UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended: December 31, 1998
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 CYPRESS CREEK ROAD, SUITE 202
FORT LAUDERDALE, FLORIDA 33309
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 493-8601
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K
-----
Based on the closing sales price of the registrant's Common Stock on the Nasdaq
National Market on March 1, 1999 the aggregate market value of the Common Stock
held by nonaffiliates of the registrant was $32,195,850.
The number of shares of the registrant's common Stock outstanding on March 1,
1999 was 10,385,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for use in connection
with its Annual Meeting of Shareholders are incorporated by reference into Part
III.
Certain exhibits listed in Part IV of this annual report on Form 10-K are
incorporated by reference from prior filings made by the registrant under the
Securities Act of 1934, as amended.
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TABLE OF CONTENTS
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PART I
Item 1. Business............................................................................ 2
Item 2. Properties.......................................................................... 12
Item 3. Legal Proceedings................................................................... 12
Item 4. Submission of Matters to a Vote of Securities Holders............................... 12
PART II
Item 5. Market for Registrant's Common Stock and
Related Shareholder Matters......................................................... 12
Item 6. Selected Consolidated Financial Data................................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................... 14
Forward Looking Information: Certain Cautionary Statements.......................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................... 27
Item 8. Consolidated Financial Statements and Supplementary Data............................ 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures........................................................... 47
PART III
Item 10. Directors and Executive Officers of the Company..................................... 47
Item 11. Executive Compensation.............................................................. 47
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 47
Item 13. Certain Relationships and Related Transactions...................................... 47
PART IV
Item 14. Exhibits, Financial Schedules and Reports on Form 10-K.............................. 47
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PART I
ITEM 1. BUSINESS
OVERVIEW
Technisource is a national provider of information technology staffing
services through 25 offices in the United States and Canada, utilizing over 1100
highly trained IT professionals. The Company's IT professionals provide services
which are used to design, develop and implement IT solutions, including database
development, documentation and training, ERP package implementation, help
desk/desktop support, Internet/intranet development, mainframe development,
network engineering, real-time development, systems administration and testing &
quality assurance. The Company's services are provided to various departments
within its client's organization, including research and product development
departments.
Since the Company's inception on March 25, 1987, the Company has developed
and refined an internal growth methodology which is focused on facilitating
rapid internal growth through the replication of Technisource Development
Triangles. Each Development Triangle is typically comprised of one account
manager, two trained recruiting professionals and a group of IT professionals.
As the revenues generated by a Development Triangle reach critical mass, a
high-performing recruiting professional from the Development Triangle is
promoted to account manager and forms a new Development Triangle, which is
seeded with a portion of the revenue-generating projects and IT professionals
from the original Development Triangle. This scalable model fuels growth by
developing and retaining employees within the Technisource culture and by
reducing the time required to achieve profitability and the risks associated
with expansion.
The Company has demonstrated the scalability of the Technisource Growth
Model, having replicated over 50 Development Triangles. This has resulted in
rapid internal growth, as revenues have increased at a five-year compound annual
growth rate of 59%, from $10.3 million in 1993 to $105.7 million in 1998. The
Company has grown from four branch offices in 1993 to 25 branch offices in 1998.
The key elements of the Company's business strategy are the following: (i)
rapidly deploy highly trained IT professionals; (ii) apply the Technisource
Growth Model by replicating Development Triangles; (iii) establish long-term
client relationships; (iv) provide a wide range of IT capabilities; (v)
capitalize on local presence; and (vi) leverage established infrastructure.
Technisource's substantial investment in a centralized infrastructure leaves the
Company well positioned to continue its expansion. For example, the Company has
expanded its proprietary TSRC Database to include over 100,000 potential IT
professionals and their qualifications, which allows the Company to identify and
quickly deploy IT professionals with the appropriate skill sets.
Technisource believes that the breadth of its service offerings fosters
long-term client relationships, affords cross-selling opportunities, reduces its
dependence on any single technology and enables the Company to attract IT
professionals with a variety of skill sets to service the needs of the Company's
clients. For each of the years 1998, 1997 and 1996, existing
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clients from the previous year generated at least 80% of the Company's revenues.
In 1998, the Company provided IT services to over 300 clients in the United
States, including more than 600 divisions or business units, in a diverse range
of industries. Clients include AlliedSignal, AT&T, Caterpillar, Eli Lilly,
General Electric, General Motors, Honeywell, Lockheed Martin, Lucent
Technologies, Motorola, Rockwell and UPS. The Company's strategy is to leverage
the Technisource Growth Model to generate same-office growth and expansion of
branch-office locations, and to selectively take advantage of acquisition
opportunities.
The Company's growth strategy includes the following elements: (i) expand
geographic presence through opening new branch offices; (ii) broaden service
lines and IT capabilities; (iii) leverage existing client base; and (iv) pursue
strategic acquisitions or partnerships.
INDUSTRY OVERVIEW
Increased competition, deregulation, globalization and technological
advances are forcing business organizations to increasingly rely on IT solutions
to resolve business issues and increase productivity. The ability of an
organization to integrate, deploy and manage new information technologies has
become critical to its long-term viability and competitiveness. The migration of
technology throughout the business enterprise has created a wide range of
opportunities, including improved service and product capabilities. These
capabilities are being deployed throughout a variety of complicated networking
protocols, operating systems, databases, devices and architectures.
Organizations are increasingly outsourcing technology services functions
throughout the business enterprise in order to: (i) keep pace with rapidly
changing technologies; (ii) efficiently match employee skills and utilization
levels with current needs; and (iii) address the growing shortage of IT
professionals.
KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES. Growth in the IT services
industry has been fueled by the clients' need to remain competitive through the
use of emerging technology capabilities, including open and distributed
computing, client/server architectures, Internet/intranet, relational databases
and object-oriented programming. The pace of change in technology capabilities
quickly renders existing IT infrastructure obsolete and makes it more difficult
for organizations to maintain the requisite internal expertise needed to
evaluate, develop and integrate new technologies.
MATCH EMPLOYEE SKILLS AND UTILIZATION LEVELS WITH CURRENT NEEDS.
Organizations are outsourcing technical functions to keep pace with changes in
technology and better match available skills with project requirements. In
today's rapidly changing environment, technical professionals are often needed
on a project by project basis. Organizations often lack the quantity or variety
of IT skills necessary to efficiently match project requirements with the
availability of qualified internal employees. The outsourcing of technical
skills in a controlled environment creates higher utilization rates and a more
efficient deployment of technical skills. Outsourcing IT services functions has
also reduced an organization's exposure to uncertain expenses, including the
costs of recruiting, hiring, terminating and under-utilizing permanent
employees.
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ADDRESS THE SHORTAGE OF IT PROFESSIONALS. As business organizations
continue to move from centralized mainframe architectures to distributed
client/server technologies, the Company believes that there will continue to be
a demand for IT professionals. In addition, the shortage of skilled IT
professionals and the complexity of IT solutions have forced organizations to
rely on outside specialists to help them execute IT strategies. Business
organizations often lack recruiting and employee management networks capable of
attracting and deploying, on short notice, large numbers of qualified IT
professionals. Further, these organizations often lack the infrastructure
necessary to provide training to IT professionals in emerging technology skills.
Third-party IT services providers have been able to attract, develop, motivate
and retain qualified IT professionals by offering a variety of benefits,
including the opportunity to train and work with emerging technologies in
multiple industries, flexible work and travel schedules, and accelerating cash
and stock compensation.
According to industry sources, the worldwide market for IT services was
estimated at $280 billion in 1997 with a projected market of $400 billion for
2001. The Company believes the IT services industry is highly fragmented and
will experience consolidation as smaller IT services firms are unable to meet
the wide-ranging service needs of, or provide nationwide services to, large
national or international clients, and are unable to achieve economies of scale
in recruiting, training and managing IT professionals. The Company believes that
these trends will provide opportunities for certain industry participants to
expand their operations by acquiring smaller IT consulting firms.
BUSINESS STRATEGY
The key elements of the Company's business strategy are the following:
RAPIDLY DEPLOY HIGHLY TRAINED IT PROFESSIONALS. Technisource's growth has
been fueled by its ability to recruit and deploy, on short notice, experienced
IT professionals to meet client needs on a national basis. The Company's
proprietary TSRC Database of over 100,000 potential IT professionals and their
qualifications allows the Company to identify and quickly deploy IT
professionals with the appropriate skill sets to meet client needs. In order to
maximize its ability to capitalize on industry growth, the Company has developed
and maintained an aggressive consultant recruiting strategy, with a full
complement of recruiting professionals to support each of the Company's offices.
Also, the Company has made substantial investments in computer-based training
systems that enable its IT professionals to learn new skills in response to
changing industry requirements. This helps ensure the high quality of the
Company's IT professionals and helps them to achieve their career objectives.
APPLY THE TECHNISOURCE GROWTH MODEL BY REPLICATING DEVELOPMENT TRIANGLES.
Over the last ten years, the Company has developed and refined the Technisource
Growth Model. This model is focused on facilitating rapid internal growth
through the replication of Development Triangles. Each Development Triangle is
typically comprised of one account manager, two trained recruiting professionals
and a group of IT professionals, who are assigned to projects managed by the
account managers. As each Development Triangle reaches a budgeted profitability
level, a high-performing recruiting professional from the Development Triangle
is promoted to account manager and a new Development Triangle is created. Each
new
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Development Triangle is seeded with a portion of the revenue-generating projects
and IT professionals from the original Development Triangle. Account managers
involved in the creation of several Development Triangles may be further
promoted to regional manager. The Company's TSRC Database maximizes employee
utilization and the expansion of skill sets by managing the migration of IT
professionals between projects and Development Triangles. The Company has
replicated over 50 Development Triangles, which currently include over 1100 IT
professionals. The Company has demonstrated the scalability of the Technisource
Growth Model as revenues have increased at a five-year compound annual growth
rate of 59%, from $10.3 million in 1993 to $105.7 million in 1998.
ESTABLISH LONG-TERM CLIENT RELATIONSHIPS. The Company's goal is to continue
to establish long-term client relationships that enable the Company to
cross-sell its capabilities within and expand the Company's business throughout
a client organization. The Company's account managers are trained to understand
the full breadth of the Company's capabilities and their clients' business
needs. By developing long-term client relationships, account managers are better
able to identify client needs and cross-sell the Company's services, generating
recurring revenue streams. For each of the years 1998, 1997, and 1996, existing
clients from the previous year generated at least 80% of the Company's revenues.
An example of the Company's success in building long-term client relationships
is its relationship with Motorola, which was serviced by one account manager and
generated revenues of approximately $340,000 from three client locations in
1993, and grew, through the Technisource Growth Model, to six account managers,
revenues of approximately $14.0 million and eight client locations in 1997.
PROVIDE A WIDE RANGE OF IT CAPABILITIES. The Company's goal is to provide
services to various departments within its client's organization, including
research and product development departments. The Company can provide its
clients with a wide range of IT applications, solutions and services, including
database development, documentation and training, ERP package implementation,
help desk/desktop support, Internet/intranet development, mainframe development,
network engineering, realtime development, systems administration and testing
and quality assurance. These services can be provided in a wide variety of
computing environments, and use leading technologies, including client/server
architectures, object-oriented programming languages and tools, distributed
database management systems and the latest networking and communications
technologies. In addition, the Company has developed proprietary methodologies
and tools to improve productivity and enhance the value of the Company's
services. The Company's strategy of providing a wide range of IT capabilities
enhances the Company's ability to establish long-term client relationships and
provides the Company with the opportunity to cross-sell multiple services.
CAPITALIZE ON LOCAL PRESENCE. Technisource has a geographically diverse
network of 25 branch offices in the United States and Canada, established and
grown by replicating Development Triangles. The Company's branch office network
demonstrates the Company's commitment to each local market, enables the Company
to generate additional client projects, and enhances the Company's ability to
attract experienced, locally based IT professionals. This branch network
increases efficiencies to clients by enhancing the Company's responsiveness and
minimizing travel expense.
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LEVERAGE ESTABLISHED INFRASTRUCTURE. In order to facilitate the
Technisource Growth Model, the Company has made significant capital investments
in its infrastructure, including a centralized client server accounting system,
and centralized, state-of-the-art billing, collections, and payroll systems. The
Company also has a centralized training program in Ft. Lauderdale, Florida for
newly hired recruiting professionals, centralized Computer Based Training
systems training capabilities through the Company's intranet site, and the
proprietary TSRC Database that matches the Company's client requirements with
the skill sets of the Company's IT professionals. This infrastructure has the
capacity to support significant growth with only modest additional capital
expenditures and additions to administrative personnel.
GROWTH STRATEGY
The Company's strategy is to grow its business by using the Technisource
Growth Model to generate same-office growth and expansion of branch office
locations, and to selectively take advantage of acquisition opportunities. The
Company has demonstrated the scalability of the Technisource Growth Model as
revenues have increased at a five-year internal compound annual growth rate of
59%, from $10.3 million in 1993 to $105.7 million in 1998. The Company's growth
strategy includes the following elements:
EXPAND GEOGRAPHIC PRESENCE BY REPLICATING DEVELOPMENT TRIANGLES.
Technisource has successfully expanded geographically by servicing new and
existing clients in strategic locations. The Company intends to continue to
expand its geographic presence by opening additional branch offices in selected
locations. The Company utilizes the Technisource Growth Model to establish new
branch offices by replicating Development Triangles in new locations. The
Company believes the Technisource Growth Model reduces the time required to
achieve profitability, as well as the risks associated with opening new offices,
by replicating Development Triangles. The Company has grown from four branch
offices in 1993 to 25 branch offices in 1998. The Company's substantial
investment in a centralized infrastructure leaves the Company well positioned to
continue the expansion of its branch office locations. In connection with each
new branch office, the Company's Office Development Team acquires office space,
outfits the new office with appropriate hardware, integrates back-office
operations with the Company's centralized systems, and enables the new office to
access the Company's TSRC Database.
BROADEN SERVICE LINES AND IT CAPABILITIES. Technisource believes that it
can increase its revenues from existing clients and attract new clients by
expanding its base of IT professionals to include additional professionals with
an increasingly broad range of skill sets. The Company has expanded its service
lines and capabilities over the last ten years to utilize IT professionals with
skill sets, including database development, documentation and training, ERP
package implementation, help desk/desktop support, Internet/intranet
development, mainframe development, network engineering, realtime development
,systems administration and testing and quality assurance. The Company provides
its IT professionals with substantial computer-based training resources in order
to allow them to respond to market needs by retooling their skills. The Company
plans to continue to selectively expand the services it offers its clients in
order to meet its client's evolving technological needs.
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LEVERAGE EXISTING CLIENT BASE. The Company intends to continue its internal
growth by expanding the amount of work it performs for existing clients. By
replicating the Development Triangles servicing existing clients, the Company
can service additional divisions and business units of existing clients and the
Company's account managers can better cross-sell the Company's wide range of
capabilities. During 1998, the Company provided services to over 300 clients in
the United States, including more than 600 divisions or business units. The
Company believes that its long-term client relationships and its ability to
address its client's needs throughout the lifecycle of their IT systems provides
the Company with substantial growth opportunities. For each of the years 1998,
1997, and 1996, existing clients from the previous year generated at least 80%
of the Company's revenues.
PURSUE STRATEGIC ACQUISITIONS OR PARTNERSHIPS. The Company intends to
selectively pursue strategic acquisitions that will provide well-trained,
high-quality professionals, new service offerings, additional industry
expertise, a broader client base and an expanded geographic presence, both
domestically and internationally. The Company believes that acquisition
opportunities exist due to the highly fragmented nature of the IT services
industry. The Company currently has no agreements, understandings or commitments
with respect to any potential acquisitions.
REPRESENTATIVE SERVICES AND SKILLS
Technisource offers its clients a comprehensive range of IT services
required to successfully design, develop and implement IT solutions. The
following is a summary of representative technology skill sets provided by the
Company:
CATEGORY DESCRIPTION OF SERVICES AND SKILLS
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DATABASE DEVELOPMENT Database developers use products and
toolsets including SQL, Oracle,
Sybase, Informix and Access. These
professionals provide data modeling,
define relational database structures,
resolve scalability issues, perform
physical/logical database design, and
design graphical user interfaces.
DOCUMENTATION AND TRAINING Professionals in this area document
technical systems, develop user
manuals and train users on how to
operate their technical systems.
Assignments in this area include
employee productivity improvement,
knowledge transfer support and
document management.
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ENTERPRISE RESOURCE PLANNING These professionals work with ERP
packages from SAP, Peoplesoft, BAAN,
Oracle and J.D. Edwards. Assignments
in this area include redesigning the
chart of accounts; identifying,
documenting and assessing current
business processes; and converting
from a mainframe environment to an ERP
environment.
HELP DESK/DESKTOP SUPPORT These professionals typically support
users of a device, software package or
operating system. The typical
assignment is to provide support for a
large business with a multi-platform
environment. Specific tasks include
providing phone support, on-site
support and troubleshooting.
INTERNET/INTRANET DEVELOPMENT These professionals are proficient in
CGI, Perl, IIS, Cold Fusion,
JavaScript ++ and HTML. Typical
services involve designing and
developing a web interface, as well as
connectivity to a database server that
will allow a user to add to or query
existing data.
MAINFRAME DEVELOPMENT These professionals typically perform
work utilizing MVS, COBOL, JCL, DB2
and IMS. Services include analyzing
change requests, identifying
requirements for fixes and
enhancements, developing project plans
for known maintenance activities,
installing upgrades and enhancements
and making program code changes to
existing on-line and batch programs.
NETWORK ENGINEERING Professionals providing these services
are proficient with gateways, routers,
hubs, bridges, Ethernet, Token Ring,
SNA, FDDI, SONET, T1, DS3, Frame
Relay, multi-point and TCP/IP. The
services provided involve network
analysis, daily network management,
network utilization trend analysis,
integration of software to perform
network/systems management,
utilization of core processes and
process design techniques, capacity
and performance management and network
tuning.
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REALTIME DEVELOPMENT Professionals in this area are
proficient in ADA, assembly language,
microprocessor experience and
debuggers. Assignments typically
involve working with a large team of
engineers developing a subsystem for
an aircraft or a communications
device. These assignments generally
involve significant documentation,
testing and quality assurance
requirements.
SYSTEMS ADMINISTRATION Professionals performing services in
this capacity generally specialize in
a particular operating platform,
including Sun/UNIX, Windows NT, Lotus
Notes or HP-UX. The tasks performed
range from establishing user accounts,
installing software and hardware
upgrades, monitoring system
performance and performing systems
programming and resource utilization
studies.
TESTING & QUALITY ASSURANCE These professionals participate in
clients' quality assurance efforts.
Services performed include interfacing
with clients to develop systems' test
requirements; interpreting,
determining and refining test
specifications; writing test plans;
overseeing systems tests;
troubleshooting; establishing test
tools; and writing test reports
CLIENTS
During 1998, the Company provided services to over 300 clients in the
United States, including more than 600 divisions or business units. More than
50% of the Company's revenues during 1998 were generated from Fortune 500
companies. The Company seeks to maximize its client retention rate and secure
follow-on engagements by being responsive to clients and providing high quality
services. For each of the years 1998, 1997, and 1996, existing clients from the
previous year generated at least 80% of the Company's revenues. During 1998, the
Company's two most significant clients, Motorola and Rockwell, accounted for
approximately 17.4% and 13.6% of the Company's revenues, respectively. The IT
services provided to Motorola were divided among a number of divisions and
subsidiaries in eight client locations.
SALES
New business engagements are generated by account managers, who manage the
Development Triangles. Upon being promoted from a recruiting professional to an
account manager in connection with the replication of a Development Triangle,
the account manager is seeded with a portion of the current revenue-generating
projects and a group of IT professionals from the original Development Triangle.
The Technisource Growth Model is designed to provide incentives to account
managers to generate new client engagements and further replicate
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Development Triangles. The Company's execution of the Technisource Growth Model
enabled the Company to generate 89 new clients in 1997 and 161 new clients in
1998. In 1998, the Company serviced over 300 clients, including more than 636
divisions or business units.
Each account manager is responsible for managing client relationships,
ensuring that the Development Triangle is performing as expected, and
identifying new business opportunities. The Company has a national sales
director and three regional managers, who are responsible for the performance of
four-to-ten Development Triangles within one or more of the Company's geographic
locations. The Company's regional managers and account managers are compensated
through a highly incentive-based compensation system that includes a combination
of base salary, commissions and bonuses.
The Company intends to compensate all of its regional managers and account
managers with stock options in order to further align their interests with the
Company's shareholders and to increase the performance-based portion of their
compensation packages. The Company believes that its performance-based
compensation structure provides incentives to its employees and allows the
Company to retain high-performing employees by compensating them at competitive
levels.
HUMAN RESOURCES AND RECRUITING
The Technisource Growth Model is designed to expand the skills and develop
the careers of the Company's employees and IT professionals, while providing
substantial incentives to further the Company's growth. The Company provides its
IT professionals with substantial computer-based training resources in order to
allow its IT professionals to respond to market needs by retooling their skills.
This has resulted in the Company maintaining a highly skilled pool of
career-oriented IT professionals. The Company also develops the careers of its
recruiting professionals and account managers by promoting high-performing
recruiting professionals to account managers with responsibility for a
Development Triangle, and by promoting high-performing account managers to
regional managers, with responsibility for several Development Triangles in
multiple geographic locations.
The Company's future growth depends in large part on its ability to
attract, develop, motivate and retain highly skilled IT professionals. The
Company's strategy for attracting career-oriented IT professionals includes
providing computer-based training; allocation of assignments in accordance with
employee skills and career objectives; and an optional comprehensive benefits
package including a Company-matched 401(k) plan, health and dental insurance, a
flexible spending account and tuition reimbursement. The Company also uses
employee stock options as an important part of its recruitment and retention
strategy. See "Management--Employee Benefit Plans."
On December 31, 1998, the Company had 122 full-time recruiting
professionals dedicated to hiring IT professionals and new recruiting
professionals. The Company actively recruits IT professionals and recruiting
professionals by advertising in leading national and local newspapers and trade
magazines, through employee recruitment and skill-matching capabilities
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on the Company's web site, and by participating in career fairs. In addition,
the Company provides incentives for its employees and IT professionals to refer
candidates for new positions.
Each new recruiting professional hired by the Company is trained during a
two-week training course held at the Company's training center located in Ft.
Lauderdale, Florida. The training course teaches the recruiting professionals
the Company's culture and operating procedures, proprietary tools and
techniques, and technical skills.
As part of its retention efforts, the Company has formulated a strategy for
minimizing turnover that emphasizes human resource management, competitive
salaries, comprehensive benefits and employee stock options. The Company's IT
professionals typically have bachelors or masters degrees in Computer Science or
other technical disciplines. As of December 31, 1998, the Company had 1,380
employees, including 971 IT professionals, 54 sales and marketing personnel, 122
recruiting professionals and 99 general and administrative personnel. As of
December 31, 1998, the Company also had 134 independent contractors working on
client engagements. The Company's employees are not represented by a union or
covered by a collective bargaining agreement and the Company believes that the
relationship between the Company and its employees is good.
COMPETITION
The IT services industry is highly competitive. The Company competes for
clients, qualified IT professionals, account managers and recruiting
professionals with a variety of companies, including general IT services firms,
temporary staffing and personnel placement companies, general management
consulting firms, major accounting firms, divisions of large hardware and
software companies, systems consulting and implementation firms, programming
companies and niche providers of IT services. Several traditional staffing
companies, which have historically emphasized the placement of clerical and
other less highly skilled personnel on short-term assignments, have begun to
provide IT services competitive with those provided by the Company. The Company
also competes for technical IT professionals within the internal IT departments
of its clients and potential clients. In addition, as part of the Company's
growth strategy, the Company may also compete with other IT staffing and
services companies for suitable acquisition candidates.
Several of the Company's competitors are substantially larger than the
Company and have greater financial and other resources. Many of these
competitors have also been in business much longer than the Company and have
significantly greater name recognition. Because the Company's competitors maybe
able to meet a broader range of a client's IT staffing and services needs and
serve a broader geographic range than the Company, they may be better able to
compete for national client accounts.
The Company believes that the primary competitive factors in obtaining and
retaining clients are its ability to provide comprehensive IT solutions for all
aspects of a client's IT needs, its understanding of the specific requirements
of a project and its ability to rapidly deploy carefully screened, highly
trained IT professionals at competitive prices. The primary competitive factors
in attracting and retaining qualified candidates for IT consultant positions are
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the Company's ability to offer competitive wages and provide a consistent flow
of high-quality and varied assignments.
The Company's executive offices are located at 1901 West Cypress Creek
Road, Suite 202, Ft. Lauderdale, Florida 33309, and its telephone number is
(954) 493-8601.
ITEM 2. PROPERTIES
The Company's executive offices are located in Fort Lauderdale, Florida,
where the Company leases approximately 16,000 square feet of office space. The
Company's other current offices are located in Huntsville, Alabama; Tempe,
Arizona; Santa Ana and San Diego, California; Toronto, Canada; Fort Lauderdale,
Jacksonville, Orlando and Tampa, Florida; Atlanta, Georgia; Chicago, Palatine,
Peoria and Willowbrook, Illinois; Carmel, Indiana; Cedar Rapids and Des Moines,
Iowa; Overland Park, Kansas; Hazlet, New Jersey; Charlotte and Raleigh, North
Carolina; Wilkes-Barre, Pennsylvania; Dallas and San Antonio, Texas. The Company
believes that its facilities are adequate for its current needs and that
additional facilities can be leased to meet future needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or its
properties or to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Technisource's common stock commenced trading on June 25, 1998 on the
NASDAQ National Market under the symbol "TSRC". The following table sets forth
the high and low sales prices of Technisource's common stock for the periods
indicated:
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FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW
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Second Quarter (commencing June 25, 1998)............................ $12.125 $10.000
Third Quarter........................................................ 15.750 7.750
Fourth Quarter....................................................... 10.125 5.750
</TABLE>
On March 1, 1999, there were 13 holders of record of the Company's common
stock. As of that date, the Company believes there were approximately 1,073
beneficial owners of the Company's common stock. The Company has never declared
or paid dividends on TSRC common stock and does not anticipate paying dividends
in the foreseeable future.
12
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains certain selected consolidated financial data
and is derived from the more detailed Consolidated Financial Statements and
Notes thereto included elsewhere in this report. The Consolidated Balance Sheets
and the Consolidated Statement of Income at December 31, 1998, 1997, 1996, 1995
has been derived from audited Consolidated Financial Statements of Technisource,
Inc. The selected financial data for the year ended December 31, 1994 is derived
from the unaudited financial statements of Technisource, Inc. which, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. The selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Technisource's Consolidated Financial Statements and Notes
thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
STATEMENTS OF OPERATIONS: 1998 1997(2) 1996(2) 1995(2) 1994(2)
----------- ---------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue.................................... $ 105,677 $ 67,327 $ 40,360 $ 29,130 $ 15,572
Cost of revenue............................ 78,912 50,775 30,624 21,879 12,050
----------- ---------- ----------- ----------- ----------
Gross profit............................... 26,765 16,552 9,736 7,251 3,522
Selling, general and administrative
expenses................................. 19,538 12,222 6,659 4,778 2,536
----------- ---------- ----------- ----------- ----------
Operating income........................... 7,227 4,330 3,077 2,473 986
Interest and other income.................. 479 27 8 23 9
Interest expense........................... 125 160 105 60 20
----------- ---------- ----------- ----------- ----------
Income before income taxes................. 7,581 4,197 2,980 2,436 975
Income taxes............................... 1,748 183 231 22 ---
Net income................................. $ 5,833 $ 4,014 $ 2,749 $ 2,414 $ 975
=========== ========== =========== =========== ==========
Income before taxes........................ 7,581 4,197 2,980 2,436 975
Unaudited:
Pro forma provision for incremental
income taxes(1).......................... 3,040 1,683 1,082 952 375
----------- ---------- ----------- ----------- ----------
Pro forma net income..................... $ 4,541 $ 2,514 $ 1,898 $ 1,484 $ 600
=========== ========== =========== =========== ==========
Pro forma net income per share- $ .51 $ .35 $ .26 $ .21 $ .08
basic....................................
=========== ========== =========== =========== ==========
Pro forma net income per share- $ .51 $ .30 $ .23 $ .18 $ .07
diluted..................................
=========== ========== =========== =========== ==========
Weighted average common and common
equivalent shares 8,845 7,200 7,200 7,200 7,200
outstanding-basic........................
Weighted average common and common
equivalent shares
outstanding-diluted...................... 8,990 8,354 8,354 8,354 8,354
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
Cash and cash equivalents................. $ 17,545 $ 470 $ 174 $ 6 $ 58
Working capital........................... 30,790 5,964 3,191 3,390 1,836
Total assets.............................. 36,830 10,638 7,949 4,455 3,278
Total debt................................ -- 10 10 10 1,021
Total shareholders' equity................ 33,455 7,230 3,914 3,681 1,917
</TABLE>
- --------------------
(1) The pro forma statement of operations information has been computed for the
pro forma period by adjusting the Company's net income, as reported for
such period, to record incremental income taxes which would have been
recorded had the Company been a C corporation during such period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 of Notes to Financial Statements.
(2) The weighted average shares outstanding-diluted includes: (i) the pro forma
effect of the of 849,644 shares of Common Stock offered hereby needed to
generate net proceeds sufficient to pay the estimated million S corporation
distribution; and (ii) the dilutive effect of common stock equivalents
using the treasury stock method.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Technisource is a national provider of IT services through 25 offices in
the United States and Canada, utilizing over 1100 highly trained IT
professionals. The Company has achieved a compound annual revenue growth rate of
59% over the past five years. This growth rate has been generated internally,
without the benefit of acquisitions. This Management's Discussion and Analysis
discusses the Company's operations for the years ended December 31, 1998, 1997,
and 1996. On June 25, 1998, Technisource completed an Initial Public Offering
("IPO") of 3.1 million shares with net proceeds to the Company of $30.7 million.
The Company's revenues grew to $105.7 million in 1998 from $29.1 million in
1995. The Company's revenue growth is driven primarily by increases in the
number of IT professionals placed with existing and new clients. The number of
IT professionals utilized by the Company grew to 1,105 as of December 31, 1998
from 320 as of December 31, 1995. For each of 1998, 1997, and 1996, clients from
the previous year generated at least 80% of the Company's revenues. Revenues are
generated substantially from fees for the provision of IT staffing services,
most of which are billed at contracted hourly rates. Clients are typically
billed and IT professionals are paid on a weekly basis. Revenues are recognized
as services are performed.
The Company's most significant cost is its personnel expense, which
consists primarily of salaries, fees and benefits of the IT professionals. 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 cost of revenues
by increasing the amounts billed 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.
Over the last ten years, the Company has developed and refined the
Technisource Growth Model. This model is focused on facilitating rapid internal
growth through the replication of Development Triangles. The Company has grown
to 54 Development Triangles as of December 31, 1998 from nine Development
Triangles as of December 31, 1995. The Company invested in the creation of over
20 Development Triangles in 1998. 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. This length of time is the amount
14
<PAGE>
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 25 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.
