SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000.
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 Identification Number)
incorporation or organization)
1901 W. CYPRESS CREEK ROAD, SUITE 200, FORT LAUDERDALE, FL 33309
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(Address of principal executive offices) (Zip Code)
(954) 493-8601
----------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares outstanding of common stock as of October 31, 2000
was 10,331,600.
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Page
----
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 2000
(Unaudited) and December 31, 1999 1
Condensed Consolidated Statements of Income for the
Three and Nine months Ended September 30, 2000
(Unaudited) and 1999 (Unaudited) 2
Condensed Consolidated Statements of Cash Flows for the Nine months
Ended September 30, 2000 (Unaudited) and 1999 (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 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
i
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(unaudited)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,890,801 $ 17,353,780
Trade accounts receivable, less allowance for doubtful
accounts of $1,741,417 and $639,933 as of September 30, 2000
and December 31, 1999, respectively 32,729,336 18,558,024
Due from shareholders and employees 397,656 348,606
Prepaid expenses and other current assets 602,693 613,669
Prepaid income taxes 748,896 415,350
Deferred tax asset, current 453,011 453,011
------------ ------------
Total current assets 36,822,393 37,742,440
Property and equipment, net 2,460,982 2,353,570
Other assets 219,013 360,340
Intangible assets 7,752,562 --
Deferred tax asset, noncurrent 128,148 128,148
------------ ------------
Total assets $ 47,383,098 $ 40,584,498
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,318,219 $ 369,199
Accrued liabilities 6,775,089 3,609,392
Note payable 1,000,000 --
------------ ------------
Total current liabilities 9,093,308 3,978,591
Shareholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized,
10,385,000 issued as of September 30, 2000 and December 31, 1999 103,850 103,850
Additional paid-in capital 30,275,624 30,129,248
Retained earnings 8,192,460 6,522,809
Less: Treasury stock, 53,400 and 25,000 shares as of September 30, 2000
and December 31, 1999, respectively (282,144) (150,000)
------------ ------------
Total shareholders' equity 38,289,790 36,605,907
------------ ------------
Total liabilities and shareholders' equity $ 47,383,098 $ 40,584,498
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues
Technology Services $ 36,260,295 $ 30,557,261 $ 100,948,047 $ 92,167,871
Reseller Sales 5,522,680 5,282,143 8,080,136 14,285,066
Hardware Commissions 297,376 150,735 1,030,811 457,763
------------- ------------- ------------- -------------
42,080,351 35,990,139 110,058,994 106,910,700
Cost of revenues
Technology Services 26,476,162 22,507,103 73,645,174 68,501,579
Reseller Sales 4,726,970 4,859,741 6,908,679 13,014,506
------------- ------------- ------------- -------------
31,203,132 27,366,844 80,553,853 81,516,085
Gross profit 10,877,219 8,623,295 29,505,141 25,394,615
Selling, general and
administrative expenses 9,596,715 7,462,096 26,850,050 20,922,114
------------- ------------- ------------- -------------
Operating income 1,280,504 1,161,199 2,655,091 4,472,501
Other income (expense):
Interest and other income 128,517 224,769 539,074 644,420
Interest expense (83,134) (247) (257,880) (247)
------------- ------------- ------------- -------------
Income before taxes 1,325,887 1,385,721 2,936,285 5,116,674
Provision for income taxes 590,265 554,287 1,266,634 2,046,668
------------- ------------- ------------- -------------
Net income $ 735,622 $ 831,434 $ 1,669,651 $ 3,070,006
============= ============= ============= =============
Net income per share - basic $ 0.07 $ 0.08 $ 0.16 $ 0.30
============= ============= ============= =============
Net income per share - diluted $ 0.07 $ 0.08 $ 0.16 $ 0.29
============= ============= ============= =============
Weighted average common shares
outstanding - basic 10,331,600 10,360,000 10,344,291 10,371,388
============= ============= ============= =============
Weighted average common shares
outstanding - diluted 10,447,436 10,491,918 10,487,079 10,524,464
