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 JUNE 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 ___ No X .
Number of shares of common stock outstanding as of August 13, 1998 is
10,300,000.
<PAGE>
INDEX
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements PAGE
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 1998
(Unaudited) and December 31, 1997.................................. 1
Condensed Consolidated Statement of Income for the Three
and Six Months Ended 2 June 30, 1998 and 1997 (Unaudited).......... 2
Condensed Consolidated Combined Statement of Cash Flows for the
Six Months Ended March 31, 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
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......... NA
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................... 15
ITEM 2. Changes in Securities............................................... 15
ITEM 6. Exhibits and Reports on Form 8-K.................................... 15-16
Signature.................................................................... 17
Index to exhibits............................................................ 18
</TABLE>
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 3) $ 24,536,535 $ 469,973
Trade accounts receivable, less allowance for doubtful
accounts of $658,933 and $425,000 at June 30, 1998
and December 31, 1997, respectively 14,147,699 8,743,630
Due from stockholders and employees 71,094 39,986
Prepaid expenses and other current assets 194,221 108,335
Deferred tax asset 377,333 -
------------ ------------
Total current assets 39,326,882 9,361,924
Property and equipments, net 1,964,472 1,229,658
Other assets 79,280 46,002
------------ ------------
Total assets $ 41,370,634 $ 10,637,584
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts $ - $ 588,106
Accounts payable 435,020 529,962
Accrued liabilities 2,214,985 1,873,004
Income tax payable 179,101 183,001
Payable to stockholders (Note 5) 7,090,211 -
Due to related parties (Note 7) 10,000 -
Line of credit (Note 4) - 223,459
----------- ------------
Total current liabilities 9,929,317 3,397,532
Due to related parties (Note 7) - 10,000
----------- ------------
Total liabilities 9,929,317 3,407,532
Stockholders' equity
Common stock, $0.01 par value, 50,000,000 shares authorized,
10,300,000 and 7,200,000 issued and outstanding as of June 30,
1998 and December 31, 1997, respectively 103,000 72,000
Additional paid-in capital 30,965,011 -
Retained earnings (Note 5) 373,306 7,158,052
----------- ------------
Total stockholders' equity 31,441,317 7,230,052
----------- ------------
Total liabilities and shareholders' equity $ 41,370,634 $ 10,637,584
============ ============
</TABLE>
See notes to condensed consolidated financial statements
1
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 25,155,075 $ 16,248,487 $ 47,935,455 $ 29,648,528
Cost of revenue 18,580,469 12,208,716 35,790,912 22,330,300
------------ ------------ ------------ ------------
Gross profit 6,574,606 4,039,771 12,144,543 7,318,228
Selling, general and
administrative expenses 4,885,341 2,691,797 9,187,101 4,994,069
------------ ------------ ------------ ------------
Operating income 1,689,265 1,347,974 2,957,442 2,324,159
Other income (expense):
Interest and other income 3,724 - 3,724 -
Interest expense (87,378) (71,171) (125,163) (173,538)
------------ ------------ ------------ ------------
Income before taxes 1,605,611 1,276,803 2,836,003 2,150,621
Provision (benefit) for income taxes
(including the $377,333 deferred
tax asset related to C corp
conversion) (208,232) 56,000 (149,126) 94,000
------------ ------------ ------------ ------------
Net income $ 1,813,843 $ 1,220,803 $ 2,985,129 $ 2,056,621
============ ============ ============ ============
Pro forma information (unaudited):
Income before taxes, as
reported $ 1,605,611 $ 1,276,803 $ 2,836,003 $ 2,150,621
Pro forma provision income
tax provision 676,300 456,000 1,147,406 768,200
------------ ------------ ------------ ------------
Proforma net income
(unaudited) $ 929,311 $ 820,803 $ 1,688,597 $ 1,382,421
============ ============ ============ ============
Net income per share $ 0.13 $ 0.11 $ 0.23 $ 0.19
============ ============ ============ ============
Net income per share - diluted $ 0.12 $ 0.10 $ 0.22 $ 0.17
============ ============ ============ ============
Weighted average common shares
outstanding 7,438,462 7,200,000 7,319,231 7,200,000
============ ============ ============ ============
Weighted average common shares
outstanding - diluted 7,759,172 8,353,743 7,631,748 8,353,743
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,985,129 $ 2,056,621
Adjustment to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 203,875 127,195
Deferred taxes, net (377,333)
Changes in assets and liabilities:
Increase in accounts receivable (5,404,069) (1,396,637)
(Increase) decrease in due from shareholders and employees (31,108) 367
Increase in prepaid expenses and other assets (119,164) (334,145)
Decrease in accounts payable (94,942) (111,653)
Increase in accrued liabilities 158,980 344,162
Increase in income tax payable 179,101 108,771
Increase in payable to stockholders 7,090,211 -
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,590,680 794,681
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (938,689) (248,593)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing/(Paydown) on line of credit (223,459) 162,355
Proceeds from public offering of common stock, net 30,996,011 -
Distribution to stockholders (9,769,875) (336,424)
Overdraft (588,106) (244,219)
----------- -----------
NET CASH PROVIDED BY (USED) IN FINANCING ACTIVITIES 20,414,571 (418,288)
NET INCREASE IN CASHAND CASH EQUIVALENTS 24,066,562 127,800
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 469,973 174,204
CASH AND CASH EQUIVALENTS, END OF PERIOD $24,536,535 $ 302,004
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 125,163 $ 165,165
=========== ===========
Taxes paid $ 232,107 $ 108,771
=========== ===========
</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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1. General
BUSINESS
The accompanying unaudited condensed consolidated financial statements
include the accounts of Technisource, Inc. ("Technisource") and its
subsidiaries, Technisource of Florida, Inc. ("Technisource-Florida") and
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 June 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 30, 1998 (the "IPO"). In connection with the IPO, all
outstanding shares 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 June 30, 1998 and for the three and
six months ended June 30, 1998 and 1997 is unaudited and have 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 in
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
4
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
with the Company's Combined Financial Statements 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 "Registration Statement"). 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 $ 23,717,000
and $0 at June 30, 1998 and December 31, 1997, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued 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 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 the cyclical and
economic factors that could have an impact on those industries. Additionally,
the Company maintained $24.5 million at June 30, 1998 in one financial
institution which is in excess of the FDIC insured funds.
INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109). SFAS 109 is an assets and
liability
5
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 30, 1998 the Company completed an initial public offering 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 initial public offering were approximately $31,000,000 of which
approximately $7,090,000 represents the distributed S corporation earnings to
existing shareholders (Note 5).
4. Line of Credit
As of June 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 August 31, 1998 and is secured by the Company's accounts
receivable and equipment and guaranteed by two of the Company's shareholders. As
of June 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 (9.0% as of June
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, at which time, the
Company converted to C Corporation status, thereafter and made a final
distribution ("the Distribution") to its existing shareholders in an aggregate
amount representing substantially all of the Company's undistributed earnings
through the closing of the IPO. Purchasers of the Company's Common Stock in the
IPO did not receive any portion of the Distribution.
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
6
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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. In addition, the Company recorded
approximately $7 million in distributions to S Corporation shareholders. 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.
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 and company expenses) 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------
1998 1997 1998 1997
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Proforma:
Net income per share:
Net income available to common shareholders $ 929,311 $ 820,803 $1,688,597 $1,382,421
Weighted average common shares outstanding 7,438,462 7,200,000 7,319,231 7,200,000
========== ========== ========== ==========
$0.13 $0.11 $0.23 $0.19
========== ========== ========== ==========
Net income per share-assuming dilution:
Net income available to common shareholders $ 929,311 $ 820,803 $1,688,597 $1,382,421
Weighted average common shares outstanding 7,759,172 7,200,000 7,631,748 7,200,000
Dilutive effect of options
Effect of assumed IPO shares for distribution 1,153,743 1,153,743
---------- ---------- ---------- ----------
7,759,172 8,353,743 7,631,748 8,353,743
---------- ---------- ---------- ----------
$0.12 $0.10 $0.22 $0.17
========== ========== ========== ==========
</TABLE>
7
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. Long-Term Debt
The long-term debt of $10,000 from related parties was fully paid in
August 1998.