Following termination of its S Corporation status, the Company was subject
to corporate income taxation on an accrual basis under Subchapter C of the
Internal Revenue Code. In connection with the termination of its S Corporation
status, the Company recorded a net deferred tax asset and a corresponding net
income tax benefit of $377,333.
RESULTS OF OPERATIONS
The following table shows the percentage of revenues and the percentage
change from the prior period for the periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE
INCREASE FROM
YEARS ENDED DECEMBER 31, PRIOR YEAR
----------------------------------------- -------------------------
1998 1997 1996 1998 1997
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues............................... 100.0% 100.0% 100.0% 57.0 66.8
Cost of revenues....................... 74.7 75.4 75.9 55.4 65.8
----------- ----------- ----------- ----------- ----------
Gross profit........................... 25.3 24.6 24.1 61.7 70.0
Selling, general and administrative
Expenses........................... 18.5 18.2 16.5 59.9 83.5
----------- ----------- ----------- ----------- ----------
Operating income....................... 6.8 6.4 7.6 66.9 40.7
Interest and other income.............. 0.5 --- --- --- ---
Interest expense....................... (0.1) (0.2) (0.2) * *
----------- ----------- ----------- ----------- ----------
Income before income taxes............. 7.2 6.2 7.4 80.6 40.8
Income taxes........................... 1.7 0.3 0.6 * 20.7
----------- ----------- ----------- ----------- ----------
Net income............................. 5.5% 5.9% 6.8% 55.6 46.0
Pro forma provision for incremental
Income taxes....................... 1.2 2.2 2.1 13.9 78.1
----------- ----------- ----------- ----------- ----------
Pro forma net income................... 4.3% 3.7% 4.7% 80.6 32.5
=========== =========== =========== =========== ==========
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. The Company's revenues increased 57% to $105.7 million in 1998
from $67.3 million in 1997. The Company's revenues in 1998 were generated
primarily by the Company's IT services business, although a small portion of
these revenues were attributable to sales of computer hardware. The Company
anticipates that revenues generated from sales of computer hardware products
will constitute a significantly greater percentage of its revenues in the
future. The growth in revenues in 1998 is primarily attributable to increased
sales in existing offices, and, to a lesser extent, the addition of nine new
branch offices in 1998. The nine offices were
15
<PAGE>
opened throughout the year in various parts of the United States and Canada. The
total number of client divisions and business units billed increased to 636
during year ended December 31, 1998 from 393 during year ended December 31,
1997. The number of IT professionals working for the Company increased to 1,105
as of December 31, 1998 from 812 as of December 31, 1997.
GROSS PROFIT. Gross profit consists of revenues less cost of revenues. The
Company's cost of revenues consists primarily of salary, benefits and expenses
for the Company's IT professionals and other direct costs associated with
providing services to clients. Gross profit increased 61.7% to $26.8 million in
1998 from $16.6 million in 1997. As a percentage of revenues, gross profit
increased to 25.3% in 1998 from 24.6% in 1997. This increase was attributable to
the shift of business toward higher margin service offerings. Sales of computer
hardware products generate much lower gross profits for the Company than
revenues generated by the Company's IT services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of costs associated with the Company's
direct selling and marketing efforts, human resources and recruiting
departments, administration, training and facilities. Selling, general and
administrative expenses increased 60% to $19.5 million for year ended December
31, 1998 from $12.2 million for year ended December 31, 1997. As a percentage of
revenues, selling, general and administrative expenses increased to 19% in 1998
from 18% in 1997. This increase resulted from expenses incurred to build and
enhance the infrastructure necessary to support the Company's continued revenue
growth, including opening nine branch offices during fiscal year 1998, and the
addition of 21 Development Triangles, which increased the number of sales and
recruiting professionals during this period.
NET INTEREST EXPENSE (INCOME). Net interest expense (income) was ($353,801)
for the year ended December 31, 1998, as compared to 133,000 for the year ended
December 31, 1997. 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.
INCOME TAXES. In 1997 and through June 24, 1998, the Company was an S
Corporation for federal and certain state income tax purposes. The income
statement for 1997 and 1998 includes a pro forma provision for income taxes at
an assumed effective rate of 40%. Income taxes for 1998 include a one-time
reduction in income tax expense of $377,333, which represents the cumulative
effect of the Company converting from an S Corporation to a C Corporation
effective June 25, 1998.
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. The Company's revenues increased 66.8% to $67.3 million in 1997
from $40.4 million in 1996. This growth is primarily attributable to increased
sales in existing offices and, to a lesser extent, the addition of seven new
branch offices. Six of the seven additional offices were opened after June 1,
1997. The total number of client divisions and business units billed increased
to 393 during the year ended December 31, 1997 from 292 during the year ended
16
<PAGE>
December 31, 1996, and the number of IT professionals working for the Company
increased to 812 as of December 31, 1997.from 476 as of December 31, 1996
GROSS PROFIT. Gross profit increased 70.0% to $16.6 million in 1997 from
$9.7 million in 1996. As a percentage of revenues, gross profit increased to
24.6% in 1997 from 24.1% in 1996. This increase was attributable to the
Company's shift of its business toward higher margin service offerings.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 83.5% to $12.2 million in 1997 from $6.7
million in 1996. As a percentage of revenues, selling, general and
administrative expenses increased to 18.2% in 1997 from 16.5% in 1996. This
increase resulted from expenses incurred to build and enhance the infrastructure
necessary to support the Company's anticipated revenue growth, including opening
six branch offices after June 1, 1997, and more than doubling the number of
Development Triangles and sales, administration, recruiting and training
professionals during 1997.
INCOME TAXES. In 1997 and 1996 the Company was an S Corporation for federal
and certain state income tax purposes. The income statements for 1997 and 1996
include a pro forma provision for income taxes as if the Company was subject to
federal and state income taxes at an assumed effective tax rate of 40%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity for 1998 were cash flow from
operations, available borrowings under its line of credit and proceeds from the
IPO. The Company's cash flow from operating activities was $(613,295),
$3,755,255 million and $968,533,for the years ended December 31, 1998, 1997 and
1996, respectively. Because the Company has elected to be treated as an S
Corporation for tax purposes in 1997 and 1996 and through June 25, 1998, the
Company's net cash provided by operations for these periods did not recognize
federal income taxes and reflects only certain state income taxes.
Cash and cash equivalents were $17.5 million at December 31, 1998 compared
to $469,973 at December 31, 1997. The increase in cash during 1998 was a direct
result of the Initial Public Offering on June 25, 1998.
Until August 31, 1998, the Company maintained a revolving line of credit
with Barnett Bank, N.A., which provided for maximum borrowings of up to $8.0
million. All outstanding borrowings under the line of credit facility were
repaid from the proceeds of the IPO. On March 9, 1999, the Company established a
new line of credit with NationsBank N.A. that provides for maximum borrowings of
up to $25 million for working capital and acquisitions. Under the NationsBank
line of credit, interest is payable monthly at LIBOR plus 1.4%. The line of
credit expires April 30, 2002.
Net cash provided by financing activities increased to approximately $19.5
million in fiscal year 1998 primarily due to the Company realizing net proceeds
of approximately $31 million from its IPO. In connection with the termination of
the Company's S Corporation status,
17
<PAGE>
the Company made distributions of its previously undistributed S Corporation
earnings totaling $10.7 million.
Inflation did not have a material impact on the Company's revenues or
income from operations in fiscal years 1998, 1997 and 1996.
The Company believes that the net proceeds from the sale of its Common
Stock offered in the IPO, together with existing sources of liquidity and funds
generated from operations, will provide adequate cash to fund its currently
anticipated cash needs at least through the next twelve months. Any significant
acquisitions, however, may require additional debt and equity financing.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for the
reporting and presentation of comprehensive income and its components. In June
1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about a company's operating segments and related
disclosures about its products, services, geographic areas of operations and
major clients. SFAS No. 130 and No. 131 deal with financial disclosures. The
Company adopted both statements in 1998. The adoption of these statements did
not result in a material impact on the Company.
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 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, which the Company believes are Year
2000-compliant. The Company has obtained representations from these companies
that indicate that the systems are Year 2000-compliant. In addition to those
representations, the Company will conduct its own tests as considered necessary,
of these critical systems to ensure that they are Year 2000-compliant. The
initial testing of these systems should be completed by March 31, 1999. In
addition, the Company's financial system, which management believes is, and the
software vendor has represented as being, Year 2000-
18
<PAGE>
compliant. The Company does not anticipate any significant disruptions of its
business resulting from its principal staffing and financial systems.
The Company has completed the first phase of an 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 is currently in the second
phase of the process, which involves investigating and documenting these facts
for each software product supported by the Company. The Company does not
anticipate any significant disruptions of the business resulting from such
software.
The Company is just beginning a review of its third-party vendors. The
Company, however, 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 is 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 will be
contacting 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 can
develop a contingency plan that effectively deals with a major failure of public
infrastructure.
The Company has begun an evaluation of the 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. The first phase will involve polling of the Company's
customers. The second phase will be planned based on the results of the initial
evaluation. 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.
The Company has not yet determined the extent of contingency planning that
may be required as this is dependant on completion of ongoing assessments of its
non-IT systems and third-party risks. Based on the status of the assessments
made and remediation work completed to date, total remediation costs, consisting
primarily of capital costs to remediate and replace
19
<PAGE>
non-IT systems, is not expected to materially impact the Company's financial
operations. All remediation costs will be funded through operating cash flows.
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.