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,669,651 $ 3,070,006
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,032,212 1,024,932
Deferred compensation 146,376 96,876
Changes in assets and liabilities:
Increase in accounts receivable (12,575,995) (5,685,170)
Increase in due from shareholders and employees (49,050) (18,281)
Decrease in prepaid expenses and other assets 225,168 (858,677)
Increase in prepaid income taxes (328,717) --
Increase in accounts payable 646,769 118,040
Increase in accrued liabilities 1,598,219 1,740,694
(Decrease) increase in income tax payable -- (37,748)
------------ ------------
Net cash used in operating activities (7,635,367) (549,328)
Cash flows from investing activities:
Issuance of note receivable (150,000) --
Purchases of property and equipment (853,572) (996,081)
Acquisitions of businesses, net of cash acquired (6,691,896) --
------------ ------------
Net cash used in investing activities (7,695,468) (996,081)
------------ ------------
Cash flows from financing activities:
Borrowings on line of credit 3,750,000 --
Repayments on line of credit (3,750,000) --
Distribution to shareholders -- (70,084)
Purchase of treasury stock (132,144) (150,000)
------------ ------------
Net cash used in financing activities (132,144) (220,084)
------------ ------------
Net decrease in cash and cash equivalents (15,462,979) (1,765,493)
Cash and cash equivalents, beginning of period 17,353,780 17,545,183
------------ ------------
Cash and cash equivalents, end of period $ 1,890,801 $ 15,779,690
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 445,941 $ 247
============ ============
Income taxes paid $ 1,593,090 $ 2,084,416
============ ============
Supplemental disclosure of MDS consulting acquisition:
Total purchase price $ 932,567
Less:
Fixed asset valuation (10,786)
Other asset valuation (3,355)
------------
Amount included in goodwill 918,426
============
Supplemental disclosure of PRISM acquisition:
Total purchase price $ 4,584,329
Less:
Accounts receivable valuation (1,595,317)
Fixed asset valuation (35,866)
Prepaid expenses and other assets valuation (71,100)
Add:
Accounts payable valuation 302,251
Accrued liabilities valuation 1,217,478
------------
Amount included in goodwill $ 4,401,775
============
Supplemental disclosure of Broadreach acquisition:
Total purchase price $ 2,763,902
Less:
Fixed asset valuation (81,191)
Deposits (3,239)
Other asset valuation (100,000)
------------
Amount included in goodwill $ 2,579,472
============
</TABLE>
See accompanying 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
The accompanying condensed consolidated financial statements include
Technisource, Inc. and its wholly owned subsidiaries (the "Company"). The
subsidiaries include TSRC.net, Inc., TSRC of Florida, Inc., Technisource
Hardware, Inc., DFI Acquisition Corporation, and former subsidiaries,
Technisource of Florida, Inc. and Technisource Midwest, Inc.
The Company is primarily an information technology ("IT") services and
consulting firm, providing technology services professionals principally on a
time and materials basis to organizations with complex IT needs. As of September
30, 2000 the Company had 32 branch office locations.
Interim Financial Data
The interim financial data as of September 30, 2000 and for the three and
nine months ended September 30, 2000 and 1999 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 disclosures 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, results of operation and 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, 1999, included in the
Company's annual report on Form 10-K.
Reclassifications
Certain reported amounts for 1999 have been reclassified to conform to the
2000 presentation.
2. Acquisitions
Acquisition of MDS Consulting Services, Inc.
On February 18, 2000, the Company, through a wholly owned subsidiary,
completed the acquisition of the assets of MDS Consulting Services, Inc., an IT
services company, for approximately $800,000 in cash plus acquisition fees. Up
to an additional $975,000 cash
4
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
consideration may be paid in the form of an earn-out payable over three years
based on certain specified criteria. The transaction was accounted for under the
purchase method of accounting.
