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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 333-4691
SOURCE SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2690960
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5580 LBJ FREEWAY
SUITE 300
DALLAS, TEXAS 75240
(Address of principal executive offices) (zip-code)
Registrant's telephone number, including area code: (214) 385-3002
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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) had been subject to such
filing requirements in the past 90 days. YES NO X
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of June 30, 1996
7,153,363 shares of $.02 par value Common Stock
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SOURCE SERVICES CORPORATION
BALANCE SHEET
(UNAUDITED)
(Amounts in thousands)
ASSETS
JUNE 30, DECEMBER 31,
1996 1995
Current assets:
Cash and cash equivalents $312 $1,388
Accounts receivable, less allowance for doubtful accounts
and fee adjustments of $1,330 and 1,357 respectively 28,849 25,299
Income tax receivable 99 0
Deferred tax asset, net 658 745
Prepaid expenses and other 469 405
------- -------
Total current assets 30,387 27,837
Property and equipment, net 4,600 2,780
Deferred tax asset, net 0 7
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Total assets $34,987 $30,624
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $1,140 $0
Accounts payable and accrued expenses 5,978 3,608
Accrued commissions and payroll 7,681 9,241
Accrued 401 (k) plan contribution 482 0
Accrued contribution to profit sharing plan 0 6
Income taxes payable 0 340
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Total current 15,281 13,195
Other liabilities 104 135
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Total liabilities 15,385 13,330
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Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par, 2,000 shares authorized, no
shares issued and outstanding 0 0
Common stock, $.02 par; 100,000 shares authorized, 7,153,
and 7,153 (includes 618 shares issued in 1996 to the
profit sharing plan and 4,684 shares issued in 1996 as a
stock dividend), respectively 144 144
Capital in excess of par 1,655 1,655
Retained earnings 17,836 15,520
Cumulative translation adjustment (33) (25)
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Total stockholders' equity 19,602 17,294
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Total liabilities and stockholders' equity $34,987 $30,624
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The accompanying notes are an integral part of these financial statements.
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SOURCE SERVICES CORPORATION STATEMENT
OF REVENUES AND EXPENSES
(Amounts in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
1996 1995 1996 1995
-------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)
Net service revenue $47,899 $34,418 $88,733 $64,360
Cost of sales, flexible staffing 20,738 14,934 39,273 28,631
------- ------- ------- -------
Gross profit 27,161 19,484 49,460 35,729
Operating expenses:
Selling 22,740 16,120 41,812 30,146
General and administrative 1,980 1,478 3,752 2,642
------- ------- ------- -------
Total operating expenses 24,720 17,598 45,564 32,788
------- ------- ------- -------
Operating income 2,441 1,886 3,896 2,941
Other income (expense):
Interest income 2 17 22 36
Interest expense (63) (22) (93) (15)
Other, net (84) (120) (249) (227)
------- ------- ------- -------
Income before income taxes 2,296 1,761 3,576 2,735
Income tax (expense) benefit:
Current (802) (706) (1,225) (1,097)
Deferred (64) 55 (119) 86
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Net income $ 1,430 $ 1,110 $ 2,232 $ 1,724
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Pro forma net income per share $ 0.16 $ 0.13 $ 0.25 $ 0.19
======= ======= ======= =======
Pro forma weighted average shares outstanding 8,716 8,742 8,716 8,749
======= ======= ======= =======
(Adjusted to reflect the sale of 1,563
shares of Common Stock offered in the
Initial Public Offering effective
July 29, 1996)
The accompanying notes are an integral part of these financial statements.
