UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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 30, 1999.
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: 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 W. CYPRESS CREEK ROAD, SUITE 202, FORT LAUDERDALE, FL 33309
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(954) 493-8601
-----------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares outstanding of common stock as of October 31, 1999
was 10,385,000.
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
PAGE
----
Condensed Consolidated Balance Sheets as of September 30, 1999
(Unaudited) and December 31, 1998............................. 1
Condensed Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1999 and 1998 (Unaudited)...... 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 (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...................................... 9-16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..... 17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 18
ITEM 2. Changes in Securities and Use of Proceeds........................ 18
ITEM 6. Exhibits and Reports on Form 8-K................................. 18
Signatures ............................................................. 19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 1
TECHNISOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(unaudited)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,779,690 $ 17,545,183
Trade accounts receivable, less allowance for doubtful
accounts of $358,933 at September 30, 1999
and December 31, 1998 21,457,605 15,772,435
138,878 120,597
792,710 326,255
258,643 258,643
------------ ------------
Total current assets 38,427,526 34,023,113
Property and equipment, net 2,542,189 2,559,790
Other assets 540,167 159,195
Deferred tax asset, noncurrent 87,991 87,991
------------ ------------
Total assets $ 41,597,873 $ 36,830,089
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
$ 841,683 $ 723,643
586,630 624,378
3,607,577 1,879,194
6,065 6,065
------------ ------------
Total current liabilities 5,041,955 3,233,280
Deferred tax liability, noncurrent 142,269 142,269
------------ ------------
Total liabilities 5,184,224 3,375,549
Shareholders' equity:
10,385,000 and 10,385,000 outstanding as of September 30,
1999 and December 31, 1998, respectively 103,850 103,850
30,096,956 30,057,853
6,362,843 3,292,837
1999 and December 31, 1998, respectively (150,000) --
------------ ------------
Total shareholders' equity 36,413,649 33,454,540
------------ ------------
Total liabilities and shareholders' equity $ 41,597,873 $ 36,830,089
============ ============
</TABLE>
See notes to condensed consolidated financial statements
1
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Staffing revenues $ 30,557,261 $ 27,149,018 $ 92,167,871 $ 74,413,321
Hardware revenues 7,167,087 382,667 19,386,550 1,053,819
------------- ------------- ------------- -------------
Total revenues 37,724,348 27,531,685 111,554,421 75,467,140
Staffing cost of revenues 22,507,103 20,056,639 68,501,579 55,375,699
Hardware cost of revenues 6,593,950 315,020 17,658,227 786,872
------------- ------------- ------------- -------------
Total cost of revenues 29,101,053 20,371,659 86,159,806 56,162,571
Gross profit 8,623,295 7,160,026 25,394,615 19,304,569
Selling, general and
administrative expenses 7,462,096 5,077,640 20,922,114 14,264,741
------------- ------------- ------------- -------------
Operating income 1,161,199 2,082,386 4,472,501 5,039,828
Other income (expense):
Interest and other income 224,769 239,859 644,420 243,583
Interest expense (247) -- (247) (125,163)
------------- ------------- ------------- -------------
Income before taxes 1,385,721 2,322,245 5,116,674 5,158,248
Provision for income taxes 554,287 923,158 2,046,668 774,032
------------- ------------- ------------- -------------
Net income $ 831,434 $ 1,399,087 $ 3,070,006 $ 4,384,216
============= ============= ============= =============
Pro forma information
Income before taxes, as
reported $ -- $ -- $ -- $ 5,158,248
Pro forma income tax
provision -- -- -- 2,070,564
------------- ------------- ------------- -------------
Pro forma net income $ -- $ -- $ -- $ 3,087,684
============= ============= ============= =============
Net income per share - basic $ 0.08 $ 0.14 $ 0.30 $ 0.37
============= ============= ============= =============
Net income per share - diluted $ 0.08 $ 0.13 $ 0.29 $ 0.37
============= ============= ============= =============
Weighted average common shares
outstanding - basic 10,360,000 10,352,889 10,371,388 8,319,852
============= ============= ============= =============