Acquisition of PRISM Group Consulting, LLC and PRISM Group, LLC
On March 1, 2000, the Company acquired substantially all of the assets and
certain liabilities of PRISM Group Consulting, LLC and PRISM Group, LLC, IT
services companies, for approximately $4,770,000 cash and a promissory note in
the amount of $1,000,000 which matures February 28, 2001. In connection with the
acquisition, the Company utilized $3,750,000 of the bank line of credit. This
amount has been repaid and there were no borrowings outstanding under the line
of credit as of September 30, 2000. (Note 5) The transaction was accounted
for under the purchase method of accounting. The pro forma effect of the
acquisition as if it occurred on January 1, 2000 and January 1, 1999 is as
follows:
Nine months ended
September 30,
-----------------------------------------
2000 1999
------------------ ------------------
Revenue $ 110,225,419 $ 114,086,021
Net Income $ 1,691,081 $ 3,925,603
Net Income per share - basic $ 0.16 $ 0.38
Net Income per share - diluted $ 0.16 $ 0.37
Acquisition of Broadreach Consulting, Inc.
On June 1, 2000, the Company completed the first phase of the acquisition of
certain of the assets of Broadreach Consulting, Inc., an IT services and
consulting company, for approximately $650,000 in cash. On August 31, 2000, the
Company completed the second phase of the acquisition of certain of the assets
of Broadreach Consulting, Inc. for $975,000 in cash. Additional post-closing
payments for the two acquisitions, for which the Company has accrued probable
payments, have not been finalized. Based on the information available, the
Company does not expect that any unrecorded liability related to these matters
would materially affect the consolidated financial position, results of
operations or cash flows. The transactions were accounted for under the purchase
method of accounting.
3. Summary of Significant Accounting Policies
Intangible Assets
Intangible assets represent the excess of the purchase price over the fair
value of acquired tangible net assets for the acquisitions of PRISM Group
Consulting, LLC, PRISM Group, LLC, MDS Consulting Services, Inc., and Broadreach
Consulting, Inc. Intangible assets are allocated between identifiable intangible
assets such as noncompete agreements that are amortized on a straight-line basis
over three to five years and to goodwill, which is being amortized on a
straight-line basis over fifteen years.
5
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue Recognition
The Company generally recognizes services revenue at the time services are
performed. Product and related service revenue is generally recognized when the
product is received by the customer. However, when the Company does not take
title to the product, revenue is recognized as commission revenue when the
customer receives the product, net of related costs.
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 services 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 technology 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 $1.9 million at September 30, 2000 in one financial institution,
which is in excess of the FDIC insured limits.
4. Contingent Liability
The Company is currently undergoing a review by the Department of Labor.
Although management believes the ultimate outcome of the review will not have an
adverse material effect on the Company's results of operations or financial
position, the outcome and effect of the review cannot yet be determined.
The Company is currently undergoing an audit by the Internal Revenue
Service. Although management believes the ultimate outcome of the audit will not
have an adverse material effect on the Company's results of operations or
financial position, the outcome and effect of the audit cannot yet be
determined.
5. Line of Credit
On March 9, 1999, the Company established a line of credit with a bank 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 January 31, 2002. There were no borrowings against the
line of credit as of September 30, 2000.
6
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. 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 during
the period. Diluted earnings per share is computed by dividing net income
attributable to common shares by the weighted average number of common shares
outstanding during the period increased to include the number of additional
common shares that would have been outstanding if the diluted common shares had
been issued. The dilutive effect of outstanding options is reflected in diluted
earnings per share by application of the treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Basic:
Weighted average common
shares outstanding 10,331,600 10,360,000 10,344,291 10,371,388
============= ============== ============== ==============
Diluted:
Weighted average common
shares outstanding 10,331,600 10,360,000 10,344,291 10,371,388
Dilutive effect of options 115,836 131,918 142,788 153,076
------------- -------------- -------------- --------------
Total 10,447,436 10,491,918 10,487,079 10,524,464
============= ============== ============== ==============
</TABLE>
7. Stock Repurchase Plan
On April 22, 1999, the Company's Board of Directors approved a Stock
Repurchase Plan pursuant to which the Company can repurchase up to $1 million of
the Company's common stock on the open market. As of September 30, 2000, the
Company had repurchased 53,400 shares of its common stock at an aggregate cost
to the Company of $282,144.