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SOURCE SERVICES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Common Stock Capital Cumulative Total
------------- in Excess Retained Translation Stockholders'
Shares Amount of Par Earnings Adjustment Equity
------ ------ --------- -------- ----------- -------------
Balance at December 31, 1995 7,153 $144 $1,655 $15,520 ($25) $17,294
Net income (unaudited) 802 802
Stock contribution to profit sharing plan (unaudited) (72) 84 12
------ ----- ------ ------ ----- ------
Balance at March 31, 1996 (unaudited) 7,153 144 1,583 16,406 (25) 18,108
------ ----- ------ ------ ----- ------
Net income (unaudited) 1,430 1,430
Foreign currency translation adjustment (unaudited) (8) (8)
Stock options exercised (unaudited) 72 72
------ ----- ------ ------ ----- ------
Balance at June 30, 1996 (unaudited) 7,153 144 1,655 17,836 (33) 19,602
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The accompanying notes are an integral part of these financial statements
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SOURCE SERVICES CORPORATION
STATEMENT OF CASH FLOWS
(Amounts in thousands)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities
Net income $2,232 $1,724
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 471 282
PSP stock contributions 12 0
Deferred compensation 0 400
Deferred tax asset, net 94 188
Loss on asset sales 7 11
Decrease (increase) in assets:
Accounts receivable (3,550) (3,617)
Income tax receivable (99) 0
Prepaid expense (64) (46)
Investments 0 147
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 2,370 (679)
Accrued commissions and payroll (1,560) 3,336
Accrued 401(k) plan contribution 482 0
Accrued contribution to profit sharing plan (6) (1,284)
Income taxes payable (340) (1,712)
Other (39) (51)
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Net cash provided by (used in)
operating activities 10 (1,301)
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Cash flows from investing activities:
Expenditures for property and equipment (2,530) (781)
Proceeds from sales of property and equipment 232 63
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Net cash used in
investing activities (2,298) (718)
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Cash flows from financing activities:
Borrowings from revolving line of credit 35,852 7,665
Repayments of revolving line of credit (34,712) (7,240)
Proceeds from exercision of stock options 72 0
Repurchase treasury stock from PSP 0 (7)
----------- ------------
Net cash provided by financing activities 1,212 418
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Net decrease in cash and cash equivalents (1,076) (1,601)
Cash and cash equivalents at beginning of period 1,388 2,211
----------- ------------
Cash and cash equivalents at end of period $312 $610
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The accompanying notes are an integral part of these financial statements.
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SOURCE SERVICES CORPORATION
SUPPLEMENTAL CASH FLOWS SCHEDULE
(Amounts in thousands)
SIX MONTHS ENDED
JUNE 30 JUNE 30,
1996 1995
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(UNAUDITED) (UNAUDITED)
Supplemental Cash Flows Information
Cash paid during the period for:
Interest $93 $15
=========== ==========
Income Taxes $1,688 $1,491
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The accompanying notes are an integral part of these financial statements.
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SOURCE SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(UNAUDITED)
NOTE A --- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Source Services Corporation (the Company), which operates in a single
business segment for generally accepted accounting principle reporting
purposes, places experienced personnel in the fields of information technology,
accounting, finance, engineering, law and health care through its divisions:
Source Edp, Source Finance, Source Engineering, Source Manufacturing, Source
Consulting, Source Temps, Source HealthCare and Source Legal divisions.
Interim Financial Information
The financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in
management's opinion, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of results for such
interim periods. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules or
regulations; however, the Company believes that the disclosures made are
adequate to make the information presented not misleading.
Revenue Recognition
Revenue for the placement of personnel on a permanent basis is recognized
on the date the employer and individual mutually agree to an offer and
acceptance of employment. If the individual fails to continue employment for a
period of time as specified in the placement agreement, generally a thirty- to
ninety-day period, the Company is not entitled to collect the placement fee.
Revenue from permanent placements is shown on the Statement of Revenues and
Expenses net of amounts written off for adjustments due to placed candidates not
remaining in employment for the Company's guarantee period. Revenue derived from
flexible staffing is recognized as services are performed by the Company's
employees. Revenue from flexible staffing on the Statement of Revenues and
Expenses represents gross billings less amounts written off. The Company
maintains an allowance for potential fee adjustments and uncollectible accounts.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and in banks and overnight
investments.
Property and equipment
Furniture and equipment is stated at cost and is depreciated on a
straight-line basis over estimated useful lives, ranging from five to seven
years. Leasehold improvements are stated at cost and are amortized on a
straight-line basis over the shorter of the lease term or the estimated useful
life of the improvements.
Income Taxes
The Company accounts for income taxes under the principles of FAS 109,
"Accounting for Income Taxes." FAS 109 requires an asset and liability approach
to the recognition of deferred tax assets and liabilities for the expected
future tax consequences of differences between the carrying amounts and the tax
bases of other assets and liabilities.
Foreign currency translation
Foreign currency translation adjustments arise primarily from activities
of the Company's Canadian operations. Results of operations are translated
using the average exchange rates during the period, while
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assets and liabilities are translated into U.S. dollars using current rates.
Resulting foreign currency translation adjustments are recorded in
stockholders' equity.
Earnings per share
Given the changes in the Company's capital structure to be effected in
connection with the initial public offering of the Company's common stock
completed on July 29, 1996 (the Offering), historical earnings per share
amounts are not presented in the financial statements as they are not considered
to be meaningful. Pro-forma earnings per share is presented and reflects the
2.9-for-1 stock split completed just prior to the Offering and the sale of 1.6
million shares of common stock offered in the Offering. Stock options
outstanding for the six month periods ended June 30, 1996 and 1995 were found to
have no dilutive effect or to have anti-dilutive effect under the treasury stock
method of calculating such dilutive effect. However, pursuant to Securities and
Exchange Commission regulations, common stock and common stock equivalents
issued by the Company during the twelve month period prior to the offering have
been included in the calculation of pro-forma earnings per share as if they were
outstanding for all periods presented using the treasury stock method. Had the
Company excluded the impact of the 1.6 million shares of common stock offered
in the Offering, historical earnings per share for the three and six month
periods ended June 30, 1996 and 1996, would have been $0.20 and $0.31 and $0.15
and $0.24, respectively.
On August 13, 1996, the underwriters of the initial public offering
exercised their option to purchase 375,000 additional shares of the Company's
common stock to cover over-allotments. The additional shares issued in
connection with this transaction have not been reflected in pro-forma earnings
per share. Had these shares been included in pro- forma weighted shares
outstanding, pro-forma earnings per share for the three and six month periods
ended June 30, 1996 would have been $0.16 and $0.25, respectively.
NOTE B --- SUBSEQUENT EVENTS
Pursuant to the Offering, 2,500,000 shares of common stock were offered;
1,563,431 shares by the Company and 936,569 shares by certain stockholders of
the Company. The offering price was $14.00 per share, of which the Company
received $13.02, after application of underwriting discounts, resulting in net
proceeds of $20,355,872. The Company did not receive any proceeds from the sale
of shares sold by existing stockholders. The Company intends to use proceeds
from the Offering to repay short-term borrowings, make capital improvements and
to support future growth.
In addition, the Company granted the underwriters of the Offering, a
30-day option to purchase up to an aggregate of 375,000 additional shares of
Common Stock at the initial public offering price less the underwriting
discount solely to cover over-allotments, if any. The Underwriters exercised
their over-allotment option in full on August 13, 1996. Upon exercising the
option, total proceeds to Company from the Offering increased to $25,238,372.
Simultaneous with the Offering, the Company issued stock options to certain
key employees. The total number of shares granted in these options was 338,750,
at the Offering price of $14.00 per share. These options are exercisable in the
following cumulative installments: First installment - Up to one-third of the
total optioned shares at any time on or after two years from the date of grant;
Second installment - Up to an additional one-third of the total optioned shares
at any time after three years from the date of grant; and Third installment - Up
to an additional one-third of the total optioned shares at any time after four
years from the date of grant. These options terminate on July 25, 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three- and Six-Month Periods Ended June 30, 1996, compared to the Three- and
Six-Month Periods Ended June 30, 1995.
Net Service Revenue. Net service revenues for the three month period
ended June 30, 1996 increased 39% to $47.9 million, from $34.4 million for the
three month period ended June 30, 1995. Net service revenues increased 38% to
$88.7 million for the six month period ended June 30, 1996, from $64.4 million
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for the six month period ended June 30, 1995. The increase in net service
revenue is primarily the result of an increase in the number of sales
associates, and the Company's continued emphasis on expanding the number of
service offerings in all markets.