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
CERTAIN STATEMENTS CONTAINED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT THAT
ARE NOT RELATED TO HISTORICAL RESULTS ARE FORWARD LOOKING STATEMENTS. ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED OR IMPLIED IN THE FORWARD
LOOKING STATEMENTS. FURTHER, CERTAIN FORWARD LOOKING STATEMENTS ARE BASED UPON
ASSUMPTIONS OF FUTURE EVENTS, WHICH MAY NOT PROVE TO BE ACCURATE. SUBSEQUENT
WRITTEN AND ORAL FORWARD LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR TO
PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE
CAUTIONARY STATEMENTS SET FORTH BELOW AND ELSEWHERE IN THIS REPORT AND IN OTHER
REPORTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
20
<PAGE>
RISKS RELATING TO RECRUITMENT AND RETENTION OF IT PROFESSIONALS
The Company's business involves delivering IT services capabilities and is
labor-intensive. The Company's success depends upon its ability to attract,
develop, motivate and retain highly skilled IT professionals possessing the
technical skills and experience necessary to meet client needs. Qualified IT
professionals are in high demand worldwide and are likely to remain a limited
resource for the foreseeable future. The shortage of IT professionals has in the
past and is likely in the future to result in wage inflation. To the extent the
Company is unable to make corresponding increases in its billing rates, the
Company's results of operations could be materially adversely affected. Further,
IT professionals typically provide services on an assignment-by-assignment basis
and can terminate an assignment with the Company at any time. The Company's
success will depend in part on its ability to attract professionals with skill
sets that keep pace with continuing changes in industry standards and client
preferences. The Company competes for such individuals with general IT services
firms, temporary staffing and personnel placement companies, general management
consulting firms, major accounting firms, divisions of large hardware and
software companies, systems consulting and implementation firms, programming
companies and niche providers of IT services. Many of the IT professionals who
work with the Company also work with the Company's competitors, and there can be
no assurance that IT professionals currently working on projects for the Company
will not choose to work for competitors on future assignments. There also can be
no assurance that qualified IT professionals will continue to be available to
the Company in sufficient numbers, or that the Company will be successful in
retaining current or future professionals. Failure to attract or retain
qualified IT professionals in sufficient numbers could have a material adverse
effect on the Company's business, operating results and financial condition.
RISKS RELATING TO DEVELOPMENT OF NEW BRANCH OFFICE LOCATIONS
The Company's growth is partially dependent on the internal development of
new branch offices. This expansion is dependent on a number of factors,
including the company's ability to: attract, hire, integrate and retain
qualified revenue-generating employees; accurately assess the demand for the
Company's IT services in a new market; initiate, develop and sustain corporate
client relationships in each new regional market; and continue to replicate its
Development Triangles to help provide an initial base of revenues for each new
office. The addition of new branch offices typically results in increases in
operating expenses primarily due to the hiring of additional employees. Expenses
are incurred in advance of forecasted revenue, and there is typically a delay
before the Company's newly opened offices reach full productivity, resulting in
initial losses. Newly opened offices generally operate at a loss for their first
ten to twelve months of operation; however there can be no assurance that newly
opened offices will become profitable within expected time frames, or at all.
Also, there can be no assurance that the Company can profitably expand with new
branch office locations or that new offices will meet the growth and
profitability objectives of the Company. The Company's business, operating
results and financial condition could be materially adversely affected if the
Company fails to successfully implement its new branch office strategy.
21
<PAGE>
CONCENTRATION OF REVENUES
The Company derives a significant portion of its revenues from a limited
number of clients. During 1998, 1997 and 1996 the Company's two most significant
clients, Motorola and Rockwell, accounted for approximately 31%, 36% and 32% of
the Company's revenue, respectively, and the Company's top ten clients accounted
for approximately 52%, 53% and 58% of its revenues in each of such years. There
can be no assurance that these clients will continue to engage the Company for
additional projects or do so at the same revenue levels. Clients engage the
Company on an assignment-by-assignment basis, and a client can generally
terminate an assignment at any time without penalty. Conditions affecting any of
the Company's significant clients could cause such clients to reduce their usage
of the Company's services for reasons unrelated to the Company's performance.
The loss of any significant client or a decrease in the revenues generated from
such a client could have a material adverse effect on the Company's business,
operating results and financial condition.
ABILITY TO MANAGE GROWTH
The Company has experienced rapid growth that has placed significant
demands on the Company's managerial, administrative and operational resources.
Revenues have grown from $10.3 million in 1993 to $105.7 million in 1998. The
Company's continued growth depends on its ability to hire recruiting
professionals and to hire or deploy additional IT professionals. Effective
management of the Company's growth will require the Company to improve its
operational, financial and other management processes and systems. The Company's
failure to manage growth effectively could have material adverse effect on its
business, operating results and financial condition.
VARIABILITY OF OPERATING RESULTS
The Company's revenues and operating results are subject to significant
variation quarter by quarter depending on the number of client projects
commenced and completed, acceleration in the hiring of recruiting professionals
and IT professionals, attrition and utilization rates, changes in the pricing of
the Company's services and timing of branch and service line expansion
activities, among other factors. The Company generally experiences lower
operating results in the first quarter due in part to the timing of unemployment
taxes, FICA tax accruals and delays in client contract renewals due to clients'
budget processes. Further the Company generally experiences a certain amount of
seasonality in the fourth quarter due to the number of holidays and the closing
of client facilities during that quarter. Because a high percentage of the
Company's expenses, in particular personnel and facilities costs, are relatively
fixed, small variations in revenues may cause significant variations in
operating results. Additionally, the Company periodically incurs cost increases
due to the hiring of new employees and strategic investments in its
infrastructure in anticipation of future opportunities for revenue growth.
Substantially all of the Company's contracts to perform services may be
cancelled or modified by the Company's clients at will or without penalty.
Approximately 20% of the Company's professionals and salaried employees receive
full compensation and benefits even if not engaged in billable work. As a
result, cancellation or reduction of a contract may result in a loss of revenue
without a corresponding reduction in cost of revenue. No assurances can be given
that
22
<PAGE>
operating results will not fluctuate, which may have a material adverse
effect on the Company's business, operating results and financial condition.
COMPETITION
The IT services industry is highly competitive and served by numerous
national, regional and local firms, all of which are either existing or
potential competitors, including general IT services firms, temporary and
personnel placement companies, general management consulting firms, major
accounting firms, divisions of large hardware and software companies, systems
consulting and implementation firms, programming companies and niche providers
of IT services. Many of these competitors have substantially greater financial,
technical and marketing resources and greater name recognition than the Company.
The IT services industry is undergoing consolidation that may result in
increasing pressure on profit margins. In addition, there are relatively few
barriers to entry into the Company's market and the Company has faced and
expects to continue to face, additional competition from new entrants into its
markets. Moreover, certain clients enter into "preferred vendor" contracts to
reduce the number of vendors with whom they do business and obtain better
pricing in return for a potential increase in the volume of business to the
preferred vendor. While these contracts may generate higher volumes, they may
also result in lower margins. Also, the failure to be designated a preferred
vendor may preclude the Company from providing services to existing or potential
clients. Further, there is a risk that clients may elect to increase their
internal IT resources to satisfy their needs. These factors may limit the
Company's ability to increase prices commensurate with increases in employee
compensation, which could adversely affect the Company's profit margins. There
can be no assurance that the Company will compete successfully with existing or
new competitors.
RISKS ASSOCIATED WITH YEAR 2000 PROJECTS
The Company believes that many of its clients and potential clients will
continue to devote substantial resources to Year 2000 projects. As a result, the
Company's clients or potential clients may postpone other information systems
projects pending completion of their Year 2000 projects. This could adversely
affect the demand for the Company's services. In addition, the Company's
competitors are offering Year 2000 services that give them an advantage in
competing for new clients. Moreover, the Company expects that Year 2000 projects
will peak prior to calendar year 2000 as companies address their Year 2000
needs. Thereafter, the availability of a substantial number of IT professionals
formerly engaged in Year 2000 projects could have a material adverse effect on
the Company, including reducing the demand for the Company's IT professionals,
increasing competition for available client engagements and creating downward
pressure on pricing for the Company's services.
DEPENDENCE ON KEY EMPLOYEES
The success of the Company is highly dependent on the efforts and abilities
of its key employees, including Joseph W. Collard, President and Chief Executive
Officer, James F. Robertson, Executive Vice President and Chief Operating
Officer, Paul Cozza, Vice President and Director of International Sales, and
John A. Morton, Vice President and Chief Financial Officer. Although the Company
has entered into employment agreements with these individuals,
23
<PAGE>
such agreements do not guarantee that these individuals will continue their
employment with the Company or that non-compete covenants provided will be
enforceable. The loss of the services of these or other key employees for any
reason including, resignation to join a competitor or to form a competing
company, and any resulting loss of existing or potential clients to any such
competition could have a material adverse effect on the Company's business,
operating results and financial condition.
LIABILITY RISKS
The Company is exposed to liability with respect to actions taken by its IT
professionals on assignment, such as damages caused by errors of IT
professionals and misuse of client proprietary information. Although the Company
maintains insurance coverage, due to the nature of the Company's engagements,
and in particular the access by IT professionals to client information systems
and confidential information, and the potential liability with respect thereto,
there can be no assurance that such insurance coverage will continue to be
available on reasonable terms or that it will be adequate to cover any such
liability. Further, many of the Company's engagements involve projects that are
critical to its clients' business or products, and the benefits provided by the
Company may be difficult to quantify. The Company's failure or inability to meet
a client's expectations in the execution of its services could result in a
material adverse effect on the client's business or products and, therefore,
could give rise to claims against the Company or damage the Company's
reputation, which might adversely affect its business, operating results and
financial condition. Moreover, the Company may be exposed to claims of
discrimination and harassment and other similar claims as a result of
inappropriate actions allegedly taken by or against its IT professionals.
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company may expand its operations through the acquisition of additional
businesses. There can be no assurance that the Company will be able to identify,
acquire or profitably manage additional businesses or successfully integrate any
acquired businesses into the Company without substantial expenses, delays or
other operational or financial problems. Further, acquisitions may involve a
number of special risks, including diversion of management's attention, failure
to retain key acquired personnel, unanticipated events or circumstances, the
inability to integrate the acquired business into the Company's operations,
legal liabilities and amortization of acquired intangible assets, some or all of
which could have a material adverse on the Company's business, operating results
and financial condition. To date, neither the Company nor any member of its
senior management has significant experience completing or integrating
acquisitions. Client dissatisfaction or performance problems within an acquired
firm could have a material adverse impact on the reputation of the Company as a
whole. There can be no assurance that acquired businesses, if any will achieve
anticipated revenues and earnings. The failure of the Company to manage any
possible acquisition successfully could have a material adverse affect on the
Company's business, operating results and financial condition.
24
<PAGE>
RAPID TECHNOLOGICAL CHANGES
Rapid technological advances, frequent product introductions and
enhancements, and changes in client requirements characterize the market for IT
services. The Company's future success depends, in part, on its ability to
provide IT professionals possessing the skills to service past, current and next
generations products and technologies. These factors will require the Company to
provide adequately trained personnel to address the increasing and evolving
needs of its clients. Any failure by the Company to anticipate or respond
rapidly to technological advances, new products and enhancements or changes in
client requirements could have a material adverse effect on the Company's
business, operating results and financial condition.
RELIANCE ON FIXED-PRICED PROJECTS
The Company may bill certain projects on a fixed-price basis and other
projects on a fee-capped basis. These billing methods entail greater risk to the
Company than its standard billing on a time-and-material basis. The failure of
the Company to complete projects billed other than on time-and-material basis
within budget or below the fee-cap would expose the Company to the risks
associated with cost overruns, which could have a material adverse effect on the
Company's business, operating results and financial condition.
