1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 1996 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 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 ---------------------- 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 X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of September 29, 1996 9,091,794 shares of $.02 par value Common Stock 2 SOURCE SERVICES CORPORATION BALANCE SHEET (AMOUNTS IN THOUSANDS) ASSETS SEPTEMBER 29, DECEMBER 31, 1996 1995 (UNAUDITED) Current assets: Cash and cash equivalents $17,244 $ 1,388 Accounts receivable, less allowance for doubtful accounts and fee adjustments of $ 1,749 and $ 1,357 respectively 33,406 25,299 Income tax receivable 641 0 Deferred tax asset, net 900 745 Prepaid expenses and other 344 405 ------- ------- Total current assets 52,535 27,837 Property and equipment, net 6,035 2,780 Deferred tax asset, net 0 7 ------- ------- Total assets $58,570 $30,624 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 2,647 $ 3,608 Accrued commissions and payroll 9,245 9,241 Accrued 401 (k) plan contribution 872 0 Accrued contribution to profit sharing plan 0 6 Income taxes payable 0 340 ------- ------- Total current 12,764 13,195 Other liabilities 90 135 Deferred tax liability, net 77 0 ------- ------- Total liabilities 12,931 13,330 ------- ------- 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, 9,091, and 7,153 shares outstanding, respectively 182 144 Capital in excess of par 25,707 1,655 Retained earnings 19,777 15,520 Cumulative translation adjustment (27) (25) ------- ------- Total stockholders' equity 45,639 17,294 ------- ------- Total liabilities and stockholders' equity $58,570 $30,624 ======= ======= The accompanying notes are an integral part of these financial statements. 3 SOURCE SERVICES CORPORATION STATEMENT OF REVENUES AND EXPENSES (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30, ------------------------------ ----------------------------- 1996 1995 1996 1995 ------------- ------------- ------------- ------------- (UNAUDITED) (UNAUDITED) Net service revenue $54,035 $37,015 $142,768 $101,375 Cost of sales, flexible staffing 24,443 16,592 63,716 45,223 ------- ------- -------- -------- Gross profit 29,592 20,423 79,052 56,152 Operating expenses: Selling 24,363 16,505 66,229 46,651 General and administrative 1,918 1,645 5,670 4,287 ------- ------- -------- -------- Total operating expenses 26,281 18,150 71,899 50,938 ------- ------- -------- -------- Operating income 3,311 2,273 7,153 5,214 Other income (expense): Interest income 92 16 114 38 Interest expense (35) (16) (126) (17) Other, net (64) (177) (259) (404) ------- ------- -------- -------- Income before income taxes 3,304 2,096 6,882 4,831 Income tax (expense) benefit: Current (1,528) (820) (2,753) (1,917) Deferred 165 44 46 130 ------- ------- -------- -------- Net income $ 1,941 $ 1,320 $ 4,175 $ 3,044 ======= ======= ======== ======== Net income per share $ 0.22 $ 0.18 $ 0.55 $ 0.42 ======= ======= ======== ======== Weighted average shares outstanding 8,474 7,167 7,593 7,179 ======= ======= ======== ======== The accompanying notes are an integral part of these financial statements. 4 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 ====== ==== ======= ======== ==== ======= Net income (unaudited) 1,941 1,941 IPO proceeds (unaudited) 1,563 31 20,325 20,356 IPO costs (unaudited) (1,148) (1,148) Underwriters overallotment exercised (unaudited) 375 7 4,875 4,882 Foreign currency translation adjustment (unaudited) 6 6 ------ ---- ------- -------- ---- ------- Balance at September 29, 1996 (unaudited) 9,091 182 25,707 19,777 (27) 45,639 ====== ==== ======= ======== ==== ======= The accompanying notes are an integral part of these financial statements. 5 SOURCE SERVICES CORPORATION STATEMENT OF CASH FLOWS (AMOUNTS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 29, SEPTEMBER 30, 1996 1995 ------------ ------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities Net income $ 4,175 $ 3,044 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 759 423 PSP stock contributions 12 0 Deferred compensation 0 401 Deferred tax asset, net (148) 188 Deferred tax liability, net 77 0 Loss on asset sales 13 17 Decrease (increase) in assets: Accounts receivable (8,107) (5,157) Income tax receivable (641) 0 Prepaid expense 61 (84) Investments 0 147 Increase (decrease) in liabilities: Accounts payable and accrued expenses (959) 69 Accrued commissions and payroll 4 4,397 Accrued 401 (k) plan contribution 872 0 Accrued contribution to profit sharing plan (6) (334) Income taxes payable (340) (1,914) Other liabilities (51) (86) ------- -------- Net cash provided by (used in) operating activities (4,279) 1,111 ------- -------- Cash flows from investing activities: Expenditures for property and equipment (4,354) (1,260) Proceeds from sales of property and equipment 327 132 ------- -------- Net cash (used in) investing activities (4,027) (1,128) ------- -------- Cash flows from financing activities: Borrowings from revolving line of credit 44,437 13,745 Repayments of revolving line of credit (44,437) (13,745) Proceeds from exercision of stock options 72 0 Proceeds from Initial Public Offering 20,356 0 Costs associated with Initial Public Offering (1,148) 0 Exercision of underwriters' overallotment option 4,882 0 Repurchase treasury stock from PSP 0 (7) ------- -------- Net cash provided by (used in) financing activities 24,162 (7) ------- -------- Net increase (decrease) in cash and cash equivalents 15,856 (24) Cash and cash equivalents at beginning of period 1,388 2,211 ------- -------- Cash and cash equivalents at end of period $17,244 $ 2,187 ======= ======== The accompanying notes are an integral part of these financial statements. 6 SOURCE SERVICES CORPORATION STATEMENT OF CASH FLOWS (AMOUNTS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 29, SEPTEMBER 30, 1996 1995 ------------- ------------- (UNAUDITED) (UNAUDITED) Supplemental Cash Flows Information Cash paid during the period for: Interest $ 63 $ 17 =========== =========== Income Taxes $ 3,553 $ 2,553 =========== =========== The accompanying notes are an integral part of these financial statements. 7 SOURCE SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS SEPTEMBER 29, 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. 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 (guarantee period), 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 guarantee period. Revenue derived from flexible staffing is recognized as services are performed by the Company's employees and contractors. 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 for both flexible staffing and permanent placements. 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. 8 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 assets and liabilