UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended: December 31, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1901 CYPRESS CREEK ROAD, SUITE 201
FORT LAUDERDALE, FLORIDA 33309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 493-8601
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [ ]
Based on the closing sales price of the registrant's Common Stock on the Nasdaq
National Market on February 3, 1999 the aggregate market value of the Common
Stock held by nonaffiliates of the registrant was $16,557,267.
The number of shares of the registrant's common Stock outstanding on February 3,
2000 was 10,385,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for use in connection
with its 2000 Annual Meeting of Stockholders are incorporated by reference into
Part III.
Certain exhibits listed in Part IV of this annual report on Form 10-K are
incorporated by reference from prior filings made by the registrant under the
Securities Act of 1933, as amended and the Securities Exchange Act of 1934.
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TABLE OF CONTENTS
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Item 1. Business............................................................................ 2
Item 2. Properties.......................................................................... 12
Item 3. Legal Proceedings................................................................... 12
Item 4. Submission of Matters to a Vote of Securities Holders............................... 12
PART II
Item 5. Market for Registrant's Common Stock and
Related Shareholder Matters......................................................... 13
Item 6. Selected Consolidated Financial Data................................................ 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................... 15
Forward Looking Information: Certain Cautionary Statements.......................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................... 26
Item 8. Consolidated Financial Statements and Supplementary Data............................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures........................................................... 47
PART III
Item 10. Directors and Executive Officers of the Company..................................... 48
Item 11. Executive Compensation.............................................................. 48
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 48
Item 13. Certain Relationships and Related Transactions...................................... 48
PART IV
Item 14. Exhibits, Financial Schedules and Reports on Form 10-K.............................. 48
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PART I
ITEM 1. BUSINESS
OVERVIEW
Technisource, Inc. ("Technisource" or the "Company") is a national
provider of information technology staffing and consulting services through 27
offices in the United States and Canada, utilizing over 1100 highly trained IT,
e-commerce and web development professionals. The Company's IT, e-commerce and
web development professionals provide services which are used to staff, design,
develop and implement IT solutions, including database development,
documentation and training, ERP package implementation, help desk/desktop
support, Internet/intranet development, mainframe development, network
engineering, real-time development, systems administration and testing & quality
assurance. The Company's services are provided to various departments within its
clients' organizations, including research and product development departments.
Since the Company's inception on March 25, 1987, the Company has
developed and refined an internal growth methodology which is focused on
facilitating rapid internal growth through the replication of Technisource
Development Triangles. Each Development Triangle is typically comprised of one
account manager, two trained recruiting professionals and a group of IT,
e-commerce and web development professionals. As the revenues generated by a
Development Triangle reaches a budgeted profitability level, a high-performing
recruiting professional from the Development Triangle is promoted to account
manager and forms a new Development Triangle, which is seeded with a portion of
the revenue-generating projects and IT, e-commerce and web development
professionals from the original Development Triangle. This scalable model fuels
growth by developing and retaining employees within the Technisource culture and
by reducing the time required to achieve profitability and the risks associated
with expansion.
The Company has demonstrated the scalability of the Technisource Growth
Model, having replicated over 60 Development Triangles. This has resulted in
rapid internal growth, as revenues have increased at a five-year compound annual
growth rate of 56%, from $15.6 million in 1994 to $144.7 million in 1999. The
Company has grown from five branch offices in 1994 to 27 branch offices in 1999.
The key elements of the Company's business strategy are the following:
(i) rapidly deploy highly trained IT, e-commerce and web development
professionals; (ii) apply the Technisource Growth Model by replicating
Development Triangles; (iii) establish long-term client relationships; (iv)
provide a wide range of IT capabilities; (v) capitalize on local presence; and
(vi) leverage established infrastructure. Technisource's substantial investment
in a centralized infrastructure leaves the Company well positioned to continue
its expansion. For example, the Company has expanded its proprietary TSRC
Database to include over 100,000 potential IT, e-commerce and web development
professionals and their qualifications, which allows the Company to identify and
quickly deploy IT, e-commerce and web development professionals with the
appropriate skill sets.
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Technisource believes that the breadth of its staffing and consulting
service offerings fosters long-term client relationships, affords cross-selling
opportunities, reduces its dependence on any single technology and enables the
Company to attract IT, e-commerce and web development professionals with a
variety of skill sets to service the needs of the Company's clients. For each of
the years 1999, 1998, and 1997, existing clients from the previous year
generated at least 70% of the Company's revenues. In 1999, the Company provided
IT services to over 500 clients in the United States, including more than 850
divisions or business units, in a diverse range of industries. Clients include
AlliedSignal, AT&T, Caterpillar, Eli Lilly, General Electric, General Motors,
Honeywell, Lockheed Martin, Lucent Technologies, Motorola, Rockwell and UPS. The
Company's strategy is to leverage the Technisource Growth Model to generate
same-office growth and expansion of branch-office locations, and to selectively
take advantage of acquisition opportunities.
The Company's growth strategy includes the following elements: (i)
expand geographic presence through opening new branch offices; (ii) pursue
strategic acquisitions or partnerships; (iii) broaden service lines and IT
capabilities; and (iv) leverage existing client base.
INDUSTRY OVERVIEW
Increased competition, deregulation, globalization and technological
advances are forcing business organizations to increasingly rely on IT solutions
to resolve business issues and increase productivity. The ability of an
organization to integrate, deploy and manage new information technologies has
become critical to its long-term viability and competitiveness. The migration of
technology throughout the business enterprise has created a wide range of
opportunities, including improved service and product capabilities. These
capabilities are being deployed throughout a variety of complicated networking
protocols, operating systems, databases, devices and architectures.
Organizations are increasingly outsourcing technology services functions
throughout the business enterprise in order to: (i) keep pace with rapidly
changing technologies; (ii) efficiently match employee skills and utilization
levels with current needs; and (iii) address the growing shortage of IT,
e-commerce and web development professionals.
KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES. Growth in the IT staffing
and consulting services industry has been fueled by the clients' need to remain
competitive through the use of emerging technology capabilities, including open
and distributed computing, client/server architectures, Internet/intranet,
relational databases and object-oriented programming. The pace of change in
technology capabilities quickly renders existing IT infrastructure obsolete and
makes it more difficult for organizations to maintain the requisite internal
expertise needed to evaluate, develop and integrate new technologies.
MATCH EMPLOYEE SKILLS AND UTILIZATION LEVELS WITH CURRENT NEEDS.
Organizations are outsourcing technical functions to keep pace with changes in
technology and better match available skills with project requirements. In
today's rapidly changing environment, technical professionals are often needed
on a project by project basis. Organizations often lack the quantity or variety
of IT skills necessary to efficiently match project requirements with the
availability of qualified internal employees. The outsourcing of technical
skills in a controlled environment
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creates higher utilization rates and a more efficient deployment of technical
skills. Outsourcing IT services functions has also reduced management's exposure
to uncertain expenses, including the costs of recruiting, hiring, terminating
and under-utilizing permanent employees.
ADDRESS THE SHORTAGE OF IT, E-COMMERCE AND WEB DEVELOPMENT STAFFING &
CONSULTING PROFESSIONALS. As business organizations continue to move from
centralized mainframe architectures to distributed client/server technologies,
the Company believes that there will continue to be a demand for IT, e-commerce
and web development professionals. In addition, the shortage of skilled IT,
e-commerce and web development professionals and the complexity of IT solutions
have forced senior executives to rely on outside specialists to help them
execute IT strategies. Business organizations often lack recruiting and employee
management networks capable of attracting and deploying, on short notice, large
numbers of qualified IT, e-commerce and web development professionals. Further,
these organizations often lack the infrastructure necessary to provide training
to IT, e-commerce and web development professionals in emerging technology
skills. Third-party IT services providers have been able to attract, develop,
motivate and retain qualified IT, e-commerce and web development professionals
by offering a variety of benefits, including the opportunity to train and work
with emerging technologies in multiple industries, flexible work and travel
schedules, and accelerating cash and stock compensation.
According to industry sources, the worldwide market for IT services was
estimated at $280 billion in 1997 with a projected market of $400 billion for
2001. The Company believes the IT services industry is highly fragmented and
will experience consolidation as smaller IT services firms are unable to meet
the wide-ranging service needs of, or provide nationwide services to, large
national or international clients, and are unable to achieve economies of scale
in recruiting, training and managing IT, e-commerce and web development
professionals. The Company believes that these trends will provide opportunities
for certain industry participants to expand their operations by acquiring
smaller IT staffing and consulting firms.
BUSINESS STRATEGY
The key elements of the Company's business strategy are the following:
RAPIDLY DEPLOY HIGHLY TRAINED IT, E-COMMERCE AND WEB DEVELOPMENT
STAFFING & CONSULTING PROFESSIONALS. Technisource's growth has been fueled by
its ability to recruit and deploy, on short notice, experienced IT, e-commerce
and web development professionals to meet client needs on a national basis. The
Company's proprietary TSRC Database of over 100,000 potential IT, e-commerce and
web development professionals and their qualifications allows the Company to
identify and quickly deploy IT, e-commerce and web development professionals
with the appropriate skill sets to meet client needs. In order to maximize its
ability to capitalize on industry growth, the Company has developed and
maintained an aggressive professional recruiting strategy, with a full
complement of recruiting professionals to support each of the Company's offices.
Also, the Company has made substantial investments in computer-based training
systems that enable its IT, e-commerce and web development professionals to
learn new skills in response to changing industry requirements. This helps
ensure the high quality of the Company's IT, e-commerce and web development
professionals and helps them to achieve their career objectives.
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APPLY THE TECHNISOURCE GROWTH MODEL BY REPLICATING DEVELOPMENT
TRIANGLES. Over the last eleven years, the Company has developed and refined the
Technisource Growth Model. This model is focused on facilitating rapid internal
growth through the replication of Development Triangles. Each Development
Triangle is typically comprised of one account manager, two trained recruiting
professionals and a group of IT, e-commerce and web development professionals,
who are assigned to projects managed by the account managers. As each
Development Triangle reaches a budgeted profitability level, a high-performing
recruiting professional from the Development Triangle is promoted to account
manager and a new Development Triangle is created. Each new Development Triangle
is seeded with a portion of the revenue-generating projects and IT, e-commerce
and web development professionals from the original Development Triangle.
Account managers involved in the creation of several Development Triangles may
be further promoted to branch or regional manager. Due to the rapid growth and
current size and scope of Technisource, branch managers and other key management
positions have been established. These positions include, but are not limited
to, Vice President of National Accounts and Vice President of Recruiting. The
Company's TSRC Database maximizes employee utilization and the expansion of
skill sets by managing the migration of IT, e-commerce and web development
professionals between projects and Development Triangles. The Company has
replicated over 60 Development Triangles, which currently include over 1100 IT,
e-commerce and web development professionals. The Company has demonstrated the
scalability of the Technisource Growth Model as revenues have increased at a
five-year compound annual growth rate of 56%, from $15.6 million in 1994 to
$144.7 million in 1999.
ESTABLISH LONG-TERM CLIENT RELATIONSHIPS. The Company's goal is to
continue to establish long-term client relationships that enable the Company to
cross-sell its capabilities within and expand the Company's business throughout
a client organization. The Company's account managers are trained to understand
the full breadth of the Company's capabilities and their clients' business
needs. By developing long-term client relationships, account managers are better
able to identify client needs and cross-sell the Company's services, generating
recurring revenue streams. For each of the years 1999, 1998, and 1997, existing
clients from the previous year generated at least 70% of the Company's revenues.
The Company continuously bids for Preferred Vendor Status with many clients
across the United States. Many of these bids have been won for Fortune 1000
companies, banks and utilities. Some such awards include Bank of America,
Nortel, and Cisco Systems. Another example of the Company's success in building
long-term client relationships is its relationship with Motorola, which was
serviced by one account manager and generated revenues of approximately $340,000
from three client locations in 1993, and grew, through the Technisource Growth
Model, to nine account managers, revenues of approximately $13.0 million and
fifteen client locations in 1999.
PROVIDE A WIDE RANGE OF IT CAPABILITIES. The Company's staffing and
consulting services are provided to various departments within its client's
organization, including research and product development departments. The
Company provides its clients with a wide range of staffing and consulting
services for IT applications, solutions and services, including database
development, documentation and training, ERP package implementation, help
desk/desktop support, Internet/intranet development, mainframe development,
network engineering, real-time development, systems administration and testing
and quality assurance. These services are
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provided in a wide variety of computing environments, and use leading
technologies, including client/server architectures, object-oriented programming
languages and tools, distributed database management systems and the latest
networking and communications technologies. In addition, the Company has
developed proprietary methodologies and tools to improve productivity and
enhance the value of the Company's services. The wide range of the Company's IT
capabilities enhances the Company's ability to establish long-term client
relationships and provides the Company with the opportunity to cross-sell
multiple services.
CAPITALIZE ON LOCAL PRESENCE. Technisource has a geographically diverse
network of 27 branch offices in the United States and Canada, established and
grown by replicating Development Triangles and through selective acquisitions.
The Company's branch office network demonstrates the Company's commitment to
each local market, enables the Company to generate additional client projects,
and enhances the Company's ability to attract experienced, locally based IT,
e-commerce and web development professionals. This branch network increases
efficiencies to clients by enhancing the Company's responsiveness and minimizing
travel expense.
LEVERAGE ESTABLISHED INFRASTRUCTURE. In order to facilitate the
Technisource Growth Model, the Company has made significant capital investments
in its infrastructure, including a centralized client server accounting system,
and centralized billing, collections, and payroll systems. The Company also has
a centralized training program in Ft. Lauderdale, Florida for newly hired
recruiting professionals, centralized CBT Systems training capabilities through
the Company's intranet site, and the proprietary TSRC Database that matches the
Company's client requirements with the skill sets of the Company's IT,
e-commerce and web development professionals. This infrastructure has the
capacity to support significant growth with only modest additional capital
expenditures and additions to administrative personnel.
GROWTH STRATEGY
The Company's strategy is to grow its business by using the
Technisource Growth Model to generate same-office growth and expansion of branch
office locations, and to selectively take advantage of acquisition
opportunities. The Company has demonstrated the scalability of the Technisource
Growth Model as revenues have increased at a five-year internal compound annual
growth rate of 56%, from $15.6 million in 1994 to $144.7 million in 1999. The
Company's growth strategy includes the following elements:
EXPAND GEOGRAPHIC PRESENCE BY REPLICATING DEVELOPMENT TRIANGLES.
Technisource has successfully expanded geographically by servicing new and
existing clients in strategic locations. One way the Company intends to continue
to expand its geographic presence by opening additional branch offices in
selected locations. The Company utilizes the Technisource Growth Model to
establish new branch offices by replicating Development Triangles in new
locations. The Company believes the Technisource Growth Model reduces the time
required to achieve profitability, as well as the risks associated with opening
new offices, by replicating Development Triangles. The Company has grown from
five branch offices in 1994 to 27 branch offices in 1999. The Company's
substantial investment in a centralized infrastructure leaves the Company well
positioned to continue the expansion of its branch office locations. In
connection
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with each new branch office, the Company's Office Development Team acquires
office space, outfits the new office with appropriate hardware, integrates
back-office operations with the Company's centralized systems, and enables the
new office to access the Company's TSRC Database.
PURSUE STRATEGIC ACQUISITIONS OR PARTNERSHIPS. The Company intends to
selectively pursue strategic acquisitions that will provide well-trained,
high-quality professionals, new service offerings, additional industry
expertise, a broader client base and an expanded geographic presence, both
domestically and internationally. The Company believes that acquisition
opportunities exist due to the highly fragmented nature of the IT services
industry. The Company currently is reviewing potential acquisitions, but has no
agreements, understandings or commitments with respect to any potential
acquisition.
BROADEN SERVICE LINES AND IT CAPABILITIES. Technisource believes that
it can increase its revenues from existing clients and attract new clients by
expanding its base of IT, e-commerce and web development professionals to
include additional professionals with an increasingly broad range of skill sets.
The Company has expanded its service lines and capabilities over the last ten
years to utilize IT, e-commerce and web development professionals with skill
sets, including database development, documentation and training, ERP package
implementation, help desk/desktop support, Internet/intranet development,
mainframe development, network engineering, real-time development, systems
administration and testing and quality assurance. The Company provides its IT,
e-commerce and web development professionals with substantial computer-based
training resources in order to allow them to respond to market needs by
retooling their skills. The Company plans to continue to selectively expand the
services it offers its clients in order to meet its client's evolving
technological needs.
LEVERAGE EXISTING CLIENT BASE. The Company intends to continue its
internal growth by expanding the amount of work it performs for existing
clients. By replicating the Development Triangles servicing existing clients,
the Company can service additional divisions and business units of existing
clients and the Company's account managers can better cross-sell the Company's
wide range of capabilities. During 1999, the Company provided services to over
500 clients in the United States, including more than 850 divisions or business
units. The Company believes that its long-term client relationships and its
ability to address its client's needs throughout the lifecycle of their IT
systems provides the Company with substantial growth opportunities.
REPRESENTATIVE SERVICES AND SKILLS
Technisource offers its clients a comprehensive range of IT staffing
and consulting services required to successfully design, develop and implement
IT solutions. The following is a summary of representative technology skill sets
provided by the Company:
CATEGORY DESCRIPTION OF SERVICES AND SKILLS
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DATABASE DEVELOPMENT Database developers use products and toolsets
including SQL, Oracle, Sybase, Informix and
Access. These professionals provide data
modeling,
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define relational database structures, resolve
scalability issues, perform physical/logical
database design, and design graphical user
interfaces.
DOCUMENTATION AND TRAINING Professionals in this area document technical
systems, develop user manuals and train users on
how to operate their technical systems.
Assignments in this area include employee
productivity improvement, knowledge transfer
support and document management.
ENTERPRISE RESOURCE PLANNING These professionals work with ERP packages from
SAP, Peoplesoft, BAAN, Oracle and J.D. Edwards.
Assignments in this area include redesigning the
chart of accounts; identifying, documenting and
assessing current business processes; and
converting from a mainframe environment to an ERP
environment.
HELP DESK/DESKTOP SUPPORT These professionals typically support users of a
device, software package or operating system. The
typical assignment is to provide support for a
large business with a multi-platform environment.
Specific tasks include providing phone support,
on-site support and troubleshooting.
INTERNET/INTRANET DEVELOPMENT These professionals are proficient in CGI, Perl,
IIS, Cold Fusion, JavaScript ++ and HTML. Typical
services involve designing and developing a web
interface, as well as connectivity to a database
server that will allow a user to add to or query
existing data.
MAINFRAME DEVELOPMENT These professionals typically perform work
utilizing MVS, COBOL, JCL, DB2 and IMS. Services
include analyzing change requests, identifying
requirements for fixes and enhancements,
developing project plans for known maintenance
activities, installing upgrades and enhancements
and making program code changes to existing
on-line and batch programs.
NETWORK ENGINEERING Professionals providing these services are
proficient with gateways, routers, hubs, bridges,
Ethernet, Token Ring, SNA, FDDI, SONET, T1, DS3,
Frame Relay, multi-point and TCP/IP. The services
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provided involve network analysis, daily network
management, network utilization trend analysis,
integration of software to perform
network/systems management, utilization of core
processes and process design techniques, capacity
and performance management and network tuning.
REAL-TIME DEVELOPMENT Professionals in this area are proficient in ADA,
assembly language, microprocessor experience and
debuggers. Assignments typically involve working
with a large team of engineers developing a
subsystem for an aircraft or a communications
device. These assignments generally involve
significant documentation, testing and quality
assurance requirements.
SYSTEMS ADMINISTRATION Professionals performing services in this
capacity generally specialize in a particular
operating platform, including Sun/UNIX, Windows
NT, Lotus Notes or HP-UX. The tasks performed
range from establishing user accounts, installing
software and hardware upgrades, monitoring system
performance and performing systems programming
and resource utilization studies.
TESTING & QUALITY ASSURANCE These professionals participate in clients'
quality assurance efforts. Services performed
include interfacing with clients to develop
systems' test requirements; interpreting,
determining and refining test specifications;
writing test plans; overseeing systems tests;
troubleshooting; establishing test tools; and
writing test reports.
CLIENTS
During 1999, the Company provided services to over 500 clients in the
United States, including more than 850 divisions or business units. More than
50% of the Company's revenues during 1999 were generated from Fortune 500
companies. The Company seeks to maximize its client retention rate and secure
follow-on engagements by being responsive to clients and providing high quality
services. For each of the years 1999, 1998, and 1997, existing clients from the
previous year generated at least 70% of the Company's revenues. During 1999, the
Company's two most significant clients, Motorola and Rockwell, each accounted
for approximately 10.9% of the Company's staffing revenues. The IT services
provided to Motorola were divided among a number of divisions and subsidiaries
in fifteen client locations.
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SALES
New business engagements are generated by account managers, who manage
the Development Triangles. Upon being promoted from a recruiting professional to
an account manager in connection with the replication of a Development Triangle,
the account manager is seeded with a portion of the current revenue-generating
projects and a group of IT, e-commerce and web development professionals from
the original Development Triangle. The Technisource Growth Model is designed to
provide incentives to account managers to generate new client engagements and
further replicate Development Triangles. The Company's execution of the
Technisource Growth Model enabled the Company to generate 161 new clients in
1998 and 277 new clients in 1999. In 1999, the Company serviced over 500
clients, including more than 850 divisions or business units.
Each account manager is responsible for managing client relationships,
ensuring that the Development Triangle is performing as expected, and
identifying new business opportunities. The Company has six regional managers,
who are responsible for the performance of four-to-ten Development Triangles
within one or more of the Company's geographic locations. The Company's regional
managers and account managers are compensated through a highly incentive-based
compensation system that includes a combination of base salary, commissions and
bonuses.
The Company compensates its regional managers and account managers with
stock options in order to further align their interests with the Company's
shareholders and to increase the performance-based portion of their compensation
packages. The Company believes that its performance-based compensation structure
provides incentives to its employees and allows the Company to retain
high-performing employees by compensating them at competitive levels.
HUMAN RESOURCES AND RECRUITING
The Technisource Growth Model is designed to expand the skills and
develop the careers of the Company's employees and IT, e-commerce and web
development professionals, while providing substantial incentives to further the
Company's growth. The Company provides its IT, e-commerce and web development
professionals with substantial computer-based training resources in order to
allow its IT, e-commerce and web development professionals to respond to market
needs by retooling their skills. This has resulted in the Company maintaining a
highly skilled pool of career-oriented IT, e-commerce and web development
professionals. The Company also develops the careers of its recruiting
professionals and account managers by promoting high-performing recruiting
professionals to account managers with responsibility for a Development
Triangle, and by promoting high-performing account managers to regional
managers, with responsibility for several Development Triangles in multiple
geographic locations.
The Company's future growth depends in large part on its ability to
attract, develop, motivate and retain highly skilled IT, e-commerce and web
development professionals. The Company's strategy for attracting career-oriented
IT, e-commerce and web development
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professionals includes providing computer-based training; allocation of
assignments in accordance with employee skills and career objectives; and an
optional comprehensive benefits package including a Company-matched 401(k) plan,
health and dental insurance, a flexible spending account and tuition
reimbursement. The Company also uses employee stock options as an important part
of its recruitment and retention strategy.
On December 31, 1999, the Company had 178 full-time recruiting and
sales professionals dedicated to hiring IT, e-commerce and web development
professionals and new recruiting professionals. The Company actively recruits
IT, e-commerce and web development professionals and recruiting professionals by
advertising in leading national and local newspapers and trade magazines,
through employee recruitment and skill-matching capabilities on the Company's
web site, and by participating in career fairs. In addition, the Company
provides incentives for its employees and IT, e-commerce and web development
professionals to refer candidates for new positions.
Each new recruiting professional hired by the Company is trained during
a training course held at the Company's training center located in Ft.
Lauderdale, Florida. The training course teaches the recruiting professionals
the Company's culture and operating procedures, proprietary tools and
techniques, and technical skills.
As part of its retention efforts, the Company has formulated a strategy
for minimizing turnover that emphasizes human resource management, competitive
salaries, comprehensive benefits and employee stock options. The Company's IT,
e-commerce and web development professionals typically have bachelors or masters
degrees in Computer Science or other technical disciplines. As of December 31,
1999, the Company had 1,359 employees, including 1,039 IT, e-commerce and web
development professionals, 62 sales and marketing personnel, 116 recruiting
professionals and 142 general and administrative personnel. As of December 31,
1999, the Company also had 124 independent contractors working on client
engagements. The Company's employees are not represented by a union or covered
by a collective bargaining agreement and the Company believes that the
relationship between the Company and its employees is good.
COMPETITION
The IT services industry is highly competitive. The Company competes
for clients, qualified IT, e-commerce and web development professionals, account
managers and recruiting professionals with a variety of companies, including
general IT services firms, temporary staffing and personnel placement companies,
general management consulting firms, major accounting firms, divisions of large
hardware and software companies, systems consulting and implementation firms,
programming companies and niche providers of IT services. Several traditional
staffing companies, which have historically emphasized the placement of clerical
and other less highly skilled personnel on short-term assignments, have begun to
provide IT services competitive with those provided by the Company. The Company
also competes for technical IT, e-commerce and web development professionals
within the internal IT departments of its clients and potential clients. In
addition, as part of the Company's growth strategy, the Company may also compete
with other IT staffing and services companies for suitable acquisition
candidates.
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Several of the Company's competitors are substantially larger than the
Company and have greater financial and other resources. Many of these
competitors have also been in business much longer than the Company and have
significantly greater name recognition. Because the Company's competitors may be
able to meet a broader range of a client's IT staffing and services needs and
serve a broader geographic range than the Company, they may be better able to
compete for national client accounts.
The Company believes that the primary competitive factors in obtaining
and retaining clients are its ability to provide comprehensive IT solutions for
all aspects of a client's IT needs, its understanding of the specific
requirements of a project and its ability to rapidly deploy carefully screened,
highly trained IT, e-commerce and web development professionals at competitive
prices. The primary competitive factors in attracting and retaining qualified
candidates for IT staffing and consulting services positions are the Company's
ability to offer competitive wages and provide a consistent flow of high-quality
and varied assignments.
The Company's executive offices are located at 1901 West Cypress Creek
Road, Suite 201, Ft. Lauderdale, Florida 33309, and its telephone number is
(954) 493-8601.
ITEM 2. PROPERTIES
The Company's executive offices are located in Fort Lauderdale,
Florida, where the Company leases approximately 16,000 square feet of office
space. The Company's other current offices are located in Huntsville, Alabama;
Tempe, Arizona; Santa Ana and San Diego, California; Toronto, Canada; Greenwood
Village, Colorado; Fort Lauderdale, Jacksonville, Orlando, Tampa and
Tallahassee, Florida; Atlanta, Georgia; Chicago, Downer's Grove, Palatine and
Peoria, Illinois; Carmel, Indiana; Cedar Rapids and Des Moines, Iowa; Overland
Park, Kansas; Hazlet, New Jersey; New York, New York; Charlotte and Raleigh,
North Carolina; Dallas, Texas; Richmond, Virginia; and Seattle, Washington. The
Company believes that its facilities are adequate for its current needs and that
additional facilities can be leased to meet future needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or
its properties or to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Technisource's common stock commenced trading on June 25, 1998 on the
NASDAQ National Market under the symbol "TSRC". The following table sets forth
the high and low closing prices of Technisource's common stock for the periods
indicated:
High Low
-------- --------
FISCAL YEAR ENDED DECEMBER 31, 1998
Second Quarter (commencing June 25, 1998) $ 11.312 $ 11.000
Third Quarter ........................... $ 15.250 $ 7.750
Fourth Quarter .......................... $ 9.875 $ 5.750
FISCAL YEAR ENDED DECEMBER 31, 1999
First Quarter ........................... $ 11.250 $ 5.570
Second Quarter .......................... $ 7.062 $ 5.000
Third Quarter ........................... $ 6.685 $ 3.875
Fourth Quarter .......................... $ 6.125 $ 3.500
On February 3, 2000, there were approximately 871 holders of record of
Technisource's common stock. The Company has never declared or paid dividends on
TSRC common stock and does not anticipate paying dividends in the foreseeable
future.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the years
ended at December 31, 1999, 1998, 1997, 1996 and 1995 have been derived from the
audited consolidated financial statements of Technisource, Inc. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Technisource's consolidated financial statements and notes thereto included
elsewhere in this report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
STATEMENT OF INCOME DATA : 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue ................................... $144,655 $105,677 $ 67,327 $ 40,360 $ 29,130
Cost of revenue ........................... 111,528 78,912 50,775 30,624 21,879
-------- -------- -------- -------- --------
Gross profit .............................. 33,127 26,765 16,552 9,736 7,251
Selling, general and administrative
expenses .................................. 28,395 19,537 12,222 6,659 4,778
-------- -------- -------- -------- --------
Operating income .......................... 4,731 7,228 4,330 3,077 2,473
Interest and other income ................. 896 478 27 8 23
Interest expense .......................... 59 125 160 105 60
-------- -------- -------- -------- --------
Income before income taxes ................ 5,569 7,581 4,197 2,980 2,436
Income taxes .............................. 2,339 1,748 183 231 22
-------- -------- -------- -------- --------
Net income ................................ $ 3,320 $ 5,833 $ 4,014 $ 2,749 $ 2,414
-------- -------- -------- -------- --------
Income before taxes ....................... $ -- $ 7,581 $ 4,197 $ 2,980 $ 2,436
Pro forma provision for incremental
income taxes (1) ........................ -- 3,040 1,683 1,082 952
-------- -------- -------- -------- --------
Pro forma net income ...................... $ -- $ 4,541 $ 2,514 $ 1,898 $ 1,484
======== ======== ======== ======== ========
Net income per share-basic ................ $ .31 $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Net income per share-diluted .............. $ .31 $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Pro forma net income per share-basic ...... $ -- $ .51 $ .35 $ .26 $ .21
======== ======== ======== ======== ========
Pro forma net income per share-diluted .... $ -- $ .51 $ .30 $ .23 $ .18
======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding-basic ..... 10,369 8,845 7,200 7,200 7,200
Weighted average common and common
equivalent shares outstanding-diluted (2) 10,524 8,990 8,354 8,354 8,354
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents .............. $ 17,354 $ 17,545 $ 470 $ 174 $ 6
Working capital ........................ 33,764 30,790 5,946 3,191 3,390
Total assets ........................... 40,584 36,830 10,638 7,949 4,455
Total debt ............................. -- -- 10 10 10
Total shareholders' equity ............. 36,606 33,455 7,230 3,914 3,681
</TABLE>
- ---------------------
(1) The pro forma statement of operations information has been computed for the
pro forma period by adjusting the Company's net income, as reported for
such period, to record incremental income taxes which would have been
recorded had the Company been a C corporation during such period. See "S
Corporation Distribution," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to
Financial Statements.
(2) The weighted average shares outstanding-diluted includes: (i) the pro forma
effect of the of 849,644 shares of Common Stock needed to generate net
proceeds sufficient to pay the estimated S corporation distribution; and
(ii) the dilutive effect of common stock equivalents using the treasury
stock method.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Technisource is a national provider of IT staffing and consulting
services through 27 offices in the United States and Canada, utilizing over 1100
highly trained IT, e-commerce and web development professionals. The Company has
achieved a compound annual revenue growth rate of 56% over the past five years.
This growth rate has been generated internally, without the benefit of
acquisitions. This Management's Discussion and Analysis discusses the Company's
operations for the years ended December 31, 1999, 1998, and 1997. On June 25,
1998, Technisource completed an Initial Public Offering ("IPO") of 3.1 million
shares with net proceeds to the Company of $30.7 million.
The Company's revenues grew to $144.7 million in 1999 from $29.1
million in 1995. The Company's revenue growth is driven primarily by increases
in the number of IT, e-commerce and web development professionals placed with
existing and new clients. The number of IT, e-commerce and web development
professionals utilized by the Company grew to 1,163 as of December 31, 1999 from
320 as of December 31, 1995. For each of 1999, 1998, and 1997, clients from the
previous year generated at least 70% of the Company's revenues. Revenues are
generated substantially from fees for the provision of IT staffing services,
most of which are billed at contracted hourly rates. Clients are typically
billed and IT, e-commerce and web development professionals are paid on a weekly
basis. Revenues are recognized as services are performed.
The Company's most significant cost is its personnel expense, which
consists primarily of salaries, fees and benefits for the IT, e-commerce and web
development professionals. To date, the Company has generally been able to
maintain its gross profit margin by offsetting increases in IT professional
salaries and fees with increases in the hourly billing rates charged to clients.
However, there can be no assurance that the Company will continue to be able to
offset increases in the cost of revenues by increasing the amounts billed to its
clients. The Company attempts to control overhead and indirect expenses, which
are not passed through to its clients, by controlling the rate of its branch
office expansion and by maintaining centralized operations and back-office
infrastructure.
Over the last eleven years, the Company has developed and refined the
Technisource Growth Model. This model is focused on facilitating rapid internal
growth through the replication of Development Triangles. The Company has grown
to 62 Development Triangles as of December 31, 1999 from nine Development
Triangles as of December 31, 1995. The Company invested in the creation of eight
Development Triangles in 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. This length of time is the amount
15
<PAGE>
management believes should generally be required for a new office to achieve
profitability. The Company expenses the costs of opening a new office as
expenses are incurred. The Company anticipates continuing to leverage its
current network of 27 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.
Operations for the Hardware Division of the Company began in the fall
of 1997. In 1999, the Company began reporting the Hardware Division as a
separate division of Technisource, Inc. The Hardware Division provides hardware
and hardware components for computers and computer related uses. The Division
staffs over 10 employees and works primarily from the Ft. Lauderdale, Florida
Technisource location. For the year ended December 31, 1999, the Hardware
Division grossed $24.1 million and contributed $2.3 million in gross profit.
Following termination of its S Corporation status, the Company was
subject to corporate income taxation on an accrual basis under Subchapter C of
the Internal Revenue Code. In connection with the termination of its S
Corporation status, the Company recorded a net deferred tax asset and a
corresponding net income tax benefit of $377,333.
RESULTS OF OPERATIONS
The following table shows the percentage of revenues and the percentage
change from the prior period for the periods indicated:
<TABLE>
<CAPTION>
Percentage Increase
Years Ended (decrease) from
December 31 Prior Year
--------------------------------------------------
1999 1998 1997 1999 1998
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Staffing revenue 83.3 % 98.0 % 99.9 % 16.4 % 53.9 %
Hardware revenue 16.7 2.0 0.1 1,019.1 2,821.4
------ ------ ------ ------- -------
Total revenue 100.0 100.0 100.0 36.9 % 57.0
Staffing cost of services 62.0 73.0 75.3 16.3 52.0
Hardware cost of services 15.1 1.7 0.1 1,118.0 3,009.3
------ ------ ------ ------- -------
Total cost of services 77.1 74.7 75.4 41.3 55.4
------ ------ ------ ------- -------
Gross Profit 22.9 25.3 24.6 23.7 61.7
Cost of expenses:
Selling, General and Administrative 18.5 18.2 59.9 19.6 45.3
------ ------ ------ ------- -------
Operating income 3.3 6.8 6.4 (34.5) 66.9
Other income (expense) 0.6 0.3 (0.2) * *
------ ------ ------ ------- -------
Income before income taxes 3.8 7.1 6.2 (26.5) 80.6
Income taxes 1.6 1.6 0.3 * *
------ ------ ------ ------- -------
Net Income 2.2 5.5 5.9 (28.9) 55.6
Pro forma income tax * 1.2 2.2 * 13.9
------ ------ ------ ------- -------
Net Income * % 4.3 % 3.7 % * % 80.6 %
====== ====== ====== ======= =======
* Not meaningful
</TABLE>
16
<PAGE>
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
STAFFING DIVISION. The Company's staffing revenues increased 16.4% to
$120.5 million in 1999 from $103.5 million in 1998. This growth is primarily
attributable to increased sales in existing offices, and, to a lesser extent,
the addition of three new branch offices in 1999. The three offices were opened
throughout the year in Seattle, Washington, Tallahassee, Florida, and Richmond,
Virginia. The total number of client divisions and business units billed
increased to 729 during year ended December 31, 1999 from 548 during year ended
December 31, 1998. The number of IT, e-commerce and web development
professionals working for the Company increased to 1,163 as of December 31, 1999
from 1,105 as of December 31, 1998.
HARDWARE DIVISION. The Company's hardware revenues increased to $24.1
million in 1999 from $2.2 million in 1998. This growth is primarily attributable
to the increased focus of hardware sales outside the cross-selling of computer
hardware with the staffing division. The hardware division also added additional
sales staff in the San Diego, California and Chicago, Illinois offices, along
with increasing their established sales group in Ft. Lauderdale. The total
number of hardware clients increased to 151 in 1999 from 88 in 1998.
GROSS PROFIT
STAFFING DIVISION. Gross profit consists of revenues less cost of
revenues. The Company's staffing cost of revenues consists primarily of salary,
benefits and expenses for the Company's IT, e-commerce and web development
professionals and other direct costs associated with providing services to
clients. Gross profit increased 16.8% to $30.8 million in 1999 from $26.4
million in 1998. As a percentage of revenues, gross profit remains constant at
25.5% in 1999 and 25.5% in 1998.
HARDWARE DIVISION. The Company's hardware cost of revenues consists
primarily of direct costs associated with the products provided to the clients.
Gross profit increased to $2.3 million in 1999 from $362,479 in 1998. As a
percentage of revenues, gross profit decreased to 9.5% in 1999 from 16.8% in
1998. This decrease is attributable to the Hardware Division's reduction in
cross-selling computer hardware with the staffing division.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
STAFFING DIVISION. Staffing division selling, general and
administrative expenses consist primarily of costs associated with the staffing
division's direct selling and marketing efforts, human resources and recruiting
departments, administration, training and facilities. Staffing selling, general
and administrative expenses increased 40.4% to $27.1 million for year ended
December 31, 1999 from $19.3 million for year ended December 31, 1998. As a
percentage of revenues, selling, general and administrative expenses increased
to 22.5% in 1999, from 18.6%
17
<PAGE>
in 1998. This increase resulted from expenses incurred to build and enhance the
infrastructure necessary to support the Company's continued revenue growth. This
included opening three branch offices during fiscal year 1999, the addition of
eight Development Triangles, which increased the number of sales and recruiting
professionals during this period
HARDWARE DIVISION. Hardware division selling, general and
administrative expenses consist primarily of costs associated with the hardware
division's direct selling and marketing efforts, human resources and sales
departments, administration and facilities. Hardware selling, general and
administrative expenses increased to $1.3 million for year ended December 31,
1999 from $266,349 for year ended December 31, 1998. As a percentage of
revenues, selling, general and administrative expenses decreased to 5.4% in 1999
from 12.4% in 1998. This decrease resulted from the continued growth of the
Hardware Division's revenues along with the monitoring of the increase in
expenses to meet the natural growth rate of the division. The 1999 expense
numbers include additional sales people, including one in San Diego, California
and one in Chicago, Illinois.
NET INTEREST INCOME
Net interest income was $836,974 for the year ended December 31, 1999,
as compared to $353,801 for the year ended December 31, 1998. This change is
primarily due to funds from the Initial Public Offering being invested for
twelve months versus the six months in 1998.
INCOME TAXES
In 1997 and through June 24, 1998, the Company was an S Corporation for
federal and certain state income tax purposes. The income statement for 1997 and
1998 includes a pro forma provision for income taxes at an assumed effective
rate of 40%. Income taxes for 1998 also include a one-time reduction in income
tax expense of $377,333, which represents the cumulative effect of the Company
converting from an S Corporation to a C Corporation effective June 25, 1998.
Income taxes for 1999 reflects a 42% effective income tax rate.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
STAFFING DIVISION. The Company's staffing revenues increased 54% to
$103.5 million in 1998 from $67.3 million in 1997. The Company's revenues in
1998 were generated primarily by the company's IT services business, increased
sales in existing offices and, to a lesser extent, the addition of nine new
branch offices in 1998. The nine offices were opened throughout the year in
various parts of the United States and Canada. The total number of client
divisions and business units billed increased to 548 during the year ended
December 31, 1998 from 390 during the year ended December 31, 1997, and the
number of IT, e-commerce and web development professionals working for the
Company increased to 1,105 as of December 31, 1998 from 812 as of December 31,
1997.
HARDWARE DIVISION. The Company's hardware revenues increased to $2.2
million in 1998 from $73,762 in 1997. This growth is primarily attributable to
an increase in the focus on
18
<PAGE>
direct hardware sales and additional sales staff within the division. The total
number of hardware clients increased to 88 in 1998 from 3 in 1997.
GROSS PROFIT
STAFFING DIVISION. Gross profit increased 59.7% to $26.4 million in
1998 from $16.5 million in 1997. As a percentage of revenues, gross profit
increased to 25.5% in 1998 from 24.6% in 1997. This increase was attributable to
the Company's shift of its business toward higher margin service offerings.
HARDWARE DIVISION. The Company's hardware cost of revenues consists
primarily of direct costs associated with the products provided to the clients.
Gross profit increased to $362,479 in 1998 from $16,114 in 1997. As a percentage
of revenues, gross profit decreased to 16.8% in 1998 from 21.9% in 1997. This
decrease is attributable to the continued expansion of the client base and
revenue sources of the Hardware Division.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
STAFFING DIVISION. Selling, general and administrative expenses consist
primarily of costs associated with the Company's direct selling and marketing
efforts, human resources and recruiting departments, administration, training
and facilities. Selling, general and administrative expenses increased 58.2% to
$19.3 million in 1998 from $12.2 million in 1997. As a percentage of revenues,
selling, general and administrative expenses increased to 18.6% in 1998 from
18.2% in 1997. This increase resulted from expenses incurred to build and
enhance the infrastructure necessary to support the Company's anticipated
revenue growth, including opening nine branch offices during fiscal year 1998,
the addition of 21 Development Triangles, which increased the number of sales
and recruiting professionals during this period.
HARDWARE DIVISION. Hardware division selling, general and
administrative expenses consist primarily of costs associated with the
Division's direct selling and marketing efforts, human resources and sales
departments, administration and facilities. Hardware selling, general and
administrative expenses increased to $266,349 for year ended December 31, 1998
from $14,414 for year ended December 31, 1997. As a percentage of revenues,
selling, general and administrative expenses increased to 12.4% in 1998 from
2.3% in 1997. This decrease resulted from the continued growth of the Hardware
Division's revenues and the monitoring of the increase of expenses to meet the
natural growth of the division, including adding additional sales people and
administrative personnel.
NET INTEREST EXPENSE (INCOME)
Net interest expense (income) was ($353,801) for the year ended
December 31, 1998, as compared to $133,000 for the year ended December 31, 1997.
This change is primarily due to reduced interest expense resulting from the
repayment of outstanding debt during the second quarter of 1998 and interest
earned from the investment on net proceeds from the company's public offering of
common stock in June of 1998.
19
<PAGE>
INCOME TAXES
In 1997 through June 24, 1998, the Company was an S Corporation for
federal and certain state income tax purposes. The income statements for 1997
and 1998 include a pro forma provision for income at an assumed effective tax
rate of 40%. Income taxes for 1998 include a one-time reduction in income tax
expense of $377,333, which represents the cumulative effect of the Company
converting from an S Corporation to a C Corporation effective June 25, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity for 1999 were cash flow from
operations, available borrowings under its line of credit and proceeds from the
IPO. The Company's cash flow from operating activities was $1,286,515,
($726,218), and $3,755,255, for the years ended December 31, 1999, 1998 and
1997, respectively. Because the Company has elected to be treated as an S
Corporation for tax purposes in 1996 and 1997 through June 24, 1998, the
Company's net cash from operations for these periods did not recognize federal
income taxes and reflects only certain state income taxes.
Cash and cash equivalents were $ 17.4 million at December 31, 1999
compared to $17.5 million at December 31, 1998. The decrease in cash during 1999
was substantially attributable to an increase in the accounts receivable.
Until August 31, 1998, the Company maintained a revolving line of
credit with Barnett Bank, N.A., which provided for maximum borrowings of up to
$8.0 million. All outstanding borrowings under the line of credit facility were
repaid from the proceeds of the IPO. On March 9, 1999, the Company established a
new line of credit with Bank of America that provides for maximum borrowings of
up to $25 million for working capital and acquisitions. Under the Bank of
America line of credit, interest is payable monthly on the outstanding principle
balance at a variable rate of LIBOR plus 1.4%. The line of credit expires April
30, 2002. 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,
L.L.C. and Prism Group Consulting, L.L.C., both of San Francisco, California.
The total consideration associated with the acquisition of the two companies was
approximately $6.1 million. (See Note 13 of the Consolidated Financial
Statements, "Subsequent Events (unaudited)")
Net cash used in financing activities was $320,696 in fiscal year 1999
primarily due to the repurchase of shares of its outstanding common stock in May
of this year. During 1998, in connection with the termination of the Company's S
Corporation status, the Company made distributions of its previously
undistributed S Corporation earnings totaling $10.7 million. On February 18,
2000, the Company acquired substantially all the assets of MDS Consulting, Inc.
of Hartford, Connecticut, for approximately $800,000 cash. (See Note 13 of the
Consolidated Financial Statements, "Subsequent Events (unaudited)").
Inflation did not have a material impact on the Company's revenues or
income from operations in fiscal years 1999, 1998 and 1997.
The Company believes that the net proceeds from the sale of its Common
Stock offered in the IPO, together with existing sources of liquidity and funds
generated from operations, will
20
<PAGE>
provide adequate cash to fund its currently anticipated cash needs at least
through the next twelve months. Any significant acquisitions, however, may
require additional debt and equity financing.
NEW ACCOUNTING PRONOUNCEMENTS
None.
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
CERTAIN STATEMENTS CONTAINED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT
THAT ARE NOT RELATED TO HISTORICAL RESULTS ARE FORWARD LOOKING STATEMENTS.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED OR IMPLIED IN THE
FORWARD-LOOKING STATEMENTS. FURTHER, CERTAIN FORWARD-LOOKING STATEMENTS ARE
BASED UPON ASSUMPTIONS OF FUTURE EVENTS, WHICH MAY NOT PROVE TO BE ACCURATE.
SUBSEQUENT WRITTEN AND ORAL FORWARD LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR TO PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS SET FORTH BELOW AND ELSEWHERE IN THIS
REPORT AND IN OTHER REPORTS FILED BY THE COMPANY WITH THE SECURITIES AND
EXCHANGE COMMISSION.
RISKS RELATING TO RECRUITMENT AND RETENTION OF IT PROFESSIONALS
The Company's business involves delivering IT services capabilities and
is labor-intensive. The Company's success depends upon its ability to attract,
develop, motivate and retain highly skilled IT, e-commerce and web development
professionals possessing the technical skills and experience necessary to meet
client needs. Qualified IT, e-commerce and web development professionals are in
high demand worldwide and are likely to remain a limited resource for the
foreseeable future. The shortage of IT, e-commerce and web development
professionals has in the past and is likely in the future to result in wage
inflation. To the extent the Company is unable to make corresponding increases
in its billing rates, the Company's results of operations could be materially
adversely affected. Further, IT, e-commerce and web development professionals
typically provide services on an assignment-by-assignment basis and can
terminate an assignment with the Company at any time. The Company's success will
depend in part on its ability to attract professionals with skill sets that keep
pace with continuing changes in industry standards and client preferences. The
Company competes for such individuals with general IT services firms, temporary
staffing and personnel placement companies, general management consulting firms,
major accounting firms, divisions of large hardware and software companies,
systems consulting and implementation firms, programming companies and niche
providers of IT services. Many of the IT, e-commerce and web development
professionals who work with the Company also work with the Company's
competitors, and there can be no assurance that IT, e-commerce and web
development professionals currently working on projects for the Company will not
choose to work for competitors on future assignments. There also can be no
assurance that qualified IT, e-commerce and web development professionals will
continue to be available to the Company in sufficient numbers, or that the
Company will be successful in retaining current or future professionals. Failure
to attract or retain qualified IT, e-commerce and web development professionals
in sufficient numbers could have a material adverse effect on the Company's
business, operating results and financial condition.
21
<PAGE>
RISKS RELATING TO DEVELOPMENT OF NEW BRANCH OFFICE LOCATIONS
The Company's growth is partially dependent on the internal development
of new branch offices. This expansion is dependent on a number of factors,
including the company's ability to: attract, hire, integrate and retain
qualified revenue-generating employees; accurately assess the demand for the
Company's IT services in a new market; initiate, develop and sustain corporate
client relationships in each new regional market; and continue to replicate its
Development Triangles to help provide an initial base of revenues for each new
office. The addition of new branch offices typically results in increases in
operating expenses primarily due to the hiring of additional employees. Expenses
are incurred in advance of forecasted revenue, and there is typically a delay
before the Company's newly opened offices reach full productivity, resulting in
initial losses. Newly opened offices generally operate at a loss for their first
ten to twelve months of operation; however there can be no assurance that newly
opened offices will become profitable within expected time frames, or at all.
Also, there can be no assurance that the Company can profitably expand with new
branch office locations or that new offices will meet the growth and
profitability objectives of the Company. The Company's business, operating
results and financial condition could be materially adversely affected if the
Company fails to successfully implement its new branch office strategy.
CONCENTRATION OF STAFFING REVENUES
The Company's Staffing Division derives a significant portion of its
revenues from a limited number of clients. During 1999, 1998 and 1997 the
Company's two most significant staffing clients, Motorola and Rockwell,
accounted for approximately 22%, 31% and 36% of the Company's revenue,
respectively, and the Company's top ten staffing clients accounted for
approximately 44%, 52% and 53% of its revenues in each of such years. There can
be no assurance that these clients will continue to engage the Company for
additional projects or do so at the same revenue levels. Clients engage the
Company on an assignment-by-assignment basis, and a client can generally
terminate an assignment at any time without penalty. Conditions affecting any of
the Company's significant clients could cause such clients to reduce their usage
of the Company's services for reasons unrelated to the Company's performance.
The loss of any significant client or a decrease in the revenues generated from
such a client could have a material adverse effect of the Company's business,
operating results and financial condition.
ABILITY TO MANAGE GROWTH
The Company has experienced rapid growth that has placed significant
demands on the Company's managerial, administrative and operational resources.
Revenues have grown from $10.3 million in 1993 to $144.7 million in 1999. The
Company's continued growth depends on its ability to hire recruiting
professionals and to hire or deploy additional IT, e-commerce and web
development professionals. Effective management of the Company's growth will
require the Company to improve its operational, financial and other management
processes and systems. The Company's failure to manage growth effectively could
have a material adverse effect on its business, operating results and financial
condition.
22
<PAGE>
VARIABILITY OF OPERATING RESULTS
The Company's revenues and operating results are subject to significant
variation quarter by quarter depending on the number of client projects
commenced and completed, acceleration in the hiring of recruiting professionals
and IT, e-commerce and web development professionals, attrition and utilization
rates, changes in the pricing of the Company's services and timing of branch and
service line expansion activities, among other factors. The Company generally
experiences lower operating results in the first quarter due in part to the
timing of unemployment taxes, FICA tax accruals and delays in client contract
renewals due to clients' budget processes. Further the Company generally
experiences a certain amount of seasonality in the fourth quarter due to the
number of holidays and the closing of client facilities during that quarter.
Because a high percentage of the Company's expenses, in particular personnel and
facilities costs, are relatively fixed, small variations in revenues may cause
significant variations in operating results. Additionally, the Company
periodically incurs cost increases due to the hiring of new employees and
strategic investments in its infrastructure in anticipation of future
opportunities for revenue growth. Substantially all of the Company's contracts
to perform services may be cancelled or modified by the Company's clients at
will or without penalty. Approximately 20% of the Company's professionals and
salaried employees receive full compensation and benefits even if not engaged in
billable work. As a result, cancellation or reduction of a contract may result
in a loss of revenue without a corresponding reduction in cost of revenue. No
assurances can be given that operating results will not fluctuate, which may
have a material adverse effect on the Company's business, operating results and
financial condition.
COMPETITION
The IT services industry is highly competitive and served by numerous
national, regional and local firms, all of which are either existing or
potential competitors, including general IT services firms, temporary and
personnel placement companies, general management consulting firms, major
accounting firms, divisions of large hardware and software companies, systems
consulting and implementation firms, programming companies and niche providers
of IT services. Many of these competitors have substantially greater financial,
technical and marketing resources and greater name recognition than the Company.
The IT services industry is undergoing consolidation that may result in
increasing pressure on profit margins. In addition, there are relatively few
barriers to entry into the Company's market and the Company has faced and
expects to continue to face, additional competition from new entrants into its
markets. Moreover, certain clients enter into "preferred vendor" contracts to
reduce the number of vendors with whom they do business and obtain better
pricing in return for a potential increase in the volume of business to the
preferred vendor. While these contracts may generate higher volumes, they may
also result in lower margins. Also, the failure to be designated a preferred
vendor may preclude the Company from providing services to existing or potential
clients. Further, there is a risk that clients may elect to increase their
internal IT resources to satisfy their needs. These factors may limit the
Company's ability to increase prices commensurate with increases in employee
compensation, which could adversely affect the Company's profit margins. There
can be no assurance that the Company will compete successfully with existing or
new competitors.
23
<PAGE>
DEPENDENCE ON KEY EMPLOYEES
The success of the Company is highly dependent on the efforts and
abilities of its key employees, including Joseph W. Collard, Chief Executive
Officer, Thomas E. Hoshko, President, James F. Robertson, Executive Vice
President and Chief Operating Officer, Paul Cozza, Vice President and Director
of International Sales, and John A. Morton, Vice President and Chief Financial
Officer. Although the Company has entered into employment agreements with these
individuals, such agreements do not guarantee that these individuals will
continue their employment with the Company or that non-compete covenants
provided will be enforceable. The loss of the services of these or other key
employees for any reason including, resignation to join a competitor or to form
a competing company, and any resulting loss of existing or potential clients to
any such competition could have a material adverse effect on the Company's
business, operating results and financial condition.
LIABILITY RISKS
The Company is exposed to liability with respect to actions taken by
its IT, e-commerce and web development professionals on assignment, such as
damages caused by errors of IT, e-commerce and web development professionals and
misuse of client proprietary information. Although the Company maintains
insurance coverage, due to the nature of the Company's engagements, and in
particular the access by IT, e-commerce and web development professionals to
client information systems and confidential information, and the potential
liability with respect thereto, there can be no assurance that such insurance
coverage will continue to be available on reasonable terms or that it will be
adequate to cover any such liability. Further, many of the Company's engagements
involve projects that are critical to its clients' business or products, and the
benefits provided by the Company may be difficult to quantify. The Company's
failure or inability to meet a client's expectations in the execution of its
services could result in a material adverse effect on the client's business or
products and, therefore, could give rise to claims against the Company or damage
the Company's reputation, which might adversely affect its business, operating
results and financial condition. Moreover, the Company may be exposed to claims
of discrimination and harassment and other similar claims as a result of
inappropriate actions allegedly taken by or against its IT, e-commerce and web
development professionals.
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company may expand its operations through the acquisition of
additional businesses. There can be no assurance that the Company will be able
to identify, acquire or profitably manage additional businesses or successfully
integrate any acquired businesses into the Company without substantial expenses,
delays or other operational or financial problems. Further, acquisitions may
involve a number of special risks, including diversion of management's
attention, failure to retain key acquired personnel, unanticipated events or
circumstances, the inability to integrate the acquired business into the
Company's operations, legal liabilities and amortization of acquired intangible
assets, some or all of which could have a material adverse effect on the
Company's business, operating results and financial condition. To date, the
Company does not have significant experience completing or integrating
acquisitions. Client dissatisfaction or performance problems within an acquired
firm could have a material adverse impact on the reputation of the Company as a
whole. There can be no assurance that acquired businesses will achieve
anticipated revenues and earnings. The failure of the Company
24
<PAGE>
to manage any acquisition successfully could have a material adverse effect on
the Company's business, operating results and financial condition.
RAPID TECHNOLOGICAL CHANGES
Rapid technological advances, frequent product introductions and
enhancements, and changes in client requirements characterize the market for IT
services. The Company's future success depends, in part, on its ability to
provide IT, e-commerce and web development professionals possessing the skills
to service past, current and next generations products and technologies. These
factors will require the Company to provide adequately trained personnel to
address the increasing and evolving needs of its clients. Any failure by the
Company to anticipate or respond rapidly to technological advances, new products
and enhancements or changes in client requirements could have a material adverse
effect on the Company's business, operating results and financial condition.
RELIANCE ON FIXED-PRICED PROJECTS
The Company may bill certain projects on a fixed-price basis and other
projects on a fee-capped basis. These billing methods entail greater risk to the
Company than its standard billing on a time-and-material basis. The failure of
the Company to complete projects billed other than on time-and-material basis
within budget or below the fee-cap would expose the Company to the risks
associated with cost overruns, which could have a material averse effect on the
Company's business, operating results and financial condition.
RELIANCE ON INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret, copyright and trademark laws to
protect its proprietary rights and the proprietary rights of third parties from
whom the Company may license intellectual property. The Company enters into
confidentiality agreements with its key employees and limits distribution of
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use of and
take appropriate steps to enforce its intellectual property rights. Although the
Company does not believe that its activities infringe on the rights of third
parties, there can be no assurance that third parties will not assert
infringement claims against the Company in the future, that such assertions will
not result in costly litigation or require the Company to obtain a license for
the intellectual property rights of third parties, or that such licenses will be
available on reasonable terms or at all.
STOCK PRICE VOLATILITY
The factors considered in determining the initial public offering price
included the history of and the prospects for the industry in which the Company
competes, the past and present operations of the Company, the historical results
of operations of the Company, the prospects for future earnings of the Company,
the recent market prices of securities of generally comparable companies and the
general condition of the securities markets at the time of the initial offering.
The Nasdaq National Market initial listing requirements include a requirement
that there be at least three market markers for the Company's Common Stock.
However, there can be no assurance that an active public market in the Common
Stock will develop or be sustained. The Nasdaq National Market has from time
experienced extreme price and volume fluctuations that have often been unrelated
to the operating performance of particular companies. In addition, factors such
as announcements of technological innovations new products or services or new
client engagements by the Company or its competitiors or third parties,
conditions and trends in the IT services industry and general market conditions
may have a significant impact on the market price of the Common Stock. The
market price for the Common Stock may also be affected by the Company ability to
meet analysts' or other market expectations, and any failure or anticipated
failure to meet such expectations, even if minor, could have a material adverse
effect on the market price of the Common Stock.
25
<PAGE>
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and
Bylaws, as well as the Florida Business Corporation Act, could make it more
difficult or discourage a third party form attempting to acquire control of the
Company without approval of the Company's Board of Directors. Such provisions
could also limit the price that certain investors might be willing to pay in the
future for shares of Common Stock. Certain of such provisions allow the Board of
Directors to authorize the issuance of preferred stock with rigths superior to
those of the Common Stock. Moreover, certain provisions of the Company's
Articles of Incorporation or Bylaws generally permit directors to be removed by
the Board of Directors only for cause or, with or without cause, by a vote of
holders of at least 50% of the outstanding shares of Common Stock, require a
vote of the holders of at least 60% of the outstanding Common Stock to amend the
Company's Articles of Incorporation or Bylaws, require a demand of the holders
of at least 50% of the outstanding Common Stock to call a special meeting of
shareholders, and prohibit shareholders actions by written consent.
CONTROL BY PRINCIPAL SHAREHOLDERS
Mr. Joseph W. Collard and Mr. James F. Robertson beneficially
approximately 33.3% and 33.9%, respectively, of the outstanding shares of Common
Stock. As a result Mr. Collard and Mr. Robertson retain the voting power to
exercise control over the election of directors and other matters requiring a
vote of the shareholders of the Company. Such a concentration of ownership may
have the effect of delaying or preventing a change in control of the Company and
may also impede or preclude transactions in which shareholders might otherwise
receive a premium for their over then current market prices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company owns no derivative financial instruments or derivative
commodity instruments. The Company does not derive a significant amount of
revenues from international operations and does not believe that it is exposed
to material risks related to foreign currency exchange rates.
