retain IT consultants and recruiters, the Company's
ability to generate new clients and projects requesting the services of the
Company's IT consultants, the Company's ability to leverage its existing
infrastructure to support future expansion without incurring significant
additional expenses, the Company's ability and willingness to devote the
resources necessary to open new branch offices and create additional Development
Triangles, the effect of conditions in the IT industry and the economy in
general; regulatory developments; legal proceedings; and certain other risks and
uncertainties. Forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by cautionary
statements in this paragraph and elsewhere in the Form 10-Q, in other reports
filed by the Company with the Securities and Exchange Commission and in the
Company's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission and in the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on April 23, 1998 (File No.
333-50803), as amended, including the Risk Factors section thereof.
14
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Registration Statement was declared effective by the Commission on
June 24, 1998. The IPO was consummated on June 30, 1998, and generated net
proceeds to the Company of approximately $31.0. The managing underwriters for
the IPO were Donaldson, Lufkin & Jenrette Securities Corporation and William
Blair & Company. In the IPO the Company registered with the Commission the sale
of 3,100,000 newly issued shares of its Common Stock and the sale of up to
465,000 additional shares of Common Stock by certain of the Company's existing
shareholders. The Company sold all of the 3,100,000 shares registered for sale
by the Company generating gross proceeds of 34,100,000 for the Company. In
connection with the IPO, the Company incurred expenses for underwriting
discounts and commissions of $2.4 million and other expenses of approximately
$0.7 million, for total expenses of approximately $3.0 million. None of such
expenses were paid to officers, directors, ten percent shareholders, or
associates or affiliates of such persons or the Company.
As of September 30, 1998, approximately $17.2 million of the net
proceeds of the IPO were invested in U.S. Treasury and highly-rated corporate
debt securities, $7.0 million had been distributed to the Company's pre-IPO
shareholders as undistributed S-corporation earnings, approximately $5.8 million
was used to repay amounts outstanding under the Company's line of credit and
approximately $1.0 million had been used for working capital.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3.1 Amended and Restated Articles of incorporation of the
Company (1)
3.2 Amended and Restated Bylaws of the Company (1)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws for the Company defining the rights
of holders of Common Stock of the Company
4.2 Specimen certificate for the Company's Common Stock (1)
27 Financial Data Schedule
----------------------
(1) Filed with the Company's Registration Statement on Form S-1 (File No.
333-50803) filed with the Securities and Exchange Commission on April
23, 1998, as amended, and incorporated herein by reference.
(b) Current Reports on Form 8-K
None
15
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
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.
TECHNISOURCE, INC.
Dated: November 13, 1998
By: /s/ James F. Robertson
---------------------------------------
James F. Robertson
Executive Vice President, Chief
Operating Officer and Director
By: /s/ John A. Morton
---------------------------------------
John A. Morton
Vice President, Chief Financial
Officer and Director (Principal
Financial and Accounting Officer)
16
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TECHNISOURCE,
INC.'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,217,114
<SECURITIES> 0
<RECEIVABLES> 14,218,170
<ALLOWANCES> 558,933
<INVENTORY> 0
<CURRENT-ASSETS> 33,625,337
<PP&E> 3,295,806
<DEPRECIATION> 1,131,350
<TOTAL-ASSETS> 36,071,405
<CURRENT-LIABILITIES> 3,004,493
<BONDS> 0
0
0
<COMMON> 103,850
<OTHER-SE> 32,897,674
<TOTAL-LIABILITY-AND-EQUITY> 36,071,405
<SALES> 75,467,140
<TOTAL-REVENUES> 75,467,140
<CGS> 56,162,571
<TOTAL-COSTS> 56,162,571
<OTHER-EXPENSES> 14,264,741
<LOSS-PROVISION> 147,459
<INTEREST-EXPENSE> 125,163
<INCOME-PRETAX> 5,158,248
<INCOME-TAX> 2,070,564<F1>
<INCOME-CONTINUING> 3,087,684<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,087,684<F1>
<EPS-PRIMARY> 0.37<F1>
<EPS-DILUTED> 0.37<F1>
<FN>
<F1>Pro forma as if the Company were subject to federal and all applicable state
corporate income taxes for the period presented.
</FN>
</TABLE>
