UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission File Number: 000-24391
TECHNISOURCE, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-2786227
------------------------------------ --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1901 W. CYPRESS CREEK ROAD, SUITE 202, FORT LAUDERDALE, FL 33309
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(954) 493-8601
------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares outstanding of common stock as of July 31, 1999 was
10,360,000.
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. Financial Statements PAGE
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998............................................................... 1
Condensed Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1999 and 1998 (Unaudited)................................. 2
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (Unaudited)........................................ 3
Notes to Condensed Consolidated Financial Statements (Unaudited)................ 4-8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 9-16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk....................... 17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings .............................................................. 18
ITEM 2. Changes in Securities and Use of Proceeds....................................... 18
ITEM 4. Submission of Matters to a Vote of Security Holders ............................ 18
ITEM 6. Exhibits and Reports on Form 8-K................................................ 19
Signatures............................................................................... 20
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECHNISOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(unaudited)
------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,874,677 $ 17,545,183
Trade accounts receivable, less allowance for doubtful
accounts of $358,933 at June 30, 1999
and December 31, 1998 20,662,834 15,772,435
Due from shareholders and employees 337,960 120,597
Prepaid expenses and other current assetes 1,057,931 326,255
Deferred tax asset, current 258,643 258,643
------------ ------------
Total current assets 38,192,045 34,023,113
Property and equipment, net 2,743,136 2,559,790
Other assets 348,643 159,195
Deferred tax asset, noncurrent 87,991 87,991
------------ ------------
Total assets $ 41,371,815 $ 36,830,089
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,781,228 $ 723,643
Income tax payable 146,360 624,378
Accrued liabilities 2,745,970 1,879,194
Deferred tax liability, current 6,065 6,065
------------ ------------
Total current liabilities 5,679,623 3,233,280
Deferred tax liability, noncurrent 142,269 142,269
------------ ------------
Total liabilities 5,821,892 3,375,549
Shareholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized
10,360,000 and 10,385,000 outstanding as of June 30,
1999 and December 31, 1998, respectively 103,850 103,850
Additional paid-in capital 30,064,664 30,057,853
Retained earnings 5,531,409 3,292,837
Less: Treasury Stock, 25,000 and 0 shares as of June 30,
1999 and December 31, 1998, respectively (150,000) --
------------ ------------
Total shareholders' equity 35,549,923 33,454,540
------------ ------------
Total liabilities and shareholders' equity $ 41,371,815 $ 36,830,089
============ ============
</TABLE>
See notes to condensed consolidated financial statements
1
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 36,229,948 $ 25,155,075 $ 73,830,073 $ 47,935,455
Cost of revenues 27,326,167 18,580,469 57,058,753 35,790,912
------------ ------------ ------------ ------------
Gross profit 8,903,781 6,574,606 16,771,320 12,144,543
Selling, general and
administrative expenses 7,749,473 4,885,341 13,460,018 9,187,101
------------ ------------ ------------ ------------
Operating income 1,154,308 1,689,265 3,311,302 2,957,442
Other income (expense):
Interest and other income 195,077 3,724 419,651 3,724
Interest expense -- (87,378) -- (125,163)
------------ ------------ ------------ ------------
Income before taxes 1,349,385 1,605,611 3,730,953 2,836,003
Provision for income taxes 539,754 (208,232) 1,492,381 (149,126)
------------ ------------ ------------ ------------
Net income $ 809,631 $ 1,813,843 $ 2,238,572 $ 2,985,129
============ ============ ============ ============
Pro forma information
Income before taxes, as
reported $ -- $ 1,605,611 $ -- $ 2,836,003
Pro forma income tax
provision -- 676,300 -- 1,147,406
------------ ------------ ------------ ------------
Pro forma net income $ -- $ 929,311 $ -- $ 1,688,597
============ ============ ============ ============
Net income per share - basic $ 0.08 $ 0.13 $ 0.22 $ 0.23
============ ============ ============ ============
Net income per share - diluted $ 0.08 $ 0.12 $ 0.21 $ 0.22
============ ============ ============ ============
Weighted average common shares
outstanding - basic 10,367,917 7,438,462 10,375,833 7,319,231
============ ============ ============ ============
Weighted average common shares
outstanding - diluted 10,506,628 7,759,172 10,532,210 7,631,748
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,238,572 $ 2,985,129
Adjustment to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 674,832 203,875
Deferred taxes, net - (377,333)
Deferred compensation 64,584 -