8. 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 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; however, pro forma adjustments have been made to reflect
the income tax provision as if the Company was taxed as a C corporation during
all periods. The pro forma adjustments to the six months ended June 30, 1998
have been made to reflect an effective tax rate of 40.46 percent, which is the
tax rate that would have been in effect had the Company been taxed as a C
corporation for the duration of such period.
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 services through 24 offices
in the United States and Canada, utilizing over 950 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 942 as of June 30, 1998. For each of 1995, 1996,
and 1997, clients from the previous year generated at least 80% of the Company's
revenues. The Company generates substantially all of its revenues from fees for
the provision of IT consulting 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 and the process of replicating these Development Triangles, which
is Technisource's recruiting model and consists of two to three recruiters and
an account manager; 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
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 93
employees at December 31, 1996 to 207 employees at December 31, 1997, and 256 at
June 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 two to three
recruiters and an account manager. The Company has grown from five Development
Triangles as of December 31, 1993 to 33 Development Triangles as of December 31,
1997, and to 43 Development Triangles as of June 30, 1998. The Company invested
in the creation of 10 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 Development Triangles, the
Company leverages its initial investment in infrastructure as Development
Triangles mature.
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 revenues of certain items reflected in the Company's statements of income:
THREE MONTHS
ENDED
JUNE 30,
-------------------
1997 1998
Revenues........................................ 100.0% 100.0%
Cost of revenues................................ 75.1 73.9
--------- --------
Gross profit.................................... 24.9 26.1
Selling, general and administrative expenses.... 16.6 19.4
--------- --------
Operating income................................ 8.3 6.7
Interest and other income....................... * *
Interest expense................................ 0.4 0.3
--------- --------
Income before income taxes...................... 7.8 6.4
Income taxes.................................... 0.3 0.8
--------- --------
Net income...................................... 7.5 7.2
Pro forma provision for income taxes............ 2.8 2.7
--------- --------
Pro forma net income............................ 5.0 3.5
========= ========
10
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues increased $ 8.9 million, or 54.8%, to $ 25.1 million
for the three months ended June 30, 1998 as compared to $ 16.2 million for the
three months ended June 30, 1997. This increase resulted primarily from
increased sales in existing offices, and to a lesser extent, the addition of
three new branch offices. The total number of client divisions and business
units billed increased from 231 during the quarter ended June 30, 1997 to 350
during the quarter ended June 30, 1998, and the number of IT consultants working
for the Company increased from 603 as of June 30, 1997 to 942 as of June 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 $2.5 million, or 62.7%, to
$ 6.5 million, for the three months ended June 30, 1998 as compared to $ 4.0
million for the three months ended June 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. To a lesser extent, the
increase is attributable to the above average margins of Client Server
Consulting and Computer Hardware compliment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $2.1 million, or 81.5%, to $4.8
million for the three months ended June 30, 1998, as compared to $ 2.7 million
for the three months ended June 30, 1997. The increase primarily resulted from
increases in corporate and administrative staff and start-up costs associated
with the addition of three branch offices and four Development Triangles.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30,1997
REVENUES. Revenues increased $ 18.3 million, or 61.6%, to $ 47.9
million for the six months ended June 30, 1998 as compared to $ 29.6 million for
the six months ended June 30, 1997. This increase resulted primarily from
increased sales in existing offices, and to a lesser extent, the addition of six
new branch offices. The total number of client divisions and business units
billed increased from 231 during the six months ended June 30, 1997 to 350
during the six months ended June 30, 1998, and the number of IT consultants
working for the Company increased from 603 as of June 30, 1997 to 942 as of June
30, 1998.
11
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
GROSS PROFIT. Gross profit increased $4.8 million, or 65.9%, to $12.1
million, for the six months ended June 30, 1998 as compared to $ 7.3 million for
the six months ended June 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 $4.2 million, or 84%, to $9.2
million for the six months ended June 30, 1998, as compared to $ 5.0 million for
the six months ended June 30, 1997. This increase primarily resulted from
increases in corporate staff and start-up costs associated with the addition of
seven branch offices and ten Development Triangles, compared to six months ended
June 30, 1997, when the company had opened three offices and added five
Development Triangles.