7
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Reportable Segment
The Company operates in two business segments: Technology Services and
Computer System Reseller Sales. The segment information set forth below is based
on the nature of the services offered. The Company evaluates each segment's
performance based primarily on their revenues, gross margin and operating
income. The accounting policies of the operating segments are the same as those
of the entire Company.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues/1/
Technology Services $36,260,295 $30,557,261 $100,948,047 $92,167,871
Reseller Sales and
Commissions 5,820,056 5,432,878 9,110,947 14,742,829
----------------- ------------------ ------------------ ------------------
$42,080,351 $35,990,139 $110,058,994 $106,910,700
================= ================== ================== ==================
Income Before Income
Taxes/2/
Technology Services $902,277 $1,149,236 $2,333,746 $4,364,195
Reseller Sales and
Commissions 423,610 236,485 602,539 752,479
----------------- ------------------ ------------------ ------------------
$1,325,887 $1,385,721 $2,936,285 $5,116,674
================= ================== ================== ==================
</TABLE>
-------------------
/1/ Two of the Company's clients accounted for approximately 34.5% and
4.7%, respectively, of the Company's reseller sales for the period
ended September 30, 2000.
/2/ Since all expenses have not been allocated to the reseller sales
segment, this basis is not necessarily a measure completed in
accordance with generally accepted accounting principles and may not be
comparable to other companies.
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 working capital, costs of setting up new branch offices,
profitability of branch offices, and the effect of liability, if any, imposed on
the Company by the Department of Labor and Internal Revenue Service 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 in this Form 10-Q and in the Form 10-K for the year ended December 31,
1999 filed with the Securities and Exchange Commission. 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 provides a wide range of technology services to a growing
client base that includes many Fortune 500 corporations. The Company's services
range from information technology staffing, provided through 32 branch offices
in the United States and Canada, to the configuration, procurement and
installation of computer hardware and software systems.
For the five calendar years through 1999, the Company's revenues grew,
without the benefit of acquisitions, at a compounded annual rate of 56.0%.
During this period revenues increased from $29.1 million in 1995 to $144.7
million in 1999 with billable professionals increasing from 320 at the end of
1995 to 1163 at the end of 1999. At September 30, 2000, the number of billable
professionals had increased to 1370. In 1999, 83.3% of total revenue was
generated from professional services and 16.7% from the resale of hardware and
software. For the first nine months of 2000, about 91.7% of revenue came from
professional services and 8.3% from reseller sales.
The Company's clients utilizing technology professionals are typically
invoiced and the professionals paid on a weekly basis, with the Company
recognizing revenue as the services are performed. Revenues from reseller sales
are recognized when the title to the products passes to the customer, with
invoicing occurring on a weekly basis.
9
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The Company's most significant cost is the personnel expense for billable
professionals, which consists primarily of salaries and benefits. To date, the
Company has generally been able to maintain gross profit margin by offsetting
increases in professional salaries and benefits with increases in the billing
rates charges to clients. There can be no assurance, however, that the Company
will able to continue maintaining margin in this way.
The number of sales, recruiting and training professionals employed by the
Company increased from 196 at December 31, 1999 to 219 at September 30, 2000.
The number of general and administrative personnel decreased from 128 to 125
between those two dates.