Weighted average common shares
outstanding - diluted 10,491,918 10,519,737 10,524,464 8,462,268
============= ============= ============= =============
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,070,006 $ 4,384,216
Adjustment to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 1,024,932 348,259
Income tax benefit from exercise of options 332,308
Deferred taxes, net (432,352)
Deferred compensation 96,876 32,293
Changes in assets and liabilities:
Increase in accounts receivable (5,685,170) (4,915,607)
Increase in due from shareholders and emplo (18,281) (80,057)
Increase in prepaid expenses and other asse (858,677) (258,479)
Increase (decrease) in accounts payable 118,040 (137,601)
Increase in accrued liabilities 1,740,694 660,273
Decrease in income taxes payable (37,748) (104,145)
------------ ------------
Net cash used in operating activities (549,328) (170,892)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (996,081) (1,283,056)
------------ ------------
Net cash used in investing activities (996,081) (1,283,056)
Cash flows from financing activities:
Paydown on note payable (10,000)
Paydown on line of credit (223,460)
Proceeds from public offering of common stock, net 30,781,854
Proceeds from issuance of common stock 10,676
Distribution to shareholders (70,084) (9,769,875)
Payments to acquire treasury stock (150,000) --
Overdraft -- (588,106)
------------ ------------
Net cash (used in) provided by financing activities (220,084) 20,201,089
Net (decrease) increase in cash (1,765,493) 18,747,141
------------ ------------
Cash and cash equivalents, beginning of period 17,545,183 469,973
------------ ------------
Cash and cash equivalents, end of period $ 15,779,690 $ 19,217,114
------------ ------------
Supplemental disclosure of cash flow information:
Interest paid $ 247 $ 125,163
------------ ------------
Income taxes paid $ 2,084,416 $ 978,221
------------ ------------
</TABLE>
Noncash financing activities:
Shareholder obligations of $127,857 and $9,769,875 were incurred during the nine
months ended September 30, 1999 and 1998, respectively, for undistributed
earnings to the former S corporation shareholders.
See notes to condensed consolidated financial statements
3
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
ORGANIZATION AND DESCRIPTION OF BUSINESS
Technisource, Inc. was incorporated in Florida on March 25, 1987.
Technisource of Florida, Inc. and Technisource Midwest, Inc. were incorporated
in Florida on March 22, 1994, to offer information technology staffing services
("IT Services") and to administer payroll and human resources activities for the
Company. In connection with the initial public offering completed June 30, 1998,
all outstanding shares of capital stock of Technisource of Florida, Inc. were
contributed to Technisource, Inc. and Technisource Midwest, Inc. was dissolved.
The accompanying unaudited condensed consolidated financial statements
include Technisource, Inc. and Subsidiaries (the "Company"). The subsidiaries
include Technisource of Florida, Inc. and Technisource Midwest, Inc.
The Company is an information technology ("IT") staffing services firm,
providing IT professionals principally on a time and materials basis to
organizations with complex IT needs. As of September 30, 1999, the Company had
26 branch office locations.
INITIAL PUBLIC OFFERING
The Company completed an initial public offering ("IPO") of common
stock on June 30, 1998. The Company sold 3,100,000 shares of its common stock,
par value $0.01 per share. The Company realized $30.6 million from the offering,
net of expenses. The Company distributed approximately $10.7 million of
accumulated S Corporation earnings to the former S Corporation shareholders.
INTERIM FINANCIAL DATA
The interim financial data as of September 30, 1999, and for the three
and nine months ended September 30, 1999, and 1998 is unaudited and has been
prepared in accordance with generally accepted accounting principles for interim
financial reporting purposes 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 or cash flows of the
Company for the periods indicated. Results of operations and cash flows for the
interim periods are not necessarily indicative of the results of operations or
cash flows for the full fiscal year. These condensed consolidated financial
statements should be read in conjunction with the Company's Financial Statements
and the notes thereto for the year ended December 31, 1998, included in the
Company's annual report on Form 10-K.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
RECLASSIFICATIONS
Certain reported amounts for 1998 have been reclassified to conform to
the 1999 presentation.
2. Summary of Significant Accounting Policies
CASH AND CASH EQUIVALENTS
For purposes of the condensed consolidated statements of cash flows,
the Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Cash equivalents
approximated $15,780,000 and $17,545,183 at September 30, 1999, and December 31,
1998, respectively and consisted of a money market account.
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. The IT service industry is highly competitive and served
by numerous national, regional, and local firms, all of which are either
existing or potential competitors of the Company. Many of these competitors have
substantially greater financial, technical and marketing resources and greater
name recognition than the Company.
The Company provides IT professional services to customers located in
the United States and Canada. 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. Financial instruments,
which potentially expose the Company to concentrations of credit risk, consist
primarily of accounts receivable. Additionally, the Company maintained
approximately $15.8 million at September 30, 1999 in one financial institution,
which is in excess of the FDIC insured limits.
3. Contingent Liability
The Company is currently undergoing a review by the Department of
Labor. While it is not possible to predict with certainty the outcome of this
review, Management believes the ultimate outcome of the review will not have an
material adverse effect on the Company's results of operations or financial
position.
5
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. Line of Credit
On March 9, 1999, the Company established a line of credit with
NationsBank, N.A. that provides for maximum borrowings of up to $25 million, $10
million of which may be used for acquisitions and $15 million of which may be
used for working capital. Interest is payable monthly at a variable rate of
LIBOR plus 1.4%. The line of credit expires April 30, 2002. There were no
borrowings outstanding at September 30, 1999.
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 undistributed S Corporation earnings through
the closing of the IPO of approximately $10.7 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
Basic earnings per share is computed by dividing net income
attributable to common shares by the weighted average number of common shares
outstanding. Diluted net income per share is computed by dividing net income
attributable to common shares by the weighted average number of common shares
outstanding and dilutive potential common shares.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic:
Weighted average common shares
outstanding 10,360,000 10,352,889 10,371,388 8,319,852
========== ========== ========== ==========
Diluted:
Weighted average common shares
outstanding 10,360,000 10,352,889 10,371,388 8,319,852
Dilutive effect of options 131,918 166,848 153,076 142,416
---------- ---------- ---------- ----------
Total 10,491,918 10,519,737 10,524,464 8,462,268
========== ========== ========== ==========
</TABLE>
Options to purchase 667,697 shares of common stock at a range of $6.41
to $14.94 per share for the nine months ended September 30, 1999, and options to
purchase 994,074 shares of common stock at a range of $4.90 to $14.94 per share
for the three months ended September 30, 1999, were excluded from the diluted
net income per share calculation for the period because the exercise price of
the options was greater than the average market price of the common shares for
the periods. The stock options expire by the year 2009.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
7. Income Taxes
Historically, the Company 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's election to be treated as an S Corporation was
terminated. As a result of the Company's Subchapter S election, the accompanying
condensed 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. 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. Stock Repurchase Plan
On April 22, 1999, the Company's Board of Directors approved a Stock
Repurchase Plan pursuant to which the Company can repurchase up to $1 million of
the Company's common stock on the open market. As of September 30, 1999, the
Company had repurchased 25,000 shares of its common stock at an aggregate cost
to the Company of $150,000.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
9. Reportable Segment
The Company operates in two business segments: IT Staffing and Computer
Hardware Sales. The segment information set forth below is based on the nature
of the services offered. The chief operating decision-makers evaluate each
segment's performance based primarily on their revenues, gross margin and
operating income. The accounting policies of the operating segments are the same
as those of the entire Company.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues(1)
IT Staffing $ 30,557,261 $ 92,167,871 $ 27,149,018 $ 74,413,321
Hardware Sales 7,167,087 19,386,550 382,667 1,053,819
------------ ------------ ------------ ------------
$ 37,724,348 $111,554,421 $ 27,531,685 $ 75,467,140
------------ ------------ ------------ ------------
Income Before Taxes(2)
IT Staffing $ 1,149,236 $ 4,364,195 $ 2,337,440 $ 5,068,868
Hardware Sales 236,485 752,479 (15,195) 89,380
------------ ------------ ------------ ------------
$ 1,385,721 $ 5,116,674 $ 2,322,245 $ 5,158,248
============ ============ ============ ============
</TABLE>
- ----------
(1) Two of the Company's clients accounted for approximately 21.00% and 31.73%,
respectively, of the Company's IT Staffing revenue. In addition two of the
Company's clients accounted for approximately 15.9% and 54.9%, respectively,
of the Company's hardware sales for the period ended September 30, 1999 and
1998.