26
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLENTARY DATA
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report................................................................................ 28
Consolidated Balance Sheets as of December 31, 1999 and 1998................................................ 29
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997............................................................................ 30
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1999, 1998, and 1997........................................................................... 31
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997............................................................................ 32
Notes to Consolidated Financial Statements.................................................................. 33
Financial Statement Schedule - Valuation and Qualifying Accounts............................................ 54
</TABLE>
27
<PAGE>
TECHNISOURCE, INC AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Technisource, Inc.:
We have audited the accompanying consolidated balance sheets of Technisource,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1999. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule of valuation and qualifying accounts as of and
for each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Technisource, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule of
valuation and qualifying accounts when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
February 21, 2000
Fort Lauderdale, Florida
28
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------
1999 1998
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,353,780 $ 17,545,183
Trade accounts receivable, less allowance for doubtful
accounts of $639,933 and $358,933 at December 31, 1999
and 1998, respectively 18,558,024 15,772,435
Due from shareholders and employees 348,606 120,597
Prepaid expenses and other current assets 613,669 326,255
Prepaid income taxes 415,350 --
Deferred tax asset, current 453,011 258,643
------------ ------------
Total current assets 37,742,440 34,023,113
Property and equipment, net 2,353,570 2,559,790
Other assets 360,340 159,195
Deferred tax asset, noncurrent 128,148 87,991
------------ ------------
Total assets $ 40,584,498 $ 36,830,089
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 369,199 $ 723,643
Income tax payable -- 624,378
Accrued liabilities 3,609,392 1,879,194
Deferred tax liability -- 6,065
------------ ------------
Total current liabilities 3,978,591 3,233,280
Deferred tax liability, non-current -- 142,269
------------ ------------
Total liabilities 3,978,591 3,375,549
Shareholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized,
10,385,000 issued as of December 31,
1999 and December 31, 1998 103,850 103,850
Additional paid-in capital 30,129,248 30,057,853
Retained earnings 6,522,809 3,292,837
Less: Treasury stock, 25,000 shares as of December 31, 1999 (150,000) --
------------ ------------
Total shareholders' equity 36,605,907 33,454,540
------------ ------------
Total liabilities and shareholders' equity $ 40,584,498 $ 36,830,089
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
29
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Revenues
IT Staffing $ 120,539,780 $ 103,522,364 $ 67,253,043
Hardware Sales 24,114,451 2,154,901 73,762
------------- ------------- -------------
144,654,231 105,677,265 67,326,805
Cost of revenues
IT Staffing 89,695,848 77,119,595 50,717,222
Hardware Sales 21,831,880 1,792,422 57,648
------------- ------------- -------------
111,527,728 78,912,017 50,774,870
Gross profit 33,126,503 26,765,248 16,551,935
Selling, general and
administrative expenses 28,394,562 19,537,741 12,221,748
------------- ------------- -------------
Operating income 4,731,941 7,227,507 4,330,187
Other income (expense):
Interest and other income 895,872 478,964 26,492
Interest expense (58,898) (125,163) (159,651)
------------- ------------- -------------
Income before taxes 5,568,915 7,581,308 4,197,028
Provision for income taxes
(including the $377,333 net
deferred tax asset related to C corp
conversion in 1998) 2,338,943 1,748,406 183,001
------------- ------------- -------------
Net income $ 3,229,972 $ 5,832,902 $ 4,014,027
============= ============= =============
Net income per share - basic $ 0.31
=============
Net income per share - diluted $ 0.31
=============
Pro forma information (unaudited):
Income before taxes, as
reported $ 7,581,308 $ 4,197,028
Pro forma income tax
provision 3,040,302 1,683,017
------------- -------------
Proforma net income $ 4,541,006 $ 2,514,011
============= =============
Net income per share - basic $ 0.51 $ 0.35
============= =============
Net income per share - diluted $ 0.51 $ 0.30
============= =============
Weighted average common shares
outstanding - basic 10,368,542 8,844,986 7,200,000
============= ============= =============
Weighted average common shares
outstanding - diluted 10,523,575 8,989,982 8,353,743
============= ============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
30
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional Treasury Retained
Shares Amount Paid-in Capital Stock Earnings Total
---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 7,200,000 $ 72,000 $ -- $ -- $ 3,841,746 $ 3,913,746
Net income 4,014,027 4,014,027
Distribution to shareholders (697,721) (697,721)
--------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 7,200,000 72,000 -- -- 7,158,052 7,230,052
---------- ------------ ------------ ------------ ------------ ------------
Issuance of common stock for
initial public offering 3,100,000 31,000 34,069,000 34,100,000
Cost associated with initial
public offering (3,430,678) (3,430,678)
Excerised stock options 85,000 850 9,826 10,676
Distribution to shareholders (987,187) (9,698,117) (10,685,304)
Tax benefit on exercise of options 332,308 332,308
Deferred compensation 64,584 64,584
Net income 5,832,902 5,832,902
---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 10,385,000 $ 103,850 $ 30,057,853 $ -- $ 3,292,837 $ 33,454,540
---------- ------------ ------------ ------------ ------------ ------------
Distribution to shareholders (57,773) (57,773)
Treasury stock (150,000) (150,000)
Deferred compensation 129,168 129,168
Net income 3,229,972 3,229,972
---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 10,385,000 $ 103,850 $ 30,129,248 $ (150,000) $ 6,522,809 $ 36,605,907
========== ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
31
<PAGE>
TECHNISOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,229,972 $ 5,832,902 $ 4,014,027
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,363,442 486,799 370,201
Deferred taxes, net (382,859) (198,300) --
Deferred compensation 129,168 64,584 --
Changes in assets and liabilities:
Increase in accounts receivable (2,785,589) (7,028,805) (1,767,829)
Increase in due from shareholders and employees (228,009) (80,611) 1,937
Increase in prepaid expenses and other assets (488,559) (331,113) (107,095)
Increase in prepaid income taxes (415,350) -- --
(Decrease) increase in accounts payable (354,444) 193,682 219,280
(Decrease) in accrued liabilities 1,843,121 (106,733) 950,504
(Decrease) increase in income tax payable (624,378) 441,377 74,230
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,286,515 (726,218) 3,755,255
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,157,222) (1,816,931) (890,188)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,157,222) (1,816,931) (890,188)
CASH FLOWS FROM FINANCING ACTIVITIES:
Paydown on note payable -- (10,000) --
Paydown on line of credit -- (223,460) (1,499,942)
Proceeds from public offering of common stock, net -- 30,669,322 --
Proceeds from issuance of common stock -- 342,984 --
Distribution to shareholders (170,696) (10,572,381) (697,721)
Payments for treasury stock (150,000) -- --
Increase (decrease) in overdraft -- (588,106) (371,635)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (320,696) 19,618,359 (2,569,298)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (191,403) 17,075,210 295,769
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,545,183 469,973 174,204
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,353,780 $ 17,545,183 $ 469,973
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 58,898 $ 125,801 $ 165,165
============ ============ ============
Taxes paid $ 3,761,530 $ 1,173,021 $ 108,771
============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
32
<PAGE>
TECHNISOURCE, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements
include Technisource, Inc. and its wholly-owned subsidiaries
(the "Company"). The subsidiaries include Technisource of
Florida, Inc., TSRC.Net, Inc., TSRC of Florida, Inc.,
Technisource Hardware, Inc. and former subsidiary,
Technisource Midwest, Inc.
Technisource, Inc. was incorporated in Florida on
March 25, 1987. Technisource of Florida, Inc. and Technisource
Midwest, Inc. were incorporated in Florida on March 22, 1994,
to offer information technology staffing services ("IT
Services") and to administer payroll and human resources
activities for the Company. In connection with the initial
public offering, all outstanding shares of capital stock of
Technisource of Florida, Inc. were contributed to
Technisource, Inc. and Technisource Midwest, Inc. was
dissolved.
TSRC.Net, Inc. was incorporated in Florida on
December 3, 1999. TSRC of Florida, Inc. and Technisource
Hardware, Inc. were incorporated in Florida on December 10,
1999. These new subsidiaries were created to accommodate
future growth and the reorganization of the Company's
corporate structure.
The Company is primarily an information technology
("IT") staffing services and consulting firm, providing IT,
e-commerce and web development professionals principally on a
time and materials basis to organizations with complex IT
needs. As of December 31, 1999, the Company had 27 branch
office locations.
(b) INITIAL PUBLIC OFFERING
The Company completed an initial public offering
("IPO") of common stock on June 25, 1998. The Company sold
3,100,000 shares of its common stock, par value $0.01 per
share. The Company realized $30.6 million from the offering,
net of expenses. The Company distributed approximately $10.7
million of accumulated S Corporation earnings to the former S
Corporation shareholders.
(c) BASIS OF PRESENTATION
All significant intercompany balances and
transactions have been eliminated in consolidation.
(d) CASH EQUIVALENTS
For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less
to be
33
<PAGE>
cash equivalents. Cash equivalents of approximately
$16,531,000 and $18,484,000 at December 31, 1999 and 1998,
consisted of a money market mutual fund account.
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounts receivable, accounts payable and accrued
liabilities carrying amounts approximate fair value due to the
short maturity of these instruments.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost.
Depreciation on property and equipment is calculated on a
straight-line basis over the estimated useful lives of the
assets, which range from three to seven years. Leasehold
improvements are amortized over the shorter of the lease term
or estimated useful life of the asset. In 1999, the Company
changed its useful life for computers from five years to three
years.
(g) OTHER ASSETS
Other assets consist of security deposits related to
operating lease agreements and the cash surrender value of
company owned life insurance.
(h) ACCRUED LIABILITIES
Accrued liabilities consist of accrued payroll and
payroll taxes, sales taxes payable and accrued expenses.
(i) INCOME TAXES
Historically, the Company elected to be taxed under
the provisions of Subchapter S of the Internal Revenue Code,
which provide that, in lieu of corporate federal, and some
state income taxes, the shareholders are taxed on their
proportionate share of the Company's taxable income. As a
result of the Company's Subchapter S election, the
accompanying consolidated statements of income do not include
an income tax provision for federal and most state income
taxes during the periods of the S Corporation election. In
conjunction with the IPO of the Company's common stock during
1998, the Company's Subchapter S status was automatically
terminated. Pro forma adjustments have been made to reflect
the income tax provision as if the Company was taxed as a C
Corporation during all S Corporation periods. The pro forma
adjustments have been made at an effective rate of 40 percent,
which is the tax rate that would have been in effect had the
Company been taxed as a C Corporation for the duration of each
of those periods.
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax
34
<PAGE>
rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period
that includes the enactment date.
(j) STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for
its stock options in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize
as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as
if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
The agreements under the stock option plan for the IT
professionals were determined to be variable under APB Opinion
No. 25 due to the original vesting schedule of the options.
The Company cancelled the original IT professional stock
option agreements and new agreements were issued with revised
vesting schedules on December 2, 1999. The Company recognized
approximately $57,000 of compensation expense related to the
variable agreements for the year ended December 31, 1999.
(k) COMPANY-OWNED LIFE INSURANCE
The Company has purchased life insurance policies to
cover its obligations under a deferred compensation plan for
key employees. Cash surrender values of these policies are
adjusted for fluctuations in the market value of underlying
investments. The cash surrender value is adjusted each
reporting period and any gain or loss is included with other
insurance expense in the Company's income statement.
(l) STOCK SPLIT
On May 26, 1998, the Company authorized a 72,000 for
1 stock split and a change in par value to $.01 per share. All
share and per share data in these consolidated financial
statements have been retroactively restated to reflect this
stock split and change in par value.
35
<PAGE>
(m) USE OF ESTIMATES
Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and
liabilities to prepare their consolidated financial statements
in conformity with generally accepted accounting principles.
Actual results could differ from the Company's estimates.
(n) IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable
intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of an asset to
be held and used is measured by a comparison of the carrying
amount of the asset to future net cash flows expected to be
generated by the asset. If such an asset is considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less cost to
sell.
(o) REVENUE RECOGNITION
The Company derives substantially all of its revenue
from IT Services. In addition, the Company's hardware segment
sells computer hardware. The majority of the Company's
staffing contracts are on a time-and-materials basis. Revenue
is recognized as services are performed. Revenue generated
from computer hardware sales is generally recognized when the
customer receives the product.
(p) SEGMENT REPORTING
The company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131) in 1999.
This statement establishes standards for the reporting of
information about operating segments in annual and interim
financial statements and requires restatement of prior year
information. Operating segments are defined as components of
an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating
decision makers in deciding how to allocate resources and in
assessing performance. SFAS No. 131 also requires disclosures
about products and services, geographic areas and major
customers. The adoption of SFAS No. 131 did not affect results
of operations of financial position but did affect the
disclosure of segment information, as presented in Note 12.
(q) ADVERTISING COSTS
The Company expenses all advertising costs as
incurred. The total amounts charged to operations for
advertising during the years ended December 31, 1999, 1998 and
1997, are approximately $969,000, $1,243,000 and $638,000,
respectively.
36
<PAGE>
(r) PRO FORMA NET INCOME AND PRO FORMA NET INCOME PER SHARE
(UNAUDITED)
In accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 1.B.3, weighted average shares
for all periods prior to the IPO also include those shares
which would have had to have been issued (at the IPO price of
$11 per share, less the underwriting discount) to generate
sufficient cash to fund the portion of the S Corporation
distribution that was in excess of the net income for the
period ended June 24, 1998.
The pro forma net income presented in the statements
of income reflects the pro forma effects for income taxes at
an effective rate of approximately 40 percent, as if the
Company had been a taxable entity for all periods presented.
Options to purchase 462,442 shares of common stock at
a range of $5.92 to $14.94 per share and options to purchase
471,785 shares of common stock at a range of $9.88 to $14.94
per share were excluded from the diluted net income per share
calculation for the year ended December 31, 1999 and 1998,
respectively, because the exercise price of the options was
greater than the average market price of the common shares for
the periods. The stock options expire in the year 2008.
(s) RECLASSIFICATIONS
Certain reclassifications have been made in prior
years' financial statements to conform to classifications used
in the current year.
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following at December 31,
1999 and 1998:
Useful lives
1999 1998 in years
----------- ----------- ------------
Office equipment $ 1,228,931 $ 921,084 5 - 7
Computer equipment 3,083,167 2,396,861 3 - 5
Telephone equipment 410,014 306,722 5
Leasehold improvements 88,385 55,113 3 - 5
----------- -----------
4,810,497 3,679,780
Less accumulated depreciation (2,456,927) (1,119,990)
----------- -----------
$ 2,353,570 $ 2,559,790
=========== ===========
Depreciation and amortization expense for 1999, 1998 and 1997,
approximated $1,363,000, $487,000 and $370,000 respectively.
(3) LINE OF CREDIT
On January 29, 1999, as amended, the Company established a
line of credit with Bank of America 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
37
<PAGE>
capital. Interest is payable monthly on the outstanding principal
balance at a variable rate of LIBOR plus 1.4%. An used line fee is
payable quarterly, computed at a rate equal to fifteen basis points
multiplied by the average daily unused portion of the revolving credit
commitment. The Company is subject to certain restrictive convenents
including, but not limited to, limitations on dividends, investments,
loans and advances with related parties and capital expenditures. The
line of credit expires January 31, 2002. There were no borrowings
outstanding as of December 31, 1999.
(4) ACCRUED LIABILITIES
Consist of the following as of December 31, 1999 and 1998 are as
follows:
1999 1998
---------- ----------
Accrued payroll and benefits $2,745,453 $1,235,506
Accrued legal 247,000 232,000
Accrued professional fees 99,998 10,000
Other 296,941 56,317
Accrued vacation 150,000 216,585
Deferred rent 70,000 15,863
Shareholder distribution -- 112,923
---------- ----------
Total $3,609,392 $1,879,194
========== ==========
(5) INCOME TAXES
In connection with the Company's conversion from an S
Corporation to a C Corporation during 1999, the Company recognized a
$377,333 income tax benefit during 1998 to establish deferred taxes
related to the conversion. Income tax expense attributable to income
from continuing operations consist of:
Current Deferred Total
----------- ----------- -----------
Year ended December 31, 1999:
U.S. Federal $ 2,242,572 $ (306,906) $ 1,935,666
State and local 479,230 (75,953) 403,277
----------- ----------- -----------
$ 2,721,802 $ (382,859) $ 2,338,943
=========== =========== ===========
Year ended December 31, 1998:
U.S. Federal $ 1,415,646 $ (144,204) $ 1,271,442
State and local 531,060 (54,096) 476,964
----------- ----------- -----------
$ 1,946,706 $ (198,300) $ 1,748,406
=========== =========== ===========
Year ended December 31, 1997:
U.S. Federal $ -- $ -- $ --
State and local 183,001 -- 183,001
----------- ----------- -----------
$ 183,001 $ -- $ 183,001
=========== =========== ===========
The U.S. federal corporate income tax rate of 34 percent, reconciled to
the effective tax rate provision, is as follows:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 34% 34% 34%
State income taxes, net of federal
income tax effect 4 4 4
Permanently nondeductible expenses 3 -- --
Effect of S Corporation income taxes -- (12) (36)
Effect of conversion to C Corporation -- (5) --
Other 1 2 2
---- ---- ----
Total 42% 23% 4%
==== ==== ====
38
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998, are as follows:
1999 1998
--------- ---------
Deferred tax assets:
Allowance for doubtful accounts $ 245,516 $ 136,076
Accrued liabilities 155,701 118,332
Stock based compensation 93,568 --
Accrued vacation 57,549 70,417
Employee benefit plans 18,931 --
Property and equipment 6,058 --
Other 3,836 21,809
--------- ---------
Total deferred tax assets 581,159 346,634
--
Deferred tax liabilities:
Property and equipment -- (142,269)
Other -- (6,065)
--------- ---------
Total deferred tax liabilities -- (148,334)
--------- ---------
Net deferred tax asset $ 581,159 $ 198,300
========= =========
The Company's management believes that it is more likely than not that
the results of future operations will generate sufficient taxable
income to realize the deferred tax assets.
(6) EMPLOYEE BENEFIT PLANS
(a) PROFIT-SHARING PLAN
The Company has a contributory 401(k) profit-sharing
plan, which covers all employees. Employees may contribute up
to 15 percent of their annual compensation. The Company makes
matching and/or profit sharing contributions at management's
discretion in amounts not to exceed limitations established by
the Internal Revenue Service. For the years ended December 31,
1999, 1998 and 1997 the Company contributed $ -, $80,000 and
$103,579 respectively.
(b) DEFERRED COMPENSATION PLAN
On April 1, 1999, the Company established the
Technisource, Inc. Deferred Compensation Plan for its key
employees. The plan provides a retirement benefit and a death
benefit to the participant. Participants may contribute up to
25% of their annual earned income to the plan each year. There
were no contributions made by the Company in 1999.
39
<PAGE>
(c) KEY EMPLOYEE STOCK OPTIONS
On October 27, 1993, the Company awarded stock
options to one of its key employees. Under the terms of the
stock option award, the employee is entitled to purchase
303,158 shares of the Company's common stock at an exercise
price per share equal to the book value of a share of common
stock at December 31, 1993, which approximated fair value at
the date of the award. No termination date for exercisability
of the options was specified, and the options vest on December
31, 1999, and provide for immediate vesting of the pro rata
portion of options granted in the event of a change in the
ownership of the Company. These stock options, which are
exercisable at $0.13 per share, became fully vested on the IPO
date and 85,000 options were subsequently exercised.
Effective November 11, 1997, the Company awarded
stock options to a key employee. Under the terms of the stock
option award, the employee is entitled to purchase 18,182
shares of common stock. The per share exercise price of such
options is $8.25, which was considered by management to be
fair value on the date of grant. These options expire ten
years from the effective date of the award and vest ratably
over three years from date of grant.
(d) INCENTIVE STOCK OPTION PLAN
Effective January 1, 1999, the Company adopted the
Technisource, Inc. Long-Term Incentive Plan (the "Plan") which
provides for the grant of awards such as stock appreciation
rights, restricted stock grants, cash awards, nonstatutory
options, and incentive stock options to management, key
employees and outside directors to purchase up to an aggregate
of 1,500,000 shares of authorized but unissued common stock.
The term of an incentive stock option cannot exceed 10 years
with an exercise price equal to or greater than fair market
value of the shares of common stock on the date of grant, or 5
years and 110 percent of the fair market value for the options
granted to a holder of 10 percent or more of the voting power.
The compensation committee shall determine the exercise price
and term of a nonqualified option. The Plan provides for a
nonstatutory stock option grant to the outside directors of
the Company for 5,000 shares of common stock on such
Director's initial election as a Director and, upon reelection
as a board member thereafter such Director shall be granted an
additional option for 2,500 shares of common stock. The
options granted to outside directors are exercisable on the
first anniversary date of the grant in full at a price equal
to the fair market value of common stock on the date of grant.
The options expire ten years after the date of grant or one
year after the outside director is no longer a director of the
Company, whichever is earlier. At December 31, 1999, there are
641,026 additional shares available for grant under the plan.
The Company applies APB Opinion No. 25 in accounting
for its Plan and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements.
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No.
123, the Company's
40
<PAGE>
pro forma net income and pro forma net income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Pro forma
------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income As reported $ 3,229,972 $ 4,541,006 $ 2,514,011
Pro Forma $ 2,790,950 $ 4,324,911 $ 2,509,825
1999 1998 1997
------------- ------------- -------------
Basic net income per
share-as reported $ 0.31 $ 0.51 $ 0.35
Basic net income per
share-as adjusted $ 0.27 $ 0.49 $ 0.35
Diluted net income per
share-as reported $ 0.31 $ 0.51 $ 0.30
Diluted net income per
share-as adjusted $ 0.27 $ 0.49 $ 0.30
</TABLE>
Pro forma net income reflects only options granted since
December 31, 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net income amounts presented above
because compensation cost is reflected over the options'
vesting periods and compensation cost for options granted
prior to January 1, 1996 is not considered. The pro forma
effect may not be representative of the pro forma effects on
net income for future years.
For the purpose of computing the pro forma amounts
indicated above, the fair value of each option on the date of
grant is estimated using the Black-Scholes option-pricing
model. The weighted average assumptions used in the model are
as follows:
1999 1998 1997
--------------------------
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock volatility 88.8% 35.0% 35%
Risk-free interest rates 4-7% 5.8% 7%
Expected lives (in years) 4-6 4-6 4
Using these assumptions in the Black-Scholes model, the
weighted average fair value of options granted for the Company is
$4.13 in fiscal 1999, $4.88 in fiscal 1998 and $3.72 in fiscal
1997.
41
<PAGE>
At December 31, 1999 and 1998, the number of options
exercisable and the weighted-average exercise price of those
options was:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price Exercise Price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at Dec. 31, 1996 ........ 303,158 $ 0.13 $ 0.13
Granted ............................. 18,182 $ 8.25 $ 8.25
Exercised ........................... -- -- --
Outstanding at Dec. 31, 1997 ........ 321,340 $ 0.13 to $ 8.25 $ 0.59
Granted ............................. 703,230 0.01 to $ 14.94 $ 9.68
Exercised ........................... (85,000) $ 0.13 $ 0.13
Outstanding at Dec. 31, 1998 ........ 939,570 $ 0.01 to $ 14.94 $ 7.44
Granted ............................. 594,256 $ 3.50 to $ 11.625 $ 5.52
Exercised ........................... -- -- --
Forfeited ........................... (366,694) $ 3.88 to $ 14.94 $ 8.60
Outstanding at December 31, 1999 .... 1,167,132 $ 0.01 to $ 14.50 $ 6.00
---------
Options exercisable at end of year .. 244,053 $ 0.13 to $ 7.63 $ 0.85
=========
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- ---------------------------------
Weighted-Average Weighted-Average
Number Remaining Weighted-Average Number Exercise
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Price
- -------------------------------- -------------- ----------------- --------------- ------------------ --------------
<C> <C> <C> <C> <C> <C>
$ 0.01 to $ 0.13 ............. 223,613 4.1 $ 0.13 218,158 $0.13
$ 3.50 to $ 5.00 ............. 224,950 8.9 4.23 -- --
$ 5.01 to $ 6.00 ............. 266,227 9.0 5.51 10,000 5.75
$ 6.01 to $ 10.99 ............. 154,232 8.2 8.16 15,895 7.63
$ 11.00 to $ 15.50 ............. 298,110 8.2 11.04 -- --
-------------- ----------------- --------------- ----------------- ---------------
Total 1,167,132 7.7 $ 6.00 244,053 $0.85
============== ================= =============== ================= ===============
</TABLE>
(7) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with four
of the Company's executive officers effective January 1, 1998. The
agreements provide for initial terms of three to five years with total
annual base salaries ranging from $110,000 to $175,000. Two of the
employment agreements automatically renew for successive one-year terms
unless terminated by either party. The executive officers may also
receive a performance bonus and stock option awards at the discretion
of the Board of Directors. The agreements also contain a
non-competition provision following termination of employment.
(8) BUSINESS AND CREDIT CONCENTRATIONS
The Company's operations depend upon, among other things, the
Company's ability to attract, develop and retain a sufficient number of
highly skilled professional employees. The IT service industry is
highly competitive and served by numerous national, regional, and local
firms, all of which are either existing or potential competitors of the
Company. Many of these competitors have substantially greater
financial, technical and marketing resources and greater name
recognition than the Company.
42
<PAGE>
The Company provides IT staffing and consulting 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 employees and the cyclical and economic
factors that could have an impact on those industries. Financial
instruments, which potentially expose the Company to concentrations of
credit risk, consist primarily of accounts receivable. Trade accounts
receivable are not normally collateralized. At December 31, 1999 and
1998, approximately 11 percent and 17 percent, respectively, of the
Company's accounts were represented by one customer. Two customers
accounted for approximately 22 percent, 31 percent and 36 percent of
revenue for the years ended December 31, 1999, 1998, and 1997,
respectively. The Company estimates an allowance for doubtful accounts
based on the specific-identification method for creditworthiness of its
customers. Given the significant amount of revenues derived from these
customers, the loss of any such customer or the uncollectability of
related receivables could have a material adverse effect on the
Company's financial condition and results of operations. Additionally,
the Company maintained $17.6 million at December 31, 1999 in one
financial institution, which is in excess of the FDIC insured limits.