Over the past 13 years, the Company has grown the number of billable
professionals it deploys through the development, refinement and replication of
Development Triangles. Each Development Triangle is typically comprised of one
Account Manager, two or three recruiters and a group of billable technology
professionals. The number of Development Triangles grew from nine at December
31, 1995 to 62 at December 31, 1999. There were 76 Development Triangles at
September 30, 2000. Although the Company's operating margins may be adversely
affected during periods following large increases in the number of Development
Triangles, the Company's initial investment in infrastructure is leveraged as
Development Triangles mature and the sales and recruiting personnel achieve
greater levels of productivity. Fifteen of the 76 Development Triangles at
September 30, 2000 were developed through acquisition, which reduces the length
of time to maturity.
The Company anticipates that each new branch office will require an
investment of about $150,000 to open the office and fund operating losses until
the office achieves profitability, which generally takes 10 to 12 months. The
Company expenses the costs of opening a new office as incurred. There can be no
assurance that new Development Triangles or branch offices will be profitable
within projected time frames or at all. Four of the 32 branch offices were
acquired through the acquisitions of MDS Consulting, PRISM, and several of
Broadreach Consulting's staffing offices.
The Company's reseller products range from personal computers and personal
computing software to sophisticated computer network hardware and software. To
further its reseller efforts, the Company often assists its customers with the
selection, the configuration and the installation of the systems purchased. The
Company generally recognizes reseller revenue at the time the product is
received by the customer. In instances where the product is shipped directly to
the customer from the Company's vendor, the Company never takes title to the
product and the revenue is recorded as commission revenue, net of related costs.
The Company's reseller sales experience a range of gross profit margins
depending on the size of the sale, the sophistication of the hardware and
software, and the level of assistance provided to the customer in selecting,
configuring, and installing the products. In 1999, total reseller revenue was
$18.4 million with a gross profit margin of 9.4%. For the quarter and the year
to date period ended September 30, 2000, total reseller revenue was $5.8 million
and $9.1 million, respectively, with gross profit percentages of 14.4% for the
quarter and 14.5% year to date.
10
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The following table sets forth for the periods indicated, depicts the
percentage of revenues of certain items reflected in the Company's statements of
income:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Technology Services Revenues 86.2 % 84.9 % 91.7 % 86.2 %
Reseller Revenues 13.8 15.1 8.3 13.8
------------ ------------ ------------ ------------
Total Revenues 100.0 100.0 100.0 100.0
Cost of Revenues
Technology Services Cost of Revenues 62.9 62.5 66.9 64.1
Reseller Costs of Revenues 11.2 13.5 6.3 12.2
------------ ------------ ------------ ------------
Gross profit 25.8 24.0 26.8 23.7
Selling, general and administrative expenses 22.8 20.7 24.4 19.5
------------ ------------ ------------ ------------
Operating income 3.0 3.3 2.4 4.2
Interest and other incomes 0.3 0.6 0.5 0.6
Interest expense 0.2 0.0 0.2 0.0
------------ ------------ ------------ ------------
Income before income taxes 3.1 3.9 2.7 4.8
Income taxes 1.4 1.6 1.2 1.9
------------ ------------ ------------ ------------
Net Income 1.7 % 2.3 % 1.5 % 2.9 %
============ ============ ============ ============
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues
Technology Services. The Company's Technology Services revenues increased to
$36.3 million for the three months ended September 30, 2000 from $30.6 million
for the same period in 1999, an 18.7% increase. Growth in the third quarter came
from an increase in the number of client divisions and business units billed and
an increase in the number of billable Technology Services professionals.
Revenues from Technology Services also increased as a result of the three
acquisitions completed in the first nine months of 2000. Revenue from
acquisitions for the period ended September 30, 2000 totaled $3.4 million,
approximately 9% of total Technology Services revenue. The total number of
client divisions and business units billed for Technology Services increased to
592 in the three months ended September 30, 2000, from 497 in the three months
ended September 30, 1999. The number of Technology Services professionals
working for the Company increased to 1,370 as of September 30, 2000 from 1,159
as of September 30, 1999.