(2) Since all expenses have not been allocated to the hardware sales segment,
this basis is not necessarily a measure completed in accordance with
generally accepted accounting principles and may not be comparable to other
companies. Additionally, the Company does not allocate assets, depreciation
expense or capital additions to the hardware segment.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-Q, PRINCIPALLY 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 YEAR 2000 PREPAREDNESS, WORKING CAPITAL, COSTS OF SETTING UP NEW
BRANCH OFFICES, PROFITABILITY OF BRANCH OFFICES, AND THE EFFECT OF LIABILITY, IF
ANY, IMPOSED ON THE COMPANY BY THE DEPARTMENT OF LABOR ARE FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, THE COMPANY'S ABILITY TO RECRUIT
AND RETAIN QUALIFIED TECHNICAL PROFESSIONALS; IDENTIFY, ACQUIRE AND INTEGRATE
SUITABLE ACQUISITION CANDIDATES; OBTAIN SUFFICIENT WORKING CAPITAL TO SUPPORT
SUCH GROWTH; COMPETE SUCCESSFULLY WITH EXISTING AND FUTURE COMPETITORS; THE
ABILITY OF NEW BRANCH OFFICES TO ACHIEVE PROFITABILITY AND OTHER FACTORS
DESCRIBED THROUGHOUT THIS FORM 10-Q. THE ACTUAL RESULTS THAT THE COMPANY
ACHIEVES MAY DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS DUE TO SUCH
RISKS AND UNCERTAINTIES. WORDS SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS,"
"INTENDS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS, BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING SUCH STATEMENTS. THE
COMPANY UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS IN
ORDER TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE OF THIS
REPORT. READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS
DISCLOSURES MADE BY THE COMPANY IN THIS REPORT AND IN THE COMPANY'S OTHER
REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE
INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S
BUSINESS.
OVERVIEW
Technisource is a national provider of IT staffing services through 26
offices in the United States and Canada, utilizing over 1,150 highly trained
professionals. The Company has achieved a compound annual revenue growth rate of
59% over the past five years based on years-ended 1994 through 1998. This growth
rate has been generated internally, without the benefit of acquisitions.
The Company's revenues grew from $29.1 million in 1995 to $105.7
million in 1998. The Company's historical revenue growth during this period has
been driven primarily by increases in the number of professionals placed with
existing and new clients. The number of professionals utilized by the Company
grew from 320 as of December 31, 1995, to 1,105 as of December 31, 1998, and to
1,159 as of September 30, 1999. For each of 1998, 1997, and 1996, clients from
the previous year generated at least 80% of the Company's revenues.
Through 1998, the Company generated primarily all of its revenues from
fees for the provision of IT Staffing. For the period ended September 30, 1999,
the Company generated 82.6% of its revenues from fees for the provision of IT
staffing services and 17.4% from hardware sales.
With respect to IT staffing services, clients are typically billed and
professionals paid on a weekly basis. The Company recognizes revenues from IT
staffing services as they are performed. With respect to hardware sales, clients
are typically billed on a weekly basis. The Company recognizes revenues from
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
hardware sales when the title to the hardware equipment passes to the customer.