(9) COMMITMENTS AND CONTINGENCIES
(a) LEASE COMMITMENTS
The Company has entered into several noncancelable operating
leases, primarily for office space. Future minimum lease
payments under noncancelable operating leases as of December
31, 1999 are as follows:
YEAR ENDING
DECEMBER 31,
------------
2000 $ 1,424,096
2001 1,323,603
2002 1,119,128
2003 535,564
2004 270,044
Thereafter 66,491
------------
$ 4,738,926
============
Rental expense under operating leases for the years ended December
31, 1999, 1998 and 1997 was approximately $1,902,000, $1,356,000,
and $552,000, respectively.
43
<PAGE>
(b) CONTINGENCIES
The Company is currently undergoing a review by the U.S.
Department of Labor. While it is not possible to predict with
certainty the outcome of this review, management believes the
ultimate outcome of the review will not have a material adverse
effect on the Company's results of operations or financial
condition.
(10) EARNINGS PER SHARE
The pro forma adjustments for the incremental income tax
provision included in the accompanying consolidated statements of
income reflect the additional provision for federal and state income
taxes at the effective income tax rate as if the Company's Subchapter S
election had been revoked prior to January 1, 1996, and the Company had
been taxed as a C corporation. The differences between the United
States federal statutory rate and the consolidated pro forma effective
rate are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(PRO FORMA - UNAUDITED)
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Statutory federal income tax rate 34 % 34 %
State income taxes, net of Federal tax effect 4 4
Other 2 2
----------- -----------
40 % 40 %
=========== ===========
</TABLE>
Basic earnings per share is computed by dividing net income
attributable to common shares by the weighted average number of common
shares outstanding. Diluted net income per share is computed by
dividing net income attributable to common shares by the weighted
average number of common shares outstanding and dilutive potential
common shares.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
(PRO FORMA - UNAUDITED)
-----------------------
Net income per share: 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income available to common
shareholders $ 3,229,972 $ 4,541,006 $ 2,514,011
Weighted average common shares
outstanding 10,368,542 8,844,986 7,200,000
----------- ----------- -----------
$ .31 $ .51 $ .35
=========== =========== ===========
Net income per share-assuming dilution:
Net income available to common
shareholders $ 3,229,972 $ 4,541,006 $ 2,514,011
Weighted average common shares
outstanding 10,368,542 8,844,986 7,200,000
Dilutive effect of options 155,033 144,996 304,099
Effect of assumed IPO shares for
distribution -- -- 849,644
----------- ----------- -----------
Weighted average common shares
outstanding - diluted 10,523,575 8,989,982 8,353,743
----------- ----------- -----------
$ .31 $ .51 $ .30
=========== =========== ===========
</TABLE>
44
<PAGE>
(11) 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
December 31, 1999, the Company had repurchased 25,000 shares of its
common stock at an aggregate cost to the Company of $150,000.
(12) REPORTABLE SEGMENT
The Company operates in two business segments: IT Services and
Computer Hardware Sales. The segment information set forth below is
based on the nature of the services offered. The chief operating
decision-makers evaluate each segment's performance based primarily on
their revenues, gross margin and operating income. The accounting
policies of the operating segments are the same as those of the entire
Company.
YEARS ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
Revenues (1)
IT Services $120,539,780 $103,522,364 $ 67,253,043
Hardware Sales 24,114,451 2,154,901 73,762
------------ ------------ ------------
$144,654,231 $105,677,265 $ 67,326,805
============ ============ ============
Operating Income (2)
IT Services $ 3,742,664 $ 7,131,377 $ 4,315,773
Hardware Sales 989,277 96,130 14,414
------------ ------------ ------------
4,731,941 7,227,507 4,330,187
Other Income/expense 836,974 353,801 (133,159)
------------ ------------ ------------
Income Before Taxes $ 5,568,915 $ 7,581,308 $ 4,197,028
============ ============ ============
(1) Two of the Company's clients accounted for approximately 22%, 31%
and 36% of the Company's IT Staffing revenue for the years ended
December 31, 1999, 1998 and 1997, respectively. In addition, two
of the Company's clients accounted for approximately 57%, 39% and
76% of the Company's hardware sales for the years ended December
31, 1999, 1998 and 1997, respectively.
(2) Since all expenses have not been allocated to the hardware sales
segment, this basis is not necessarily a measure completed in
accordance with generally accepted accounting principles and may
not be comparable to other companies. Additionally, the Company
does not allocate assets, depreciation expense or capital
additions to the hardware segment.
(13) SUBSEQUENT EVENTS (UNAUDITED):
(a) EMPLOYMENT AGREEMENTS
Effective January 1, 2000, the Company entered into a
three-year employment agreement with its President with annual
base salary of $200,000. The employment agreement
automatically renews for successive one-year terms unless
terminated by either party. The President may also receive a
performance bonus and stock option awards at the discretion of
45
<PAGE>
the Board of Directors. The agreements also contain a
non-competition provision following termination of employment.
(b) ACQUISITION OF MDS CONSULTING SERVICES, INC.
On February 18, 2000, the Company, through a wholly
owned subsidiary, completed the acquisition of substantially
all of the assets of MDS Consulting Services, Inc. for
approximately $800,000 in cash. Up to an additional $975,000
cash consideration may be paid in the form of an earn-out
payable over three years based on certain specified criteria.
(c) 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 for approximately
$5,078,000 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 bank line of
credit.
(d) STOCK REPURCHASE PLAN
On March 16, 2000, the Company repurchased 3,000
shares of its common stock at an aggregate cost to the Company
of $15,938.
(14) SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following table sets forth certain quarterly operating
information for each of the eight quarters ending with the quarter
ended December 31, 1999. This information was derived from the
unaudited financial statements of the Company which, in the opinion of
management, were prepared on the same basis as the financial statements
contained elsewhere in this report and include all adjustments,
consisting of normal recurring adjustments, which management considers
necessary for the fair presentation of the information for the periods
presented. The financial data shown below should be read in conjunction
with the financial statements and notes thereto included in this
report.
<TABLE>
<CAPTION>
Statements of Income
(In thousands) First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
1999
Revenue $ 37,600 $ 36,230 $ 37,724 $ 33,100
Gross profit $ 7,868 $ 8,904 $ 8,623 $ 7,732
Operating income $ 2,157 $ 1,154 $ 1,161 $ 203
Net income $ 1,429 $ 810 $ 831 $ 160
Net income per share - basic $ 0.14 $ 0.08 $ 0.08 $ 0.02
Net income per share -
diluted $ 0.14 $ 0.08 $ 0.08 $ 0.02
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
1998
Revenue $ 22,780 $ 25,155 $ 27,532 $ 33,100
Gross profit $ 5,570 $ 6,575 $ 7,160 $ 7,732
Operating income $ 1,268 $ 1,689 $ 2,082 $ 203
Net income $ 1,171 $ 1,814 $ 1,399 $ 160
Pro forma net income $ 759 $ 929 $ 1,399 $ 160
Pro forma net income per share -
basic (1) $ 0.11 $ 0.13 $ 0.14 $ 0.14
Pro forma net income per share -
diluted (1) $ 0.09 $ 0.12 $ 0.13 $ 0.14
</TABLE>
- ---------------------------
(1) Basic and diluted income per share for proforma net income reflects
the proforma effects for income taxes as if the Company had been a
taxable entity during the periods presented.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
47
<PAGE>
PART III
The information required by Items 10, 11, 12 and 13 of Part III of Form 10-K
will be set forth in the definitive Proxy Statement of the Company relating to
the 2000 Annual Meeting of the Shareholders and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are filed as part of this
Form 10-K:
Technisource, Inc. Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended Dec. 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) The following financial statement schedules are filed as part of this
Form 10-K.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
------------------------------------------
Balance at Charged Write-off of Balance
Beginning to Costs Uncollectible at End of
of period and Accounts Period
Expenses
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1999 $ 358,933 $ 495,036 $ 214,036 $ 639,933
1998 $ 425,000 $ 243,956 $ 310,023 $ 358,933
1997 $ 336,000 $ 177,760 $ 88,760 $ 425,000
</TABLE>
48
<PAGE>
(3) The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
3.1** Amended and Restated Articles of Incorporation of the Company
3.2** Amended and Restated Bylaws of the Company
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws of the Company defining the rights of
holders of Common Stock of the Company
4.2** Specimen certificate for the Company's Common Stock
10.1** Employment Agreement, dated as of April, 1998, between Joseph W.
Collard and the Company
10.2** Employment Agreement, dated as of April, 1998, between James F.
Robertson and the Company
10.3** Employment Agreement, dated as of April, 1998, between John A.
Morton and the Company
10.4** Employment Agreement, dated as of April, 1998, between Paul Cozza
and the Company
10.5** Lease, dated January 31, 1998, between Highwoods/Florida Holdings,
L.P. and the Company
10.6** Registration Rights Agreement, dated April 1998, between Joseph W.
Collard and the Company
49
<PAGE>
10.7** Registration Rights Agreement, dated April 1998, between James F.
Robertson and the Company
10.8** The Technisource, Inc. Long-Term Incentive Plan
10.10** Stock Option Agreement between the Company and Paul Cozza
10.11** Stock Option Agreement between the Company and John A. Morton
10.12*** Credit Agreement by and among the Company and NationsBank, N.A.
dated January 29, 1999.
10.13*** Revolving Promissory Note issued by the Company in favor of
NationsBank, N.A. dated January 29, 1999.
10.14*** First Amendment to Credit Agreement by and between the Company and
NationsBank, N.A. dated March 9, 1999.
21** Subsidiaries of the Company
23 Consent of KPMG LLP
24 Power of Attorney (included on the signature page)
27 Financial Data Schedule
** Filed with the Company's Registration Statement on Form S-1 (File No.
333-50803), as amended, filed with the Securities and Exchange
Commission on April 23, 1998, and incorporated herein by reference.
*** Filed with the Company's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission for the Company's three-month period
ended March 31, 1999, and incorporated herein by reference.
(b) Reports on Form 8-K
During the fiscal quarter ended on December 31, 1999, the Company did
not file any reports on Form 8-K.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:
---------------------------
James F. Robertson
Executive Vice President,
Chief Operating Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Joseph W. Collard and James F. Robertson and each of
them, his true and lawful attorney-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any all amendments to this report, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorneys-in-fact
or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
SIGNATURES CAPACITY DATE
- ---------- -------- ----
_______________________ Chairman of the Board and March ___, 1999
Joseph W. Collard Chief Executive Officer
(Principal Executive Officer)
_______________________ Executive Vice President, March ___, 1999
James F. Robertson Chief Operating Officer and
Director
_______________________ Vice President, March ___, 1999
John A. Morton Chief Financial Officer and
Director
(Principal Financial and
Accounting officer)
_______________________ Director March ___, 1999
C. Shelton James
_______________________ Director March ___, 1999
Paul J. Kinyon
_______________________ Director March ___, 1999
H. Scott Barrett
51
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
23 Consent of KPMG LLP
27 Financial Data Schedule
52
EXHIBIT 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Technisource, Inc.
Fort Lauderdale, Florida
We consent to the incorporation by reference in the registration statement (No.
333-66787) on Form S-8 of Technisource, Inc. of our report dated February 21,
2000, relating to the consolidated balance sheets of Technisource, Inc. and
subsidiaries as of December 31, 1999 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1999, and the related schedule,
which report appears in the December 31, 1999 annual report on Form 10-K of
Technisource, Inc.
KPMG LLP
Fort Lauderdale, Florida
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TECHNISOURCE, INC.'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 17,353,780
<SECURITIES> 0
<RECEIVABLES> 19,197,957
<ALLOWANCES> 639,933
<INVENTORY> 0
<CURRENT-ASSETS> 37,742,440
<PP&E> 4,810,497
<DEPRECIATION> 2,456,927
<TOTAL-ASSETS> 40,584,498
<CURRENT-LIABILITIES> 3,978,591
<BONDS> 0
0
0
<COMMON> 103,850
<OTHER-SE> 36,502,057
<TOTAL-LIABILITY-AND-EQUITY> 40,584,498
<SALES> 144,654,231
<TOTAL-REVENUES> 144,654,231
<CGS> 111,527,728
<TOTAL-COSTS> 111,527,728
<OTHER-EXPENSES> 28,394,562
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,568,915
<INCOME-TAX> 2,338,943
<INCOME-CONTINUING> 3,229,972
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,229,972
<EPS-BASIC> .31
<EPS-DILUTED> .31
</TABLE>