Changes in assets and liabilities:
Increase in accounts receivable (4,890,399) (5,404,069)
Increase in due from shareholders and employees (217,363) (31,108)
Increase in prepaid expenses and other assets (928,624) (119,164)
Increase (decrease) in accounts payable 2,057,585 (94,942)
Increase in accrued liabilities 879,087 341,981
(Decrease) increase in income taxes payable (478,018) (3,900)
------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (599,744) (2,499,531)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (850,678) (938,689)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (850,678) (938,689)
CASH FLOWS FROM FINANCING ACTIVITIES:
Paydown on line of credit - (223,459)
Proceeds from public offering of common stock, net - 30,996,011
Distribution to shareholders (70,084) (2,679,664)
Payments to acquire treasury stock (150,000) -
Overdraft - (588,106)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (220,084) 27,504,782
NET (DECREASE) INCREASE IN CASH (1,670,506) 24,066,562
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,545,183 469,973
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,874,677 $ 24,536,535
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ - $ 125,163
============ ============
Income taxes paid $ 1,970,399 $ 232,107
============ ============
</TABLE>
NONCASH FINANCING ACTIVITIES:
Shareholder obligations of $57,773 and $9,769,875 were incurred during the six
months ended June 30, 1999 and 1998, respectively, for undistributed earnings to
the former S corporation shareholders.
See notes to condensed consolidated financial statements
3
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
ORGANIZATION AND DESCRIPTION OF BUSINESS
Technisource, Inc. was incorporated in Florida on March 25, 1987.
Technisource of Florida, Inc. and Technisource Midwest, Inc. were incorporated
in Florida on March 22, 1994, to offer information technology staffing services
("IT Services") and to administer payroll and human resources activities for the
Company. In connection with the initial public offering completed June 30, 1998,
all outstanding shares of capital stock of Technisource of Florida, Inc. were
contributed to Technisource, Inc. and Technisource Midwest, Inc. was dissolved.
The accompanying unaudited condensed consolidated financial statements
include Technisource, Inc. and Subsidiaries (the "Company"). The subsidiaries
include Technisource of Florida, Inc. and Technisource Midwest, Inc.
The Company is an information technology ("IT") staffing services firm,
providing IT professionals principally on a time and materials basis to
organizations with complex IT needs. As of June 30, 1999, the Company had 26
branch office locations.
INITIAL PUBLIC OFFERING
The Company completed an initial public offering ("IPO") of common stock on
June 30, 1998. The Company sold 3,100,000 shares of its common stock, par value
$0.01 per share. The Company realized $30.6 million from the offering, net of
expenses. The Company distributed approximately $10.7 million of accumulated S
Corporation earnings to the former S Corporation shareholders.
INTERIM FINANCIAL DATA
The interim financial data as of June 30, 1999, and for the three and six
months ended June 30, 1999, and 1998 is unaudited and has been prepared in
accordance with generally accepted accounting principles for interim financial
reporting purposes and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Certain information and footnote disclosure normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
The information reflects all adjustments, consisting only of normal recurring
entries, that, in the opinion of management, are necessary to present fairly the
financial position and results of operations or cash flows of the Company for
the periods indicated. Results of operations and cash flows for the interim
periods are not necessarily indicative of the results of operations or cash
flows for the full fiscal year. These condensed consolidated financial
statements should be read in conjunction with the Company's Financial Statements
and the notes thereto for the year ended December 31, 1998, included in the
Company's annual report on Form 10-K. The
4
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Company's management believes that the disclosures are sufficient for interim
financial reporting purposes.
RECLASSIFICATIONS
Certain reported amounts for 1998 have been reclassified to conform to the
1999 presentation.
2. Summary of Significant Accounting Policies
CASH AND CASH EQUIVALENTS
For purposes of the condensed consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents. Cash equivalents approximated
$15,875,000 and $17,545,183 at June 30, 1999, and December 31, 1998,
respectively and consisted of a money market account.
BUSINESS RISKS AND CONCENTRATION
The Company's operations depend upon, among other things, the Company's
ability to attract, develop and retain a sufficient number of highly skilled
professional employees. The IT service industry is highly competitive and served
by numerous national, regional, and local firms, all of which are either
existing or potential competitors of the Company. Many of these competitors have
substantially greater financial, technical and marketing resources and greater
name recognition than the Company.