The Company's most significant cost is its personnel expense, which
consists primarily of salaries, fees and benefits of the Company's
professionals. To date, the Company has generally been able to maintain its
gross profit margin by offsetting increases in professional 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 directly passed through to its clients, by
controlling the rate of its branch office expansion and by maintaining
centralized operations and back-office infrastructure.
The Company increased its administrative, sales, recruiting and
training professionals from 207 employees on December 31, 1997 to 275 employees
on December 31, 1998, and to 313 at September 30, 1999.
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. Each Development
Triangle is typically comprised of one Account Manager, two or three recruiting
professionals and a group of IT professionals. The Company has grown from nine
Development Triangles as of December 31, 1995 to 54 Development Triangles as of
December 31, 1998, and to 60 Development Triangles as of September 30, 1999.
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 and the Company's sales and
recruiting personnel achieve greater levels of productivity.
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. The Company expenses the
costs of opening a new office as such expenses are incurred. The Company
anticipates continuing to leverage its current network of 26 branch offices, as
the start-up costs have already been expensed and additional start-up branch
office costs will constitute a smaller percentage of revenues as the Company
continues to increase its revenue base. There can be no assurance that new
Development Triangles or branch offices will be profitable within projected time
frames or at all.
The Company's computer hardware sales grew to approximately $19.4
million in the first nine months of 1999 from approximately $1.1 million in the
same period of 1998. The gross margin on the sale of computer hardware, at 9.8%,
is substantially lower than the gross margin on the Company's IT staffing
services.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Consistent with industry trends, the Company has experienced a slowdown
in service revenue from certain offices. Technisource believes there will be at
least a short-term slowdown in historical revenue and income growth rates and
that it will be difficult to forecast revenue for the remainder of 1999.
The Company has minimized the impact of the reduced growth in demand by
shifting recruiting resources and professionals to the Company's faster growing
offices. The Company has slowed, but not stopped, office expansion until it has
the business to fully utilize its resources without jeopardizing its positioning
for rapid growth in the year 2000. This will allow the Company to better utilize
its existing infrastructure. In addition, the Company is investing in name
recognition in the computer consulting community through increased advertising
using the Internet and traditional advertising methods.
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues 77.1 % 74.0 % 77.2 % 74.4 %
------- ------- ------- -------
Gross profit 22.9 % 26.0 % 22.8 % 25.6 %
Selling, general and administrative 19.8 % 18.4 % 18.8 % 18.9 %
expenses
------- ------- ------- -------
Operating income 3.1 % 7.6 % 4.0 % 6.7 %
Interest and other income 0.6 % 0.9 % 0.6 % 0.3 %
Interest expense 0.0 % 0.0 % 0.0 % 0.2 %
------- ------- ------- -------
Income before income taxes 3.7 % 8.5 % 4.6 % 6.8 %
Income taxes 1.5 % 3.4 % 1.8 % 1.0 %
------- ------- ------- -------
Net Income 2.2 % 5.1 % 2.8 % 5.8 %
Pro forma provision for income taxes -- -- -- 2.7 %
Pro forma net income -- -- -- 4.1 %
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES. IT Staffing revenues increased $3.4 million, or 13%, to $30.6
million for the three months ended September 30, 1999, as compared to $27.2
million for the three months ended September 30, 1998. This increase resulted
primarily from increased sales in existing offices. Sales of hardware represent
approximately 19% of the total sales for the quarter. The hardware sales revenue
increased $6.8 million, or 1,772%, to $7.2 million for the quarter ended
September 30, 1999, as compared to $382,667 for the quarter ended September 30,
1998. The total number of client divisions and business units billed increased
to 636 during the quarter ended September 30, 1999, from 400 during the quarter
ended September 30, 1998. Of those, 139 are client divisions and business units
billed for the Hardware Group. The number of IT professionals working for the
Company increased to 1,159 as of September 30, 1999, from 1,040 as of September
30, 1998.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
GROSS PROFIT. Gross profit consists of revenues less cost of revenues.