Reseller. The Company's Reseller revenues increased to $5.8 million for the
three months ended September 30, 2000 from $5.4 million for the same period in
1999. Product shipped directly to customers from the Company's vendors is
recorded as commission revenue and, as such, is net of related costs, since the
Company never takes title to the product. For the three months ended September
30, 2000, $1.8 million of product was shipped directly to customers
11
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TECHNISOURCE, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
resulting in $297,376 of commission revenue compared to $150,735 for the same
period in 1999. The total number of Reseller customers served increased to 187
in the 2000 period from 136 in 1999.
Gross Profit
Technology Services. The Company's Technology Services cost of revenues
consists primarily of salaries, benefits and expenses for the Company's
Technology Services professionals and other direct costs associated with
providing services to clients. Gross profit increased 21.5% to $9.8 million for
the three months ended September 30, 2000 from $8.1 million for the same period
in 1999. As a percentage of services revenue, gross profit increased to 27.0% in
the third quarter of 2000 compared to 26.3% for the three months ended September
30, 1999. The increase in gross profit is attributable to placements of higher
skilled professionals. The Technology Services' utilization rate for
professionals, which is the percentage of hours billed to hours paid, was 98.1%
for the three months ended September 30, 2000 compared to 98.6% for the three
months ended September 30, 1999.
Reseller. The Company's Reseller cost of revenues consists primarily of the
direct costs associated with the products provided to the customers. Gross
profit, exclusive of reseller commissions, increased to $795,710 for the three
months ended September 30, 2000 from $422,402 for the three months ended
September 30, 1999. As a percentage of reseller revenues, gross profit increased
to 14.4% in the third quarter of 2000 from 8.0% for the same period in 1999 with
an increase in the mix of higher margin network hardware and software sold.
Reseller commission revenue increased 97.3% to $297,376 from $150,735.
Selling, General and Administrative Expenses
Technology Services. Technology Services selling, general and administrative
expenses consist primarily of costs associated with the Technology Services
sales and marketing efforts, human resources and recruiting departments,
administration, training and facilities. Technology Services selling, general
and administrative expenses increased 27.2% to $9.0 million for the three months
ended September 30, 2000 from $7.1 million for the three months ended September
30, 1999. The increase includes bad debt expense of $916,000 that was recorded
to reflect bad debts identified related to dot-com sector clients. Bad debt
expense increased 366.0% quarter over quarter, and salary and employment
expenses increased 20.8% quarter over quarter. As a percentage of revenues,
selling, general and administrative expenses increased to 24.9% in the third
quarter of 2000 compared to 23.3% for the same period of 1999.
Reseller. Reseller selling, general and administrative expenses consist
primarily of costs associated with the Reseller sales and marketing efforts,
human resources and sales departments, administration and facilities. Reseller
selling, general and administrative expenses increased to $563,745 for the
quarter ended September 30, 2000 from $336,652 for the quarter ended September
30, 1999. As a percentage of revenues, selling, general and administrative
expenses increased to 9.7% for the third quarter of 2000 from 6.2% in the same
period of 1999. This increase resulted from an increase in the number of
customers served.
12
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TECHNISOURCE, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Net Interest Income
Net interest income was $45,383 for the three months ended September 30,
2000, as compared to $224,522 for the three months ended September 30, 1999. The
decrease is attributable to interest accrued on the $1,000,000 note payable for
the acquisition of PRISM Group Consulting, LLC and PRISM Group, LLC, the
decrease in cash outstanding related to investments in acquisitions and working
capital, and the interest paid on line of credit. The line of credit was repaid
prior to September 30, 2000.
Income Taxes
Income taxes for the three months ended September 30, 2000 reflect a 44.5%
effective income tax rate compared to the tax rate of 40.0% for same period of
1999. The increase in the tax rate occurred due to an increase in permanently
non-deductible items, primarily a portion of per diem for billable
professionals.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenues
Technology Services. Revenues increased $8.8 million or 9.5%, to $100.9
million for the nine months ended September 30, 2000, as compared to $92.2
million for the same period in 1999. Most of the increase, $7.7 million, related
to the three acquisitions completed during the period, with the remainder from
increased sales in existing offices, and to a lesser extent, the addition of one
new branch office. Revenue from acquisitions was 7.6% of total Technology
Services's revenue for the period.