Net service revenues from flexible staffing services grew 39.3% to $28.8
million for the three months ended June 30, 1996, from $20.6 million for the
three months ended June 30, 1995. Net service revenue from flexible staffing
services grew 39.1% to $54.6 million for the six month period ended June 30,
1996, from $39.3 million for the six month period ended June 30, 1995. The
growth in flexible staffing net service revenue is primarily due to an increase
in the hours billed and an increase in the average billing rates. Permanent
placement net service revenue increased 37.2% to $19.1 million for the three
month period ended June 30, 1996, from $14.0 million for the three month period
ended June 30, 1995. Permanent placement net service revenue increased 35.8%
to $34.1 million for the six month period ended June 30, 1996, from $25.1
million for the six month period ended June 30, 1995. The growth in permanent
placement net service revenue is primarily the result of an increase in the
number of permanent placements and, to a lesser extent, an increase in the
average placement fees.
Gross profit. Gross profit increased 39% to $27.1 million for the three
month period ended June 30, 1996, from $19.5 million for the three month period
ended June 30, 1995. Gross profit as a percentage of net service revenues
increased to 56.7% for the three month period ended June 30, 1996, from 56.6%
for the three month period ended June 30, 1995. Gross profit increased 38% to
$49.5 million for the six month period ended June 30, 1996, from $35.7 million
for the six month period ended June 30, 1995. Gross profit as a percentage of
net service revenues increased to 55.7% for the six month period ended June 30,
1996, from 55.5% for the six month period ended June 30, 1995. The increase was
primarily a result of the factors described above.
Operating expenses. Operating expenses increased 40.5% to $24.7 million
for the three months ended June 30, 1996, from $17.6 million for the three
months ended June 30, 1995. Operating expenses as a percentage of net service
revenues increased slightly to 51.6% for the three months ended June 30, 1996,
from 51.1% for the three months ended June 30, 1995. Operating expenses
increased 39.0% to $45.6 million for the six months ended June 30, 1996, from
$32.8 million for the six months ended June 30, 1995. Operating expenses as a
percentage of net service revenues increased to 51.3% for the six months ended
June 30, 1996, from 50.9% for the six months ended June 30, 1995. This increase
in operating expense as a percentage of net service revenues resulted from
continued investment in opening service lines in existing markets and growing
the sales force by 30% over the last year.
Other (income) expense. Other (income) expense was $0.1 million of expense
for the three months ended June 30, 1996 and 1995. Other (income) expense
decreased $0.1 million to approximately $0.3 million of expense for the six
months ended June 30, 1996 from approximately $0.2 million of expense for the
six months ended June 30, 1995.
Income Before Taxes. Income before taxes increased 30.4% to $2.3 million
for the three month period ended June 30, 1996, from $1.8 million for the three
month period ended June 30, 1995. Income before taxes increased 30.7% to $3.6
million for the six month period ended June 30, 1996, from $2.7 million for the
six month period ended June 30, 1995. The increase in income before taxes is
primarily a result of the factors described above.
Income Taxes. The effective tax rate increased slightly to 37.7% for the
three months ended June 30, 1996, and 37.6% for the six months ended June 30,
1996, compared to 37.0% for both the three and six months ended June 30, 1995.
Net Income. Net income increased to $1.4 million for the three months
ended June 30, 1996, and $2.2 million for the six months ended June 30, 1996,
from $1.1 million for the three months ended June 30, 1995, and $1.7 million
for the six months ended June 30, 1995. The increase was primarily a result of
the factors described above.
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Liquidity and Capital Resources
As of June 30, 1996 the Company's sources of liquidity included
approximately $15.1 million in net working capital. In addition, as of June 30,
1996, $8.9 million was available for borrowing under the Company's line of
credit.
During the first six months of 1996, cash flow used by operations was
approximately $ 0.01 million, resulting primarily from an increase in accounts
payable and accrued expenses, an increase in accounts receivable and a decrease
in accrued commissions and payroll.
During the first six months of 1996, cash flow used by investing
activities was approximately $2.3 million, resulting primarily from expenditures
for property, plant and equipment.
As a result of the Offering, the Company received total proceeds of $25.2
million, which were used to repay short- term borrowings, make capital
improvements and to support future growth.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly
authorized.
Source Services Corporation
(Registrant)
By:
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Richard Dupont, Chief Financial Officer
and Secretary
Date: September 6, 1996
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EXHIBIT INDEX
Exhibit Method of Filing
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27. Financial Data Schedule . . . . . . . . . . . . . . . . . . . . Filed herewith electronically