The Company's IT Staffing cost of revenues consists primarily of compensation,
benefits and expenses for the Company's professionals and other direct costs
associated with providing services to clients. Gross profit for the IT Staffing
area increased $957,779, or 14%, to $8.1 million, for the three months ended
September 30, 1999, as compared to $7.1 million for the three months ended
September 30, 1998. Gross profit for the hardware group increased $505,490, or
747%, to $573,137, for the three months ended September 30, 1999, as compared to
$67,647 for the three months ended September 30, 1998. Total gross profit grew
while the percent to revenue dropped to 23% from 26% for the three months ended
September 30, 1998. The overall Company gross profit margin is impacted by the
substantially lower gross profit margin hardware sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $2.4 million, or 47%, to $7.5
million for the three months ended September 30, 1999, as compared to $5.1
million for the three months ended September 30, 1998. The increase primarily
resulted from increases in sales and recruiting staff and the expenses
attributed to these workforce additions.
NET INTEREST EXPENSE (INCOME). Net interest income was approximately
$224,522 for the three months ended September 30, 1999, as compared to net
interest income of approximately $239,859 for the three months ended September
30, 1998. This change is primarily due to lower cash balances in interest
bearing accounts.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES. IT staffing revenues increased $17.8 million, or 24%, to
$92.2 million for the nine months ended September 30, 1999, as compared to $74.4
million for the nine months ended September 30, 1998. This increase resulted
primarily from increased revenues in existing offices, and to a lesser extent,
the addition of two new branch offices. Sales of hardware represent
approximately 17.4% of the total revenues for the nine months ended September
30, 1999. The hardware sales revenue increased 1,740% to $19.4 million for the
nine months ended September 30, 1999, as compared to $1 million for the nine
months ended September 30, 1998.
GROSS PROFIT. IT staffing gross profit increased $4.6 million, or 24%,
to $23.7 million, for the nine months ended September 30, 1999, as compared to
$19.0 million for the nine months ended September 30, 1998. Gross profit for the
hardware group increased $1.5 million, or 547%, to $1.7 million, for the nine
months ended September 30, 1999, as compared to $266,947 for the nine months
ended September 30, 1998. Total gross profit grew while the percent to sales
dropped to 23% from 25.6% for the nine months ended September 30, 1998. The
lower overall Company gross profit percentage is due to the substantially lower
gross profit margin hardware sales.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $6.7 million, or 47%, to $20.9
million for the nine months ended September 30, 1999, as compared to $14.3
million for the nine months ended September 30, 1998. The increase primarily
resulted from increases in the addition of 12 Development Triangles and the
expenses attributed to these workforce additions.
NET INTEREST EXPENSE (INCOME). Net interest income was approximately
$644,173 for the nine months ended September 30, 1999, as compared to net
interest income of approximately $118,420 for the nine months ended September
30, 1998. This change is primarily due to reduced interest expense resulting
from the repayment of outstanding debt during the second quarter of 1998 and
interest earned from the investment on net proceeds from the company's public
offering of common stock in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flow from
operations and available borrowings under its line of credit. Cash and cash
equivalents and working capital approximated $15.8 million and $33.6 million,
respectively, as of September 30, 1999.
On March 9, 1999 the Company established a line of credit with
NationsBank N.A., which provides for maximum borrowings of up to $25 million,
$10 million of which may be used for acquisitions and $15 million of which may
be used for working capital. Under the NationsBank line of credit, interest is
payable monthly at LIBOR plus 1.4%. The line of credit expires April 30, 2002.
There were no borrowings outstanding under the line of credit at September 30,
1999.
Net cash used by operating activities was approximately $549,000 for
the nine-month period ended September 30, 1999, as compared to $171,000 during
the nine-month period ended September 30, 1998. The increase in cash used in
operations is primarily due to an increase in accounts receivable.
Net cash used in investing activities was comparable period to period
and represents purchases of property and equipment for office locations.