Reseller. Reseller revenue represented approximately 8.3% of the total
company revenue for the nine months ended September 30, 2000, down from 13.2% in
1999. Reseller revenue decreased 38.2% to $9.1 million for the nine months ended
September 30, 2000 as compared to $14.7 million for the nine months ended
September 30, 1999. The decrease in revenue is attributable to a one-time $4.4
million sale of computer equipment in 1999. For the nine months ended September
30, 2000, $5.9 million was shipped directly from vendors to customers resulting
in $1.0 million of commission revenue, compared to $457,763 in 1999.
Gross Profit
Technology Services. Gross profit increased $3.6 million, or 15.4%, to $27.3
million, for the nine months ended September 30, 2000, as compared to $23.7
million for the nine months ended September 30, 1999. Gross profit as a
percentage of Technology Services revenues also increased to 27% from 25.7% for
the nine months ended September 30, 1999. The increase is
13
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
primarily a result of placements of higher skilled billable professionals, many
related to web and Internet projects.
Reseller. The Company's Reseller gross profit, exclusive of reseller
commissions, decreased to $1.2 million for the first nine months of 2000 from
$1.3 million in the same period of 1999. As a percentage of reseller revenues,
gross profit increased to 14.5% for the nine months ended September 30, 2000
from 8.9% for the same period in 1999. The amount of reseller commission revenue
recognized increased 125% to $1 million from $457,763 for the third quarter of
1999. The increase is primarily related to an increase in the sale of network
systems.
Selling, General and Administrative Expenses
Technology Services. Selling, general and administrative expenses increased
approximately $5.6 million or 27.9%, to $25.5 million for the nine months ended
September 30, 2000, as compared to $19.9 million for nine months ended September
30, 1999. The increase primarily resulted from increases in corporate and
administrative staff, the addition of 14 Development Triangles, and an increase
in bad debt expense related to receivables from dot-com customers.
Reseller. Reseller selling, general and administrative expenses increased
35.5% to $1.3 million for the nine months ended September 30, 2000 as compared
to $975,844 for the same period in 1999. This increase in expense is related to
an increase in the number of customers served which grew to 294 from 191 in
1999. As a percentage of revenues, selling, general and administrative expenses
increased to 14.5% for the nine months ended September 30, 2000 from 6.6% in the
same period of 1999.
Net Interest Income
Net interest income was approximately $281,194 for the nine months ended
September 30, 2000, as compared to net interest income of $644,173 for the nine
months ended September 30, 1999. The decrease is attributable to interest
accrued on the $1,000,000 note payable related to the acquisition of PRISM Group
Consulting, LLC and PRISM Group, LLC, decrease in cash balances related to
investments in acquisitions and working capital and interest paid on the line of
credit. The line of credit was repaid prior to September 30, 2000.
Income Taxes
Income taxes for the nine months ended September 30, 2000 reflect a 43.0%
effective income tax rate compared to the tax rate of 40.0% for same period of
1999. The increase in the tax rate occurred due to an increase in permanently
non-deductible items, primarily a portion of per diem for billable
professionals.
14
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
LIQUIDITY AND CAPTIAL RESOURCES
The Company's primary sources of liquidity have been cash flow from
operations and borrowing availability under its $25 million bank line of credit.
Cash and cash equivalents and working capital approximated $1.9 million and
$28.2 million, respectively, as of September 30, 2000. In addition, the
Company's entire line of credit was available at that time.
Net cash used by operating activities was approximately $7.6 million for the
nine-month period ended September 30, 2000, as compared to $549,328 during the
nine month period ended September 30, 1999. The increase in cash used in
operations is primarily due to an increase in accounts receivable of
approximately $12.6 million and accrued liabilities of approximately $1.6
million.