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 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, which the Company believes are Year
2000-compliant. The Company has obtained representations from these companies
that indicate that the systems are Year 2000-compliant. In addition to those
representations, the Company will conduct its own tests, as considered
necessary, of these critical systems to ensure that they are Year
2000-compliant. The initial testing of these systems should be completed by
March 31, 1999. In addition, the Company's financial system, which management
believes is, and the software vendor has represented as being, Year
2000-compliant. The Company does not anticipate any significant disruptions of
its business resulting from its principal staffing and financial systems.
25
<PAGE>
The Company has completed the first phase of an 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 is currently in the second
phase of the process, which involves investigating and documenting these facts
for each software product supported by the Company. The Company does not
anticipate any significant disruptions of the business resulting from such
software.
The Company is just beginning a review of its third-party vendors. The
Company, however, 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 is 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 will be
contacting 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 can
develop a contingency plan that effectively deals with a major failure of public
infrastructure.
The Company has begun an evaluation of the 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. The first phase will involve polling of the Company's
customers. The second phase will be planned based on the results of the initial
evaluation. 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.
The Company has not yet determined the extent of contingency planning that
may be required as this is dependant on completion of ongoing assessments of its
non-IT systems and third-party risks. Based on the status of the assessments
made and remediation work completed to date, total remediation costs, consisting
primarily of capital costs to remediate and replace non-IT systems, is not
expected to materially impact the Company's financial operations. All
remediation costs will be funded through operating cash flows.
26
<PAGE>
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 it believes 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.
ITEM 7A. 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.
27
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................................................................ 29
Consolidated Balance Sheets as of December 31, 1998 and 1997................................................ 30
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996............................................................................ 31
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1998, 1997, and 1996........................................................................... 32
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996............................................................................ 33
Notes to Consolidated Financial Statements.................................................................. 34
Financial Statement Schedule - Valuation and Qualifying Accounts............................................ S-1
</TABLE>
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Technisource, Inc.:
We have audited the accompanying consolidated balance sheets of Technisource,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as of and for each of the years in
the three-year period ended December 31, 1998. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Technisource, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG LLP
Fort Lauderdale, Florida
February 19, 1999
29
<PAGE>
<TABLE>
<CAPTION>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,545,183 $ 469,973
Trade accounts receivable, less allowance for doubtful
Accounts of $358,933 and $425,000 at December 31, 1998
And 1997, respectively 15,772,435 8,743,630
Due from shareholders and employees 120,597 39,986
Prepaid expenses and other current assets 326,255 108,335
Deferred tax asset, current 258,643 ---
------------------- -------------------
Total current assets 34,023,113 9,361,924
Property and equipment, net 2,559,790 1,229,658
Other assets 159,195 46,002
Deferred tax asset, noncurrent 87,991 ---
------------------- -------------------
Total assets $ 36,830,089 $ 10,637,584
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdrafts $ --- $ 588,106
Accounts payable 723,643 529,961
Income tax payable 624,378 183,001
Accrued liabilities 1,879,194 1,873,004
Line of credit --- 223,460
Deferred tax liability 6,065 ---
------------------- -------------------
Total current liabilities 3,233,280 3,397,532
Due to related parties --- 10,000
Deferred tax liability, non-current 142,269 ---
------------------- -------------------
Total liabilities 3,375,549 3,407,532
Shareholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized,
10,385,000 and 7,200,000 issued and outstanding as of
December 31, 1998 and December 31, 1997, respectively 103,850 72,000
Additional paid-in capital 30,057,853 ---
Retained earnings 3,292,837 7,158,052
------------------- -------------------
Total shareholders' equity 33,454,540 7,230,052
------------------- -------------------
Total liabilities and shareholders' equity $ 36,830,089 $ 10,637,584
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Revenues $ 105,677,265 $67,326,805 $40,359,792
Cost of revenues 78,912,017 50,774,870 30,624,300
-------------------- ------------------- -------------------
Gross profit 26,765,248 16,551,935 9,735,492
Selling, general and
administrative expenses 19,537,741 12,221,748 6,658,589
-------------------- ------------------- -------------------
Operating income 7,227,507 4,330,187 3,076,903
Other income (expense):
Interest and other income 478,964 26,492 8,419
Interest expense (125,163) (159,651) (105,202)
-------------------- ------------------- -------------------
Income before taxes 7,581,308 4,197,028 2,980,120
Provision for income taxes
(including the $377,333 net
deferred tax asset related to C corp
conversion) 1,748,406 183,001 230,783
-------------------- ------------------- -------------------
Net income $ 5,832,902 $ 4,014,027 $ 2,749,337
==================== =================== ===================
Pro forma information (unaudited):
Income before taxes, as reported $ 7,581,308 $ 4,197,028 $ 2,980,120
Pro forma income tax provision 3,040,302 1,683,017 1,081,963
-------------------- ------------------- -------------------
Proforma net income $ 4,541,006 $ 2,514,011 $ 1,898,157
-------------------- ------------------- -------------------
Pro Forma
Income per share - basic $ 0.51 $ 0.35 $ 0.26
==================== =================== ===================
Pro Forma
Income per share - diluted $ 0.51 $ 0.30 $ 0.23
==================== =================== ===================
Weighted average common shares
outstanding - basic 8,844,986 7,200,000 7,200,000
==================== =================== ===================
Weighted average common shares
outstanding - diluted 8,989,982 8,353,743 8,353,743
==================== =================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
<TABLE>
<CAPTION>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional
------------------------------ Paid-in Retained
Shares Amount Capital Earnings Total
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 7,200,000 $ 72,000 $ -- $3,608,809 3,680,809
Net income 2,749,337 2,749,337
Distribution to shareholders (2,516,400) (2,516,400)
------------- ------------- ------------- ------------- --------------
Balance at December 31, 1996 7,200,000 72,000 --- 3,841,746 3,913,746
Net income 4,014,027 4,014,027
Distribution to shareholders (697,721) (697,721)
------------- ------------- ------------- ------------- --------------
Balance at December 31, 1997 7,200,000 72,000 --- 7,158,052 7,230,052
Issuance of common stock
for initial public 3,100,000 31,000 34,069,000 34,100,000
offering
Cost associated with initial
public offering (3,430,678) (3,430,678)
Exercised stock options 85,000 850 9,826 10,676
Distribution to shareholders (987,187) (9,698,117) (10,685,304)
Tax benefit on exercise of
Options 332,308 332,308
Deferred compensation 64,584 64,584
Net income 5,832,902 5,832,902
------------- ------------- ------------- ------------- --------------
Balance at December 31, 1998 10,385,000 $ 103,850 $30,057,853 $3,292,837 $ 33,454,540
============= ============= ============= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,832,902 $ 4,014,027 $ 2,749,337
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 486,799 370,201 190,235
Deferred taxes, net (198,300) --- ---
Deferred compensation 64,584 --- ---
Changes in assets and liabilities:
Increase in accounts receivable (7,028,805) (1,767,829) (2,850,130)
Increase (decrease) in due from stock-
holders and employees (80,611) 1,937 (25,370)
Increase in prepaid expenses and other
Assets (331,113) (107,095) (34,061)
Increase in accounts payable 193,682 219,280 147,130
Increase in accrued liabilities 6,190 950,504 682,621
Increase in income tax payable 441,377 74,230 108,771
----------------- ----------------- ------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (613,295) 3,755,255 968,533
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,816,931) (890,188) (606,344)
----------------- ----------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES (1,816,931) (890,188) (606,344)
CASH FLOWS FROM FINANCING ACTIVITIES:
Paydown on note payable (10,000) --- ---
Proceeds from line of credit --- --- 1,723,302
Paydown on line of credit (223,460) (1,499,942) ---
Proceeds from public offering of common stock,
Net 30,669,322 --- ---
Proceeds from issuance of common stock 342,984 --- ---
Distribution to shareholders (10,685,304) (697,721) (2,516,400)
Increase (decrease) in overdraft (588,106) (371,635) 599,332
----------------- ----------------- ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 19,505,436 (2,569,298) (193,766)
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,075,210 295,769 168,423
----------------- ----------------- ------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 469,973 174,204 5,781
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,545,183 $ 469,973 $ 174,204
================= ================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 125,801 $ 165,165 $ 108,536
================= ================= ==================
Taxes paid $ 1,173,021 $ 108,771 $ 122,012
================= ================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include
Technisource, Inc. and Subsidiaries (the "Company"). The subsidiaries
include Technisource of Florida, Inc. and former subsidiary,
Technisource Midwest, Inc.
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, all outstanding shares of capital stock of
Technisource of Florida, Inc. were contributed to Technisource, Inc.
and Technisource Midwest, Inc. was dissolved.
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 December 31, 1998,
the Company had 25 branch office locations.
(B) INITIAL PUBLIC OFFERING
The Company completed an initial public offering ("IPO") of
common stock on June 25, 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.
(C) BASIS OF PRESENTATION
All significant intercompany balances and transactions have been
eliminated in consolidation.
(D) CASH EQUIVALENTS
For purposes of the 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 of approximately $18,484,000 at December 31, 1998
consisted of a money market account.
34
<PAGE>
(E) FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounts receivable, line of credit facility, accounts payable
and accrued liabilities carrying amounts approximate fair value due to
the short maturity of these instruments.
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on
property and equipment is calculated on a straight-line basis over the
estimated useful lives of the assets, which range from three to seven
years. Leasehold improvements are amortized over the shorter of the
lease term or estimated useful life of the asset.
(G) OTHER ASSETS
Other assets consist of security deposits related to operating
lease agreements.
(H) 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. 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. In conjunction with the IPO
of the Company's common stock during 1998, the Company's Subchapter S
status was automatically terminated. 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 presented. The pro forma
adjustments have been made at an effective rate of 40 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 each of those periods.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
35
<PAGE>
(I) STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for its stock
options in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. As such, compensation expense
would be recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. On January
1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
(J) STOCK SPLIT
On May 26, 1998, the Company authorized a 72,000 for 1 stock
split and a change in par value to $.01 per share. All share and per
share data in these consolidated financial statements have been
retroactively restated to reflect this stock split and change in par
value.
(K) 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
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from the
Company's estimates.
(L) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, ACCOUNTING FOR LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of an asset to be held and used is measured by a comparison of the
carrying amount of the asset to future net cash flows expected to be
generated by the asset. If such an asset is considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less cost to sell.