For the nine-month period ended September 30, 1999, net cash used in
financing activities primarily related to the purchase of treasury stock.
On April 22, 1999, the Company's Board of Directors approved a Stock
Repurchase Plan pursuant to which the Company can repurchase up to $1 million of
the Company's common stock on the open market. As of September 30, 1999, the
Company has repurchased 25,000 shares of its common stock at an aggregate cost
to the Company of $150,000.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company anticipates that its primary uses of working capital in
future periods will be for the internal development of new offices, expansion of
the hardware group, 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 commitments with respect to any potential
acquisitions.
The Company believes that the existing cash and cash equivalents, cash
flow from operations and available borrowings under the Credit Facility will be
sufficient to meet the Company's presently anticipated working capital needs for
at least the next twelve months.
Inflation did not have a material impact on the Company's revenues or
income from operations in the third quarter of fiscal 1999. The Company cannot
predict what effect, if any, inflation may have on its future results of
operations.
YEAR 2000
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
use of computer programs which have been written using two digits, rather-than
four, to define the applicable year of business transactions. In evaluating the
Company's state of readiness the Company is considering the following key areas:
(i) the Company's principal staffing and financial systems; (ii) software used
in the Company's internal computer network; (iii) third party vendors; (iv)
customers; and (v) telecommunications and other support systems. The Company is
addressing each of these areas in three separate phases (the "Year 2000 Plan").
The first phase identifies all systems in each area that may contain potential
Year 2000 issues. The second phase involves an investigation into whether a Year
2000 issue actually exists for each system identified. The third phase involves
actual resolution of the issue and/or the development of a contingency plan.
The Company has completed an evaluation of its principal staffing and
financial systems. These systems are licensed from and maintained by third-party
software development companies. The Company has obtained representations from
these companies that indicate that the systems are Year 2000-compliant. In
addition to those representations, the Company has conducted its own tests of
these critical systems to ensure that they are Year 2000-compliant. The Company
does not anticipate any significant disruptions of its business resulting from
its principal staffing and financial systems.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company has completed the evaluation of the mission critical
software used on the Company's internal computer network. Substantially all
software used on the Company's internal computer network is licensed from major
software vendors that have represented that their products are compliant or will
be compliant by January 1, 2000. The Company has investigated and documented
these facts for each software product supported by the Company.
The Company has completed a review of its third-party vendors. The
Company, believes that its exposure with respect to third party vendors is
minimal. With the exception of basic utilities, any disruption to the Company's
other vendors are not likely to significantly disrupt the Company's business.
The Company is dependent on basic public infrastructure, such as
telecommunications and utilities, in order to function normally. Significant
long-term interruptions of this infrastructure could have an adverse effect on
the operations of the Company. As part of the second phase, the Company
contacted major telecommunications and utility companies to determine whether
any significant interruptions of service are probable. Notwithstanding the
Company's efforts in this area, there can be no assurance that the Company's
contingency plan will effectively deal with a major failure of public
infrastructure.
The Company has evaluated potential risks associated with its
customers' Year 2000 issues. The Company will attempt to evaluate whether a
potential disruption of revenue could result from a Year 2000 problem in a
customer's system. Although the Company has received some information from its
customers regarding their Year 2000 compliance efforts, there can be no
assurance that such customers will not experience disruption in their business
which would result in material adverse effects to the Company.
The Company does not believe that it will need to acquire any
significant new software systems in response to Year 2000 issues. The Company
has participated in Year 2000 remediation projects for some of its customers.
Although the Company has no reason to believe that such work will result in
litigation against the Company, it is possible that the Company could be
materially adversely affected by litigation in connection with the Year 2000
remediation services provided by the Company.