Net cash used in investing activities was approximately $7.7 million during
the nine-month period ended September 30, 2000 as compared to $996,081 during
the nine months ended September 30, 1999. The increase in cash used in investing
activities resulted from the acquisitions of MDS Consulting Services, Inc. in
Hartford, Connecticut; PRISM Group, LLC and PRISM Group Consulting, LLC in San
Francisco, California; and certain assets of Broadreach Consulting, Inc.
For the nine-month period ended September 30, 2000, net cash used in
financing activities was $132,144 as compared to $220,084 used in financing
activities for the nine-month period ended September 30, 1999. The change in
cash used in financing activities is primarily related to the purchase of
treasury stock.
On March 9, 1999 the Company established a line of credit with a bank 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. Under the bank line of credit, interest is payable monthly at LIBOR
plus 1.4%. The line of credit expires January 31, 2002.
On February 18, 2000, the Company acquired substantially all of the assets
of MDS Consulting, Inc. of Hartford, Connecticut, for approximately $800,000
cash and acquisition costs. On March 1, 2000, the Company used funds from the
line of credit to acquire substantially all of the assets and certain
liabilities of PRISM Group, LLC and PRISM Group Consulting, LLC, both of San
Francisco, California. The total consideration associated with the acquisition
of the two companies was approximately $6.1 million. The Company acquired IT
consulting professionals and a secure facility in Phoenix, Arizona along with IT
consulting professionals in Orlando and Jacksonville, Florida; Raleigh, North
Carolina; and Philadelphia, Pennsylvania from Broadreach Consulting, Inc., a
privately held company. The total consideration associated with the acquisition,
assuming all contingent payments are made, is approximately $2.7 million.
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
15
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
stock on the open market. As of September 30, 2000, the Company has repurchased
53,400 shares of its common stock at an aggregate cost to the Company of
$282,144.
The Company anticipates that its primary uses of working capital in future
periods will be for the internal development of new offices and services,
investments in its management information systems and possible acquisitions. The
Company continually reviews and evaluates acquisition candidates to complement
and expand its business. The Company's ability to grow through acquisitions is
dependent on the availability of suitable acquisition candidates and the terms
on which such candidates may be acquired, which may be adversely affected by
competition for such acquisitions. The Company cannot predict to what extent new
offices will be added through acquisitions as compared to internal development.
The Company currently has no commitments with respect to any potential
acquisitions.
The Company believes that the existing cash and cash equivalents, cash flow
from operations and available borrowings under the Credit Facility will be
sufficient to meet the Company's presently anticipated working capital needs for
at least the next twelve months.
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.
16
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TECHNISOURCE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
3.1* Amended and Restated Articles of Incorporation of the
Company
3.2* Amended and Restated Bylaws of the Company
4.1 See Exhibits 3.1 and 3.2 for provisions of the
Articles of Incorporation and Bylaws for the Company
defining the rights of holders of Common Stock of the
Company
4.2* Specimen certificate for the Company's Common Stock.
10.1 Employment Agreement dated July 28, 2000, between
Andrew C. Hill and the Company
27 Financial Data Schedule
* Filed with the Company's Registration Statement on Form S-1 (File No.
333-50803) filed with the Securities and Exchange Commission on April 23,
1998, and incorporated herein by reference.
(b) Current Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
September 30, 2000.
17
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TECHNISOURCE, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNISOURCE, INC.
Dated: November 14, 2000
By: /s/ James F. Robertson
-----------------------------------
James F. Robertson
Executive Vice President,
Chief Operating Officer
Dated: November 14, 2000
By: /s/ Andrew C. Hill
-----------------------------------
Andrew C. Hill
Executive Vice President
Chief Financial Officer
18
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TECHNISOURCE, INC. AND SUBSIDIARIES
INDEX OF EXHIBITS
Exhibit Number Description
-------------- -----------
10.1 Employment Agreement dated July 28, 2000, between
Andrew C. Hill and the Company
27 Financial Data Schedule