36
<PAGE>
(M) REVENUE RECOGNITION
The Company derives substantially all of its revenue from IT
Services. The majority of the Company's contracts are on a
time-and-materials basis. Revenue is recognized as services are
performed.
(N) ADVERTISING COSTS
The Company expenses all advertising costs as incurred. The total
amounts charged to operations for advertising during the years ended
December 31, 1998, 1997 and 1996 are approximately $1,243,000,
$638,000 and $299,000, respectively.
(O) PRO FORMA NET INCOME AND PRO FORMA NET INCOME PER SHARE (UNAUDITED)
In accordance with Securities and Exchange Commission 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 IPO 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.
The pro forma net income presented in the statements of income
reflects the pro forma effects for income taxes at an effective rate
of approximately 40 percent, as if the Company had been a taxable
entity for all periods presented.
Options to purchase 471,785 shares of common stock at a range of
$9.88 to $14.94 per share for the year ended December 31, 1998, 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 in the year 2008.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board 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 Company adopted these pronouncements effective January
1, 1998 with no material impact.
37
<PAGE>
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Useful lives
1998 1997 in years
------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Office equipment $ 921,084 $ 355,021 5 - 7
Computer equipment 2,396,861 1,459,879 3 - 5
Telephone equipment 306,722 180,095 5
Leasehold improvements 55,113 17,754 3 - 5
------------------- ------------------
3,679,780 2,012,749
Less accumulated depreciation (1,119,990) (783,091)
------------------- ------------------
$ 2,559,790 $ 1,229,658
=================== ==================
</TABLE>
Depreciation and amortization expense for 1998, 1997 and 1996
approximated $487,000, $370,000 and $190,000 respectively.
(3) LINE OF CREDIT
The Company maintained a revolving line of credit with a bank,
which provided for maximum borrowings of up to $8,000,000 and interest
payable monthly at a variable rate of 0.5% over the bank's prime rate.
This line of credit expired on August 31, 1998 and was secured by the
Company's accounts receivable and equipment and guaranteed by the
Company's shareholders.
(4) INCOME TAXES
In connection with the Company's conversion from an S Corporation to a
C Corporation during 1998, the Company recognized a $377,333 income
tax benefit during 1998 to establish deferred taxes related to the
conversion. Income tax expense attributable to income from continuing
operations consist of:
<TABLE>
<CAPTION>
Current Deferred Total
----------------- ----------------- --------------------
<S> <C> <C> <C>
Year ended December 31, 1998:
U.S. Federal $ 1,415,646 $ (144,204) $ 1,271,442
State and local 531,060 (54,096) 476,964
----------------- ----------------- --------------------
$ 1,946,706 $ (198,300) $ 1,748,406
================= ================= ====================
Year ended December 31, 1997:
U.S. Federal $ $ - $ -
-
State and local 183,001 - 183,001
----------------- ----------------- --------------------
$ 183,001 $ - $ 183,001
================= ================= ====================
Year ended December 31, 1996:
U.S. Federal $ - $ - $ -
State and local 230,783 - 230,783
----------------- ----------------- --------------------
$ 230,783 - $ 230,783
================= ================= ====================
</TABLE>
38
<PAGE>
The U.S. federal corporate income tax rate of 34 percent, reconciled
to the effective tax rate provision, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ----------------- ------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34% 34% 34%
State income taxes, net of federal income
tax effect 4 4 4
Effect of S Corporation income taxes (12) (36) (28)
Effect of change to C Corporation (5) - -
Other 2 2 (2)
-------------------- ----------------- ------------------------
Total 23% 4% 8%
==================== ================= ========================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998, are as follows:
1998
-------------------
Deferred tax assets:
Accrued vacation $ 70,417
Allowance for doubtful accounts
136,076
Prepaid rent 21,809
Accrued liabilities 118,332
-------------------
Net deferred tax assets 346,634
Deferred tax liabilities:
Other (6,065)
Depreciation and amortization (142,269)
-------------------
Total deferred tax liabilities (148,334)
-------------------
Net deferred tax asset $ 198,300
===================
The Company's management believes that it is more likely than not that
the results of future operations will generate sufficient taxable
income to realize the deferred tax assets.
(5) EMPLOYEE BENEFIT PLANS
(A) PROFIT-SHARING PLAN
The Company has a contributory 401(k) profit-sharing plan, which
covers all employees. Employees may contribute up to 15 percent of
their annual compensation. The Company makes matching and/or profit
sharing contributions at management's discretion in amounts not to
exceed limitations established by the Internal Revenue Service. For
the years ended December 31, 1998, 1997 and 1996 the Company
contributed $80,000, $103,579 and $0.0, respectively.
39
<PAGE>
(B) KEY EMPLOYEE STOCK OPTIONS
On October 27, 1993, the Company awarded stock options to one of
its key employees. Under the terms of the stock option award, the
employee is entitled to purchase 303,158 shares of the Company's
common stock at an exercise price per share equal to the book value of
a share of common stock at December 31, 1993, which approximated fair
value at the date of the award. No termination date for exercisability
of the options was specified, and the options vest on December 31,
1998, and provide for immediate vesting of the pro rata portion of
options granted in the event of a change in the ownership of the
Company. These stock options, which are exercisable at $0.13 per
share, became fully vested on the IPO date and 85,000 options were
subsequently exercised.
Effective November 11, 1997, the Company awarded stock options to
another of its key employees. Under the terms of the stock option
award, the employee is entitled to purchase 18,182 shares of common
stock. The per share exercise price of such options is $8.25, which
was considered by management to be fair value on the date of grant.
These options expire ten years from the effective date of the award
and vest ratably over the next three years.
(C) INCENTIVE STOCK OPTION PLAN
Effective January 1, 1998, the Company adopted the Technisource,
Inc. Long-Term Incentive Plan (the "Plan") which provides for the
grant of awards such as stock appreciation rights, restricted stock
grants, cash awards, nonstatutory options, and incentive stock options
to management, key employees and outside directors to purchase up to
an aggregate of 1,500,000 shares of authorized but unissued common
stock. The term of an incentive stock option cannot exceed 10 years
with an exercise price equal to or greater than fair market value of
the shares of common stock on the date of grant, or 5 years and 110
percent of the fair market value for the options granted to a holder
of 10 percent or more of the voting power. The compensation committee
shall determine the exercise price and term of a nonqualified option.
The Plan provides for a nonstatutory stock option grant to the outside
directors of the Company for 5,000 shares of common stock on such
Director's initial election as a Director and, upon reelection as a
board member thereafter such Director shall be granted an additional
option for 2,500 shares of common stock. The options granted to
outside directors will be exercisable on the first anniversary date of
the grant in full at a price equal to the fair market value of common
stock on the date of grant. The options will expire ten years after
the date of grant or one year after the outside director is no longer
a director of the Company, whichever is earlier. At December 31, 1998,
there are 775,293 additional shares available for grant under the
plan.
40
<PAGE>
The Company applies APB Opinion No. 25 in accounting for its Plan
and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's pro forma net income
and pro forma net income per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
(unaudited)
<S> <C> <C> <C>
Pro forma Net income As reported $4,541,006 $2,514,011
Pro forma $4,324,911 $2,509,825
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
<S> <C> <C>
Pro forma basic net earnings per
Share-as reported $0.51 $0.35
Pro forma basic net earnings per
Share-as adjusted $0.49 $0.35
Pro forma diluted net earnings per
Share-as reported $0.51 $0.30
Pro forma diluted net earnings per
Share-as adjusted $0.49 $0.30
</TABLE>
Pro forma net income reflects only options granted since December 31,
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected
over the options' vesting periods and compensation cost for options
granted prior to January 1, 1996 is not considered. The pro forma
effect on fiscal 1998 may not be representative of the pro forma
effects on net earnings for future years.
For the purpose of computing the pro forma amounts indicated
above, the fair value of each option on the date of grant is estimated
using the Black-Scholes option-pricing model. The weighted average
assumptions used in the model are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Expected dividend yield 0.0% 0.0%
Expected stock volatility 35.0% 35.0%
Risk-free interest rates 5.8% 7%
Expected lives (in years) 4 & 6 4
</TABLE>
Using these assumptions in the Black-Scholes model, the weighted
average fair value of options granted for the Company is $4.88 in
fiscal 1998 and $3.72 in fiscal 1997.
41
<PAGE>
At December 31, 1998 and 1997, the number of options exercisable
and the weighted-average exercise price of those options was:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price Exercise Price
----------------------------------------- ---------- --------------------- -------------------
<S> <C> <C> <C>
Outstanding at Dec. 31, 1996................. 303,158 $0.13 $0.13
Granted...................................... 18,182 $8.25 $8.25
Exercised.................................... --- --- ---
Outstanding at Dec. 31, 1997................. 321,340 $0.13 to $8.25 $0.59
Granted...................................... 703,230 $0.01 to $14.94 $9.68
Exercised.................................... (85,000) $0.13 $0.13
Outstanding at Dec. 31, 1998................. 939,570 $0.01 to $14.94 $7.44
Options exercisable at end of year .......... 218,158 $ 0.13 $0.13
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------- ------------------------------
Weighted-Average Weighted-Average
Number Remaining Weighted-Average Number Exercise Price
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable
- -------------------------------- -------------- -------------------- ------------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
$0.01 to 0.13................... 223,613 9.5 $ 0.13 218,158 $ 0.13
$5.50 to 5.75................... 95,791 9.6 5.59 - -
$5.76 to 10.99.................. 161,432 9.7 8.22 - -
$11.00.................. 422,635 9.5 11.00 - -
$11.01 to 15.50.................. 36,100 9.6 12.37 - -
-------
Total ........................... 939,570 9.5 $ 7.44 218,158 $ 0.13
------- --- ------ ------- ------
</TABLE>
(6) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with the
Company's four executive officers. The agreements, effective January
1, 1998, provide for initial terms of three to five years with total
annual base salaries ranging from $110,000 to $175,000. Two of the
employment agreements automatically renew for successive one-year
terms unless terminated by either party. The four executive officers
may also receive a performance bonus and stock option awards at the
discretion of the Board of Directors. The agreements also contain a
non-competition provision following termination of employment.
(7) BUSINESS AND CREDIT CONCENTRATIONS
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 consulting services to customers located
in the United States and Canada. The Company's revenue is generated
from a limited number of clients in
42
<PAGE>
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. Financial instruments, which potentially expose the
Company to concentrations of credit risk, consist primarily of
accounts receivable. Trade accounts receivable are not normally
collateralized. At December 31, 1998 and 1997, approximately 17
percent and 21 percent, respectively, of the Company's accounts were
represented by one customer. Two customers accounted for approximately
31 percent, 36 percent and 32 percent of revenue for the years ended
December 31, 1998, 1997, and 1996, respectively. The Company estimates
an allowance for doubtful accounts based on the
specific-identification method for creditworthiness of its customers.
Given the significant amount of revenues derived from these customers,
the loss of any such customer or the uncollectability of related
receivables could have a material adverse effect on the Company's
financial condition and results of operations. Additionally, the
Company maintained $18.5 million at December 31, 1998 in one financial
institution, which is in excess of the FDIC insured limits.
(8) COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
The Company has entered into several noncancelable operating
leases, primarily for office space.
Future minimum lease payments under noncancelable operating
leases as of December 31, 1998 are as follows:
Year ending
December 31,
1999 $ 1,242,005
2000 1,080,425
2001 981,648
2002 907,068
2003 333,045
Thereafter 188,383
-----------------
$ 4,732,574
=================
Rental expense under operating leases for the years ended December 31,
1998, 1997 and 1996 was approximately $1,356,000, $552,000 and
$279,000, respectively.
(B) CONTINGENCIES
The Company is subject to certain legal matters arising in the
ordinary course of business which, in the opinion of management and
based on the advice of its legal counsel, will not have a material
adverse effect on the financial position and results of operations of
the Company.
43
<PAGE>
(9) PRO FORMA EARNINGS (UNAUDITED)
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.
The pro forma adjustments for the incremental income tax
provision included in the accompanying consolidated statements of
income reflect the additional provision for federal and state income
taxes at the effective income tax rate as if the Company's Subchapter
S election had been revoked prior to January 1, 1996, and the Company
had been taxed as a C corporation. The differences between the United
States federal statutory rate and the consolidated effective rate are
as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate 34 % 34 % 34 %
State income taxes, net of Federal tax effect 4 4 4
Other 2 2 (2)
======== ======== ========
40 % 40 % 36 %
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA: 1998 1997 1996
------------- -------------- ---------------
<S> <C> <C> <C>
Net income per share:
Net income available to common
Shareholders $ 4,541,006 $ 2,514,011 $ 1,898,157
Weighted average common
shares 8,844,986 7,200,000 7,200,000
Outstanding
------------- -------------- ---------------
$ 0.51 $ 0.35 $ 0.26
============= ============== ===============
Net income per share-assuming dilution:
Net income available to common
Shareholders $ 4,541,006 $ 2,514,011 $ 1,898,157
Weighted average common shares
Outstanding 8,844,986 7,200,000 7,200,000
Dilutive effect of options 144,996 304,099 304,099
Effect of assumed IPO shares for
Distribution - 849,644 849,644
------------- -------------- ---------------
Weighted average common shares
outstanding - diluted 8,989,982 8,353,743 8,353,743
------------- -------------- ---------------
$ 0.51 $ 0.30 $ 0.23
============= ============== ===============
</TABLE>
Basic and diluted income per share for pro forma net income reflects
the pro forma effects for income taxes as if the Company had been a
taxable entity during the periods presented. The weighted shares
outstanding used for 1997 calculations were 8,353,743 and 7,200,000
for diluted and basic income per share, respectively.
44
<PAGE>
(10) SUBSEQUENT EVENTS (UNAUDITED):
On March 9, 1999, the Company established a new line of credit
with NationsBank N.A. that provides for maximum borrowings of up to
$25 million. Interest is payable monthly at a variable rate of LIBOR
plus 1.4%. The line of credit expires April 9, 2002.
(11) SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following table sets forth certain quarterly operating
information for each of the 8 quarters ending with the quarter ended
December 31, 1998. This information was derived from the unaudited
financial statements of the Company which, in the opinion of
management, were prepared on the same basis as the financial
statements contained elsewhere in this report and include all
adjustments, consisting of normal recurring adjustments, which
management considers necessary for the fair presentation of the
information for the periods presented. The financial data shown below
should be read in conjunction with the financial statements and notes
thereto included in this report.
<TABLE>
<CAPTION>
Statements of Income FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
1998
<S> <C> <C> <C> <C>
Revenue $ 22,780 $ 25,155 $ 27,532 $ 30,210
Gross profit $ 5,570 $ 6,575 $ 7,160 $ 7,460
Operating income $ 1,268 $ 1,689 $ 2,082 $ 2,188
Net income $ 1,171 $ 1,814 $ 1,399 $ 1,445
Pro forma net income $ 759 $ 929 $ 1,399 $ 1,453
Pro forma net income per share - basic (1) $ 0.11 $ 0.13 $ 0.14 $ 0.14
Pro forma net income per share - diluted (1) $ 0.09 $ 0.12 $ 0.13 $ 0.14
1997
Revenue $ 13,400 $ 16,249 $ 17,333 $ 20,345
Gross profit $ 3,278 $ 4,040 $ 4,134 $ 5,100
Operating income $ 918 $ 1,345 $ 1,022 $ 1,045
Net income $ 836 $ 1,221 $ 980 $ 977
Pro forma net income $ 524 $ 765 $ 614 $ 611
Pro forma net income per share - basic (1) $ 0.07 $ 0.11 $ 0.09 $ 0.08
Pro forma net income per share - diluted (1) $ 0.06 $ 0.09 $ 0.07 $ 0.07
</TABLE>
45
<PAGE>
(1) Basic and diluted income per share for proforma net income
reflects the proforma effects for income taxes as if the Company had
been a taxable entity during the periods presented. The weighted
shares outstanding used for 1997 calculations were 8,353,743 and
7,200,000 for diluted and basic income per share, respectively.
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
The information required by Items 10, 11, 12 and 13 of Part III of Form 10-K
will be set forth in the definitive Proxy Statement of the Company relating to
the 1999 Annual Meeting of the Shareholders and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are filed as part of this
Form 10-K:
Technisource, Inc. Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) The following financial statement schedules are filed as part of this Form
10-K.
Schedule II - Valuation and Qualifying Accounts
47
<PAGE>
(3) The following exhibits are filed herewith:
Exhibit
Number Exhibit 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 of the Company defining the
rights of holders of Common Stock of the Company
4.2* Specimen certificate for the Company's Common Stock
10.1* Employment Agreement, dated as of January 1, 1998,
between Joseph W. Collard and the Company
10.2* Employment Agreement, dated as of January 1, 1998,
between James F. Robertson and the Company
10.3* Employment Agreement, dated as of November 11, 1997,
between John A. Morton and the Company
10.4* Employment Agreement, dated as of January 1, 1998,
between Paul Cozza and the Company
10.5* Lease, dated January 31, 1998, between Highwoods/Florida
Holdings, L.P. and the Company
10.6* Registration Rights Agreement, dated April 21, 1998,
between Joseph W. Collard and the Company
10.7* Registration Rights Agreement, dated April 21, 1998,
between James F. Robertson and the Company
10.8* The Technisource, Inc. Long-Term Incentive Plans
10.10* Stock Option Agreement between the Company and Paul Cozza
10.11* Stock Option Agreement between the Company and John A. Morton
48
<PAGE>
21* Subsidiaries of the Company
23. Consent of KPMG LLP
24. Power of Attorney (included on the signature page)
27 Financial Data Schedule
* Filed with the Company's Registration Statement on Form S-1 (File No.
333-50803), as amended, filed with the Securities and Exchange Commission
on April 23, 1998, and incorporated herein by reference.
(b) Reports on Form 8-K
None
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TECHNISOURCE, INC.
By: /s/ JAMES F. ROBERTSON
-------------------------
James F. Robertson
Executive Vice President, Chief Operating Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Joseph W. Collard and James F. Robertson and each of
them, his true and lawful attorney-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any all amendments to this report, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorneys-in-fact
or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signatures Capacity Date
- ---------- -------- ----
/s/ JOSEPH W. COLLARD President March 25, 1999
- -----------------------
Joseph W. Collard
/s/ JAMES F. ROBERTSON Executive Vice President, March 29, 1999
- ----------------------- Chief Operating Officer
James F. Robertson (Principal Executive Officer)
/s/ JOHN A. MORTON Vice President, March 31, 1999
- ----------------------- Chief Financial Officer
John A. Morton (Chief Accounting Officer)
/s/ C. SHELTON JAMES Director March 30, 1999
- -----------------------
C. Shelton James
/s/ PAUL J. KINYON Director March 29, 1999
- -----------------------
Paul J. Kinyon
/s/ H. SCOTT BARRETT Director March 30, 1999
- -----------------------
H. Scott Barrett
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Balance at Charged to Write-off of Balance
Beginning of Costs and Uncollectible at End of
period Expenses Accounts Period
--------------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1998 $ 425,000 $ 243,956 $ 310,173 $ 358,933
1997 $ 336,000 $ 177,760 $ 88,760 $ 425,000
1996 $ 70,000 $ 266,000 $ - $ 336,000
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
23 Consent of KPMG LLP
27 Financial Data Schedule
EXHIBIT 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Technisource, Inc.
Fort Lauderdale, Florida
We consent to the incorporation by reference in the registration statement on
Form S-8 of Technisource, Inc. of our report dated February 19, 1999, relating
to the consolidated balance sheets of Technisource, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the December
31, 1998 annual report on Form 10-K of Technisource, Inc.
KPMG LLP
Fort Lauderdale, Florida
March 31, 1999
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,545,183
<SECURITIES> 0
<RECEIVABLES> 16,131,368
<ALLOWANCES> 358,933
<INVENTORY> 0
<CURRENT-ASSETS> 34,023,113
<PP&E> 3,679,780
<DEPRECIATION> 1,119,990
<TOTAL-ASSETS> 36,830,089
<CURRENT-LIABILITIES> 3,233,280
<BONDS> 0
0
0
<COMMON> 103,850
<OTHER-SE> 33,350,690
<TOTAL-LIABILITY-AND-EQUITY> 36,830,089
<SALES> 105,677,265
<TOTAL-REVENUES> 105,677,265
<CGS> 78,912,017
<TOTAL-COSTS> 78,912,017
<OTHER-EXPENSES> 19,537,741
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125,163
<INCOME-PRETAX> 7,581,308
<INCOME-TAX> 3,040,302<F1>
<INCOME-CONTINUING> 4,541,006<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,541,006<F1>
<EPS-PRIMARY> 0.51<F1>
<EPS-DILUTED> 0.51<F1>
<FN>
Pro forma as if the Company was subject to federal and all applicable
state corporate income taxes for the period.
</FN>
</TABLE>