The Company provides IT professional services to customers located in the
United States and Canada. The Company's revenue is generated from a limited
number of clients in specific industries. Future operations may be affected by
the Company's ability to retain these clients and the cyclical and economic
factors that could have an impact on those industries. Financial instruments,
which potentially expose the Company to concentrations of credit risk, consist
primarily of accounts receivable. Additionally, the Company maintained
approximately $14.9 million at June 30, 1999 in one financial institution, which
is in excess of the FDIC insured limits.
3. Contingent Liability
The Company is currently undergoing a review by the Department of Labor.
Although management believes the ultimate outcome of the review should not
materially impact the results of operations or financial position of the
Company, the outcome and effect of the review of the Company cannot yet be
determined.
5
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. Line of Credit
On March 9, 1999, the Company established a line of credit with
NationsBank, N.A. that provides for maximum borrowings of up to $25 million, $10
million of which may be used for acquisitions and $15 million of which may be
used for working capital. Interest is payable monthly at a variable rate of
LIBOR plus 1.4%. The line of credit expires April 30, 2002. There were no
borrowings outstanding at June 30, 1999.
5. S Corporation Distribution and Termination of S Corporation Election
The Company's S Corporation status for federal income tax purposes
terminated on June 24, 1998, in connection with the IPO and the Company
converted to C Corporation status and made a final distribution ("the
Distribution") to its existing shareholders in an aggregate amount representing
substantially all of the Company's undistributed S Corporation earnings through
the closing of the IPO of approximately $10.7 million. Purchasers of the
Company's Common Stock in the IPO did not receive any portion of the
Distribution.
6. Pro forma Earnings per Share
Basic earnings per share is computed by dividing net income attributable to
common shares by the weighted average number of common shares outstanding.
Diluted net income per share is computed by dividing net income attributable to
common shares by the weighted average number of common shares outstanding and
dilutive potential common shares.
Pro forma net income per share was computed based on the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares are calculated using the treasury stock method and
represent incremental shares issuable upon the exercise of outstanding stock
options. In accordance with SEC Staff Accounting Bulletin No. 1.B.3, weighted
average shares for all periods prior to the IPO also include those shares which
would have had to have been issued (at the initial public offering price of $11
per share, less the underwriting discount) to generate sufficient cash to fund
the portion of the S Corporation distribution that was in excess of the net
income for the period ended June 24, 1998.
6
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
1999 1998 1999 1998
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Basic:
Weighted average common shares outstanding 10,367,917 7,438,462 10,375,833 7,319,231
============== ============ ============ ===========
Diluted:
Weighted average common shares outstanding 10,367,917 7,438,462 10,375,833 7,319,231
Dilutive effect of options 138,711 320,710 156,377 312,517
-------------- ------------ ------------ -----------
Total 10,506,628 7,759,172 10,532,210 7,631,748
============== ============ ============ ===========
</TABLE>
Options to purchase 670,112 shares of common stock at a range of $7.18 to
$14.94 per share for the six months ended June 30, 1999, and options to purchase
724,862 shares of common stock at a range of $5.81 to $14.94 per share for the
three months ended June 30, 1999, were excluded from the diluted net income per
share calculation for the period because the exercise price of the options was
greater than the average market price of the common shares for the periods. The
stock options expire by the year 2009.
7. Income Taxes
Historically, the Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code which provide that, in lieu of
corporate federal and some state income taxes, the shareholders are taxed on
their proportionate share of the Company's taxable income. In connection with
the IPO, the Company's election to be treated as an S Corporation was
terminated. As a result of the Company's Subchapter S election, the accompanying
condensed consolidated statements of income do not include an income tax
provision for federal and most state income taxes during the periods of the S
Corporation election. The provision for income taxes for periods prior to the
conversion related to certain states that do not recognize S Corporation status.
The provision for income taxes for the period following the conversion reflects
the estimated current provision for federal and state income taxes. Pro forma
net income is based on the assumption that the Company's S Corporation status
was terminated at the beginning of each period and reflects a pro forma income
tax provision based on applicable tax rates as if the Company was a C
Corporation taxpayer for all periods presented.