Based on the status of the Company's Year 2000 assessments made and
remediation work completed to date, total remediation costs, consisting
primarily of capital costs to remediate and replace IT and non-IT systems, is
not expected to materially impact the Company's financial operations. All
remediation costs will be funded through operating cash flows.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The extent and magnitude of the Year 2000 problem as it will affect the
Company, both before, and for some period after, January 1, 2000, is difficult
to predict or quantify for a number of reasons. Among the most important are the
lack of control over systems that are used by the third-parties who are critical
to the Company's operation, the complexity of testing interconnected networks
and applications that depend on third-party networks and the uncertainty
surrounding how others will deal with the issues raised by Year 2000-related
failures. Moreover, the estimated costs to implement the Year 2000 Plan does not
take into account the costs, if any, that might be incurred as a result of Year
2000-related failures that occur despite the Company's implementation of the
Year 2000 Plan. As the Year 2000 project continues, additional Year 2000
problems may be discovered or the Company may find that the cost of these
activities exceed current expectations. In many cases the Company must rely on
assurances from suppliers that new and upgraded information systems as well as
key services will be Year 2000 compliant. While the Company plans to validate
supplier representations, it cannot be sure that its tests will be adequate, or
that, if problems are identified, they will be addressed in a timely and
satisfactory manner. Even if the Company, in a timely manner, completes all of
its assessments, implements and tests all remediation plans it believes to be
adequate, and develops contingency plans believed to be adequate, some problems
may not be identified or corrected in time to prevent material adverse
consequences or business interruptions to the Company. Furthermore, there may be
certain mission critical third parties such as utilities, telecommunications
companies, or vendors where alternative arrangements or sources are limited or
unavailable.
Although the Company is not currently aware of any material operational
issues associated with preparing its internal systems for the Year 2000, or
material issues with respect to the adequacy of mission-critical third-party
systems, there can be no assurance, due to the overall complexity of the Year
2000 issue, that the Company will not experience material unanticipated negative
consequences and/or material costs caused by undetected errors or defects in
such systems or by the Company's failure to adequately prepare for the results
of such errors or defects, including costs or related litigation, if any. Such
consequences could have a material adverse effect on the Company's business,
financial condition or results of operations.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company owns no derivative financial instruments or derivative
commodity instruments. The Company does not derive a significant amount of
revenues from international operations and does not believe that it is exposed
to material risks related to foreign currency exchange rates.
17
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
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 AND USE OF PROCEEDS
The Company completed an initial public offering (IPO) of its common
stock on June 30, 1998, which generated net proceeds to the Company of
approximately $31.0 million. 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, 1999, approximately $13.8 million of the net
proceeds of the IPO were invested in U.S. Treasury and highly rated corporate
debt securities. In 1998, $10.7 million was 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*
3.2 Amended and Restated Bylaws of the Company*
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*
27 Financial Data Schedule
(b) Current Reports on Form 8-K
None
- ----------
* 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,
and incorporated herein by reference.
18
<PAGE>
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 12, 1999
By:
James F. Robertson
Executive Vice President, Chief
Operating Officer and Director
By:
John A. Morton
Vice-President, Chief Financial
Officer and Director
19
<PAGE>
INDEX OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 Amended and Restated Articles of incorporation of the Company*
3.2 Amended and Restated Bylaws of the Company*
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*
27 Financial Data Schedule
- ----------
* 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.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TECHNISOURCE,
INC.'S 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 15,779,690
<SECURITIES> 0
<RECEIVABLES> 21,457,605
<ALLOWANCES> 358,933
<INVENTORY> 0
<CURRENT-ASSETS> 38,427,526
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,597,873
<CURRENT-LIABILITIES> 5,041,955
<BONDS> 0
0
0
<COMMON> 103,850
<OTHER-SE> 30,096,956
<TOTAL-LIABILITY-AND-EQUITY> 41,597,873
<SALES> 37,724,348
<TOTAL-REVENUES> 37,724,348
<CGS> 29,101,053
<TOTAL-COSTS> 29,101,053
<OTHER-EXPENSES> 7,462,096
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 247
<INCOME-PRETAX> 1,385,721
<INCOME-TAX> 554,287
<INCOME-CONTINUING> 831,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 831,434
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