LIQUIDITY AND CAPITAL RESOURCES
Through June 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 generated net proceeds to the Company of approximately
$31 million. Cash and cash equivalents and working capital totaled $24.5 million
and $29.3 million, respectively, as of June 30, 1998. The Company believes that
it has an amount of working capital that will be sufficient to fund the
Company's operations for at least the next 12 months.
The Company maintains a revolving line of credit with the "Credit
Facility", which provides for maximum borrowings of up to $8.0 million. 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 9.0% as of
June 30, 1998. All interest and principal outstanding under the line of credit
is due on August 31, 1998. As of June 30, 1998, the company does 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
YEAR 2000
The Company has performed an initial assessment of the impact of the
"Year 2000 Issue" on its reporting systems and operations. The "Year 2000 Issue"
exists because many computer systems and applications currently use two-digit
fields to designate a year. As the century date occurs, date sensitive systems
will recognize the year 2000 as 1900, or not at all. Based on the Company's
initial assessment, it believes that its accounting systems and operations
substantially avoid the problems associated with the "Year 2000 Issue," thereby
enabling it to properly process critical financial and operational information.
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.
NEW ACCOUNTING POLICIES
In June 1997, the FASB issued 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 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 in 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.
These forward-looking statements are based upon assumptions of future events
that may not prove to be accurate. These forward-looking statements also involve
risks and uncertainties, including but not limited to the Company's ability to
13
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
attract and retain IT consultants and recruiters, the Company's ability to
generate new clients and projects requiring 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 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 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or
its properties or to which the Company is a party
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 $30,996,000. 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, and the
selling shareholders sold 379,380 shares generating aggregate gross proceeds of
$4,173,180 for the selling shareholders. In connection with the IPO, the Company
incurred expenses for underwriting discounts and commissions of $2,387,000 and
other expenses of approximately $717,000, for total expenses of approximately
$3,035,000. None of such expenses were paid to officers, directors, ten percent
shareholders, or associates or affiliates of such persons or the Company.
As of June 30, 1998, all of the Company's net proceeds of the IPO were
invested in U.S. Treasury and highly-rated corporate debt securities.
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)
10.1 Employment Agreement, dated as of January 1, 1998,
between Joseph W. Collard and the Company (1)
10.2 Employment Agreement, dated as of January 1, 1998,
between James F. Robertson and the Company (1)
15
<PAGE>
10.3 Employment Agreement, dated as of November 11, 1997,
between John A. Morton and the Company (1)
10.4 Employment Agreement, dated as of January 1, 1998,
between Paul Cozza and the Company (1)
10.5 Registration Rights Agreement, dated April 21, 1998,
between Joseph W. Collard and the Company (1)
10.6 Registration Rights Agreement, dated April 21, 1998,
between James F. Robertson and the Company (1)
10.7 The Technisource, Inc. Long-Term Incentive Plan (1)
10.8 Stock Option Agreement between the Company and Paul
Cozza (1)
10.9 Stock Option Agreement between the Company and John A.
Morton (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
16
<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: August 13, 1998
By: /s/ JAMES F. ROBERTSON
------------------------------------
James F. Robertson
Executive Vice President, Chief
Operating Officer
By: /s/ JOHN A. MORTON
------------------------------------
John A. Morton
Vice President, Chief Financial
Officer (Principal Financial and
Accounting Officer)
17
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 24,536,535
<SECURITIES> 0
<RECEIVABLES> 14,806,632
<ALLOWANCES> 658,933
<INVENTORY> 0
<CURRENT-ASSETS> 39,326,882
<PP&E> 2,807,333
<DEPRECIATION> 842,861
<TOTAL-ASSETS> 41,370,634
<CURRENT-LIABILITIES> 9,929,317
<BONDS> 0
0
0
<COMMON> 103,000
<OTHER-SE> 31,338,317
<TOTAL-LIABILITY-AND-EQUITY> 41,370,634
<SALES> 0
<TOTAL-REVENUES> 47,935,455
<CGS> 0
<TOTAL-COSTS> 35,790,912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125,163
<INCOME-PRETAX> 2,836,003
<INCOME-TAX> (149,126)
<INCOME-CONTINUING> 2,985,129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,688,597
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