8. Stock Repurchase Plan
On April 22, 1999, the Company's Board of Directors approved a Stock
Repurchase Plan pursuant to which the Company can repurchase up to $1 million of
the Company's common stock on the open market. As of June 30, 1999, the Company
had repurchased 25,000 shares of its common stock at an aggregate cost to the
Company of $150,000.
7
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
9. Reportable Segment
The Company operates in two business segments: IT Staffing and Computer
Hardware Sales. The segment information set forth below is based on the nature
of the services offered.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues
IT Staffing $31,614,046 $61,610,610
Hardware Sales 4,615,902 12,219,463
----------------- -----------------
$36,229,948 $73,830,073
================= =================
Income Before Taxes
IT Staffing $1,166,077 $3,214,958
Hardware Sales 183,306 515,993
----------------- -----------------
$1,349,383 $3,730,951
================= =================
</TABLE>
8
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-Q, PRINCIPALLY IN THIS
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," THAT ARE NOT RELATED TO HISTORICAL RESULTS, INCLUDING STATEMENTS
RELATING TO ANTICIPATED WORKING CAPITAL AND PROFITABILITY OF BRANCH OFFICES, ARE
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF
RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, THE COMPANY'S ABILITY TO
RECRUIT AND RETAIN QUALIFIED TECHNICAL PROFESSIONALS; IDENTIFY, ACQUIRE AND
INTEGRATE SUITABLE ACQUISITION CANDIDATES; OBTAIN SUFFICIENT WORKING CAPITAL TO
SUPPORT SUCH GROWTH; COMPETE SUCCESSFULLY WITH EXISTING AND FUTURE COMPETITORS;
THE ABILITY OF NEW BRANCH OFFICES TO ACHIEVE PROFITABILITY AND OTHER FACTORS
DESCRIBED THROUGHOUT THIS FORM 10-Q. THE ACTUAL RESULTS THAT THE COMPANY
ACHIEVES MAY DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS DUE TO SUCH
RISKS AND UNCERTAINTIES. WORDS SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS,"
"INTENDS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS, BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING SUCH STATEMENTS. THE
COMPANY UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS IN
ORDER TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE OF THIS
REPORT. READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS
DISCLOSURES MADE BY THE COMPANY IN THIS REPORT AND IN THE COMPANY'S OTHER
REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE
INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S
BUSINESS.
OVERVIEW
Technisource is a national provider of IT staffing services through 26
offices in the United States and Canada, utilizing over 1,150 highly trained
professionals. The Company has achieved a compound annual revenue growth rate of
59% over the past five years based on years-ended 1994 through 1998. This growth
rate has been generated internally, without the benefit of acquisitions.
The Company's revenues grew from $29.1 million in 1995 to $105.7 million in
1998. The Company's revenue growth is driven primarily by increases in the
number of professionals placed with existing and new clients. The number of
professionals utilized by the Company grew from 320 as of December 31, 1995, to
1,105 as of December 31, 1998, and to 1,161 as of June 30, 1999. For each of
1998, 1997, and 1996, clients from the previous year generated at least 80% of
the Company's revenues. The Company generates primarily all of its revenues from
fees for the provision of IT staffing services; most of which are billed at
contracted hourly rates. Clients are typically billed and professionals are paid
on a weekly basis. The Company recognizes revenues as services are performed.
The Company's most significant cost is its personnel expense, which
consists primarily of salaries, fees and benefits of the Company's
professionals. To date, the Company has generally been able to maintain its
gross profit margin by offsetting increases in professional salaries and fees
with increases in the hourly billing rates
9
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
charged to clients. However, there can be no assurance that the Company will
continue to be able to offset increases in the Company's cost of revenues by
increasing the amounts the Company bills to its clients. The Company attempts to
control overhead and indirect expenses, which are not passed through to its
clients, by controlling the rate of its branch office expansion and by
maintaining centralized operations and back-office infrastructure.
The Company increased its administrative, sales, recruiting and training
professionals from 207 employees on December 31, 1997 to 275 employees on
December 31, 1998, and 317 at June 30, 1999.
Over the last ten years, the Company has developed and refined the
Technisource Growth Model, which is focused on facilitating rapid internal
growth through the replication of Development Triangles. Each Development
Triangle is typically comprised of one Account Manager, two or three recruiting
professionals and a group of IT professionals. The Company has grown from nine
Development Triangles as of December 31, 1995 to 54 Development Triangles as of
December 31, 1998, and to 58 Development Triangles as of June 30, 1999. Although
the Company's operating margins may be adversely affected during periods
following relatively large increases in the number of the Company's Development
Triangles, the Company leverages its initial investment in infrastructure as
Development Triangles mature and the Company's sales and recruiting personnel
achieve greater levels of productivity.
The Company anticipates that each new branch office will require an
investment of approximately $100,000 to $150,000 in order to begin operations
and fund operating losses for an initial ten-to-twelve month period of
operations, which is the amount of time management believes should generally be
required for a new office to achieve profitability. The Company expenses the
costs of opening a new office as such expenses are incurred. The Company
anticipates continuing to leverage its current network of 26 branch offices, as
the start-up costs have already been expensed and additional start-up branch
office costs will constitute a smaller percentage of revenues as the Company
continues to increase its revenue base. There can be no assurance that new
Development Triangles or branch offices will be profitable within projected time
frames or at all.
The Company's computer hardware sales grew to $12.2 million in the first
half of 1999 from $906,000 in the same period of 1998. The gross margin on the
sale of computer hardware is at a substantially lower gross margin than the
Company's IT staffing services.
Consistent with industry trends, the Company has experienced a slowdown in
service revenue from certain offices. Technisource believes there will be a
short-term slowdown in historical revenue and income growth rates and that it
will be difficult to forecast revenue for the remainder of 1999. Although
management is being cautious in the reduction of hiring to match the diminished
demand, management continues to staff
10
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
and position the Company for the significant amount of work the Company's
customers will require in the year 2000.
The Company has minimized the impact of the reduced demand by shifting
recruiting resources and professionals to the Company's faster growing offices.
The company has slowed, but not stopped, office expansion until it has the
business to fully utilize its resources without jeopardizing its positioning for
rapid growth in the year 2000. This will allow the Company to better utilize its
existing infrastructure. In addition, the Company is investing in name
recognition in the computer consulting community through increased advertising
using the Internet and traditional advertising methods.
The following table set forth for the periods indicated, depicts the
percentage of revenues of certain items reflected in the Company's statements of
income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 1998
---------------------------
<S> <C> <C>
Revenues 100.0 % 100.0 %
Cost of revenues 75.4 % 73.9 %
------------- ------------
Gross profit 24.6 % 26.1 %
Selling, general and administrative expenses 21.4 % 19.4 %
------------- ------------
Operating income 3.2 % 6.7 %
Interest and other income 0.5 % 0.0 %
Interest expense 0.0 % 0.3 %
------------- ------------
Income before income taxes 3.7 % 6.4 %
Income taxes 1.5 % 0.8 %
------------- ------------
Net Income 2.2 % 7.2 %
Pro forma provision for income taxes 0.0 % 2.7 %
Pro forma net income 0.0 % 3.5 %
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues increased $11.1 million, or 44%, to $36.2 million for
the three months ended June 30, 1999, as compared to $25.2 million for the three
months ended June 30, 1998. This increase resulted primarily from increased
sales in existing offices, and to a lesser extent, the addition of four new
branch offices. Sales of hardware represent approximately 13% of the total sales
for the quarter. The hardware sales revenue increased 961% to $4.5 million for
the period ended June 30, 1999, as compared
11
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
to $428,000 for the three months ended June 30, 1998. The total number of client
divisions and business units billed increased to 502 during the quarter ended
June 30, 1999, from 350 during the quarter ended June 30, 1998, and the number
of IT professionals working for the Company increased to 1,161 as of June 30,
1999, from 942 as of June 30, 1998.
GROSS PROFIT. Gross profit consists of revenues less cost of revenues. The
Company's cost of revenues consists primarily of compensation, benefits and
expenses for the Company's professionals and other direct costs associated with
providing services to clients, and to a lesser extent, the profit from the
revenue generated from the hardware group. Gross profit increased $2.3 million,
or 35%, to $8.9 million, for the three months ended June 30, 1999, as compared
to $6.6 million for the three months ended June 30, 1998. Total gross margin
grew while the percent to sales dropped to 25% from 26% for the three months
ended June 30, 1998. Gross profit is impacted by the substantially lower margin
hardware sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
admin-istrative expenses increased approximately $2.9 million, or 59%, to $7.7
million for the three months ended June 30, 1999, as compared to $4.9 million
for the three months ended June 30, 1998. The increase primarily resulted from
increases in corporate and administrative staff, the addition of 15 Development
Triangles and the expenses attributed to these workforce additions.
NET INTEREST EXPENSE (INCOME). Net interest income was approximately
$195,077 for the three months ended June 30, 1999, as compared to net interest
expense of approximately $84,000 for the three months ended June 30, 1998. This
change is primarily due to reduced interest expense resulting from the repayment
of outstanding debt during the second quarter of 1998 and interest earned from
the investment on net proceeds from the company's public offering of common
stock in 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues increased $25.9 million, or 54%, to $73.8 million for
the six months ended June 30, 1999, as compared to $47.9 million for the six
months ended June 30, 1998. This increase resulted primarily from increased
sales in existing offices, and to a lesser extent, the addition of four new
branch offices. Sales of hardware represent approximately 17% of the total sales
for the six months ended June 30, 1999. The hardware sales revenue increased
1,250% to $12.2 million for the six months ended June 30, 1999, as compared to
$906,000 for the six months ended June 30, 1998.
GROSS PROFIT. Gross profit increased $4.6 million, or 38%, to $16.8
million, for the six months ended June 30, 1999, as compared to $12.1 million
for the six months ended June 30, 1998. Total gross margin grew while the
percent to sales dropped to 23%
12
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
from 25% for the six months ended June 30, 1998. Gross profit is impacted by the
substantially lower margin hardware sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
admin-istrative expenses increased approximately $4.3 million, or 47%, to $13.5
million for the six months ended June 30, 1999, as compared to $9.2 million for
the six months ended June 30, 1998. The increase primarily resulted from
increases in corporate and administrative staff, the addition of 15 Development
Triangles and the expenses attributed to these workforce additions.
NET INTEREST EXPENSE (INCOME). Net interest income was approximately
$420,000 for the six months ended June 30, 1999, as compared to net interest
expense of approximately $121,000 for the six months ended June 30, 1998. This
change is primarily due to reduced interest expense resulting from the repayment
of outstanding debt during the second quarter of 1998 and interest earned from
the investment on net proceeds from the company's public offering of common
stock in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flow from
operations and available borrowings under its line of credit. Cash and cash
equivalents and working capital approximated $15.9 million and $32.6 million,
respectively, as of June 30, 1999.
On March 9, 1999 the Company established a line of credit with NationsBank
N.A., which provides for maximum borrowings of up to $25 million, $10 million of
which may be used for acquisitions and $15 million of which may be used for
working capital. Under the NationsBank line of credit, interest is payable
monthly at LIBOR plus 1.4%. The line of credit expires April 30, 2002. There
were no borrowings outstanding under the line of credit at June 30, 1999.
Net cash used by operating activities was approximately $600,000 for the
six-month period ended June 30, 1999, as compared to $2.5 million during the
six-month period ended June 30, 1998. The decrease in cash used in operations is
primarily due to an increase in accounts receivable.
Net cash used in investing activities was comparable period to period and
represents purchases of property and equipment for office locations.
For the six-month period ended June 30, 1999, net cash used in financing
activities primarily related to the purchase of treasury stock.
On April 22, 1999, the Company's Board of Directors approved a Stock
Repurchase Plan pursuant to which the Company can repurchase up to $1 million of
the Company's common stock on the open market. As of June 30, 1999, the Company
has
13
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
repurchased 25,000 shares of its common stock at an aggregate cost to the
Company of $150,000.
The Company anticipates that its primary uses of working capital in future
periods will be for the internal development of new offices, expansion of the
hardware group, investments in its management information systems, possible
acquisitions and the funding of increases in accounts receivable. The Company
continually reviews and evaluates acquisition candidates to complement and
expand its business. The Company's ability to grow through acquisitions is
dependent on the availability of suitable acquisition candidates and the terms
on which such candidates may be acquired, which may be adversely affected by
competition for such acquisitions. The Company cannot predict to what extent new
offices will be added through acquisitions as compared to internal development.
The Company currently has no agreements, understandings or commitments with
respect to any potential acquisitions.
The Company believes that the existing cash and cash equivalents, cash flow
from operations and available borrowings under the Credit Facility will be
sufficient to meet the Company's presently anticipated working capital needs for
at least the next twelve months.
Inflation did not have a material impact on the Company's revenues or
income from operations in the second quarter of fiscal 1999. The Company cannot
predict what effect, if any, inflation may have on its future results of
operations.
YEAR 2000
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
use of computer programs which have been written using two digits, rather than
four, to define the applicable year of business transactions. In evaluating the
Company's state of readiness the Company is considering the following key areas:
(i) the Company's principal staffing and financial systems; (ii) software used
in the Company's internal computer network; (iii) third party vendors; (iv)
customers; and (v) telecommunications and other support systems. The Company is
addressing each of these areas in three separate phases. The 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
14
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
they are Year 2000-compliant. The initial testing of these systems has been
completed. In addition, the Company believes its financial system is Year 2000
compliant and has obtained such a representation from the software vendor. 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 are not likely to significantly disrupt the Company's
business. The Company is dependent on basic public infrastructure, such as
telecommunications and utilities, in order to function normally. Significant
long-term interruptions of this infrastructure could have an adverse effect on
the operations of the Company. As part of the second phase, the Company 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.
15
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company has not yet determined the extent of contingency planning that
may be required as this is dependent 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.
The extent and magnitude of the Year 2000 problem as it will affect the
Company, both before, and for some period after, January 1, 2000, is difficult
to predict or quantify for a number of reasons. Among the most important are the
lack of control over systems that are used by the third-parties who are critical
to the Company's operation, the complexity of testing interconnected networks
and applications that depend on third-party networks and the uncertainty
surrounding how others will deal with the issues raised by Year 2000-related
failures. Moreover, the estimated costs to implement the Year 2000 Plan does not
take into account the costs, if any, that might be incurred as a result of Year
2000-related failures that occur despite the Company's implementation of the
Year 2000 Plan. As the Year 2000 project continues, additional Year 2000
problems may be discovered or the Company may find that the cost of these
activities exceed current expectations. In many cases the Company must rely on
assurances from suppliers that new and upgraded information systems as well as
key services will be Year 2000 compliant. While the Company plans to validate
supplier representations, it cannot be sure that its tests will be adequate, or
that, if problems are identified, they will be addressed in a timely and
satisfactory manner. Even if the Company, in a timely manner, completes all of
its assessments, implements and tests all remediation plans it believes to be
adequate, and develops contingency plans believed to be adequate, some problems
may not be identified or corrected in time to prevent material adverse
consequences or business interruptions to the Company. Furthermore, there may be
certain mission critical third parties such as utilities, telecommunications
companies, or vendors where alternative arrangements or sources are limited or
unavailable.
Although the Company is not currently aware of any material operational
issues associated with preparing its internal systems for the Year 2000, or
material issues with respect to the adequacy of mission-critical third-party
systems, there can be no assurance, due to the overall complexity of the Year
2000 issue, that the Company will not experience material unanticipated negative
consequences and/or material costs caused by undetected errors or defects in
such systems or by the Company's failure to adequately prepare for the results
of such errors or defects, including costs or related litigation, if any. Such
consequences could have a material adverse effect on the Company's business,
financial condition or results of operations.
16
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company owns no derivative financial instruments or derivative
commodity instruments. The Company does not derive a significant amount of
revenues from international operations and does not believe that it is exposed
to material risks related to foreign currency exchange rates.
17
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or its
properties or to which the Company is a party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Registration Statement was declared effective by the Commission on June
24, 1998. The Initial Public Offering (IPO) was consummated on June 30, 1998,
and generated net proceeds to the Company of approximately $31.0 million. The
managing underwriters for the IPO were Donaldson, Lufkin & Jenrette Securities
Corporation and William Blair & Company. In the IPO the Company registered with
the Commission the sale of 3,100,000 newly issued shares of its Common Stock and
the sale of up to 465,000 additional shares of Common Stock by certain of the
Company's existing shareholders. The Company sold all of the 3,100,000 shares
registered for sale by the Company generating gross proceeds of $34,100,000 for
the Company. In connection with the IPO, the Company incurred expenses for
underwriting discounts and commissions of $2.4 million and other expenses of
approximately $0.7 million, for total expenses of approximately $3.0 million.
None of such expenses were paid to officers, directors, ten- percent
shareholders, or associates or affiliates of such persons or the Company.
As of June 30, 1999, approximately $15.9 million of the net proceeds of the
IPO were invested in U.S. Treasury and highly rated corporate debt securities.
In 1998, $7.0 million was distributed to the Company's pre-IPO shareholders as
undistributed S-Corporation earnings, approximately $5.8 million was used to
repay amounts outstanding under the Company's line of credit and approximately
$1.0 million had been used for working capital.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 6, 1999, the Company held its 1999 Annual Meeting of Shareholders in
Fort Lauderdale. Only holders of record of Common Stock on March 19, 1999, (the
"Record Date") were entitled to vote at the Annual Meeting. Each holder of
record of Common Stock at the close of business on the Record Date was entitled
to one vote per share on each matter voted upon by the shareholders at the
Annual Meeting. As of the Record Date, there were 10,385,000 shares of Common
Stock outstanding.
The following matters were submitted for a vote by security holders:
Proposal 1 To elect six directors of the Company to serve until
the 2000 Annual Meeting of Shareholders and until
their successors have been elected and qualified.
18
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
Set forth below is information regarding the
7,731,742 shares of Common Stock voted in the
election of the six directors.
<TABLE>
<CAPTION>
NAME FOR AGAINST WITHHELD
---- --- ------- --------
<S> <C> <C> <C>
Joseph W. Collard 7,729,917 0 1,825
James F. Robertson 7,729,917 0 1,825
John A. Morton 7,729,917 0 1,825
C. Shelton James 7,729,917 0 1,825
Paul J. Kinyon 7,729,917 0 1,825
H. Scott Barrett 7,729,917 0 1,825
</TABLE>
Proposal 2 To ratify the appointment of KPMG LLP as the
Company's independent certified public accountants
for the fiscal year ending December 31, 1999.
Set forth below is information regarding the
7,731,742 shares of Common Stock voted to ratify the
appointment of KPMG LLP as independent certified
public accountants.
<TABLE>
<S> <C>
Votes FOR 7,729,217
Votes AGAINST 625
Votes WITHHELD 1,900
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
3.1 Amended and Restated Articles of incorporation of the Company 1
3.2 Amended and Restated Bylaws of the Company 1
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and
Bylaws for the Company defining the rights of holders of Common Stock of the
Company
4.2 Specimen certificate for the Company's Common Stock 1
27 Financial Data Schedule
</TABLE>
(b) Current Reports on Form 8-K
None
- --------
1 Filed with the Company's Registration Statement on Form S-1 (File No.
333-50803) filed with the Securities and Exchange Commission on April 23, 1998,
as amended, and incorporated herein by reference.
19
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNISOURCE, INC.
Dated: August 16, 1999
By: /s/ James F. Robertson
---------------------------------------
James F. Robertson
Executive Vice President, Chief
Operating Officer and Director
By: /s/ John A. Morton
---------------------------------------
John A. Morton
Vice-President, Chief Financial
Officer and Director
20
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
3.1 Amended and Restated Articles of incorporation of the Company 1
3.2 Amended and Restated Bylaws of the Company 1
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws
for the Company defining the rights of holders of Common Stock of the Company
4.2 Specimen certificate for the Company's Common Stock 1
27 Financial Data Schedule
</TABLE>
- -----------
1 Filed with the Company's Registration Statement on Form S-1 (File No.
333-50803) filed with the Securities and Exchange Commission on April 23, 1998,
as amended, and incorporated herein by reference.
21
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 15,874,677
<SECURITIES> 0
<RECEIVABLES> 21,021,767
<ALLOWANCES> 358,933
<INVENTORY> 0
<CURRENT-ASSETS> 38,192,045
<PP&E> 4,536,253
<DEPRECIATION> 1,793,117
<TOTAL-ASSETS> 41,371,815
<CURRENT-LIABILITIES> 5,679,623
<BONDS> 0
0
0
<COMMON> 103,850
<OTHER-SE> 30,064,664
<TOTAL-LIABILITY-AND-EQUITY> 41,371,815
<SALES> 36,229,948
<TOTAL-REVENUES> 36,425,025
<CGS> 27,326,167
<TOTAL-COSTS> 27,326,167
<OTHER-EXPENSES> 7,749,475
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,349,383
<INCOME-TAX> 539,753
<INCOME-CONTINUING> 809,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 809,630
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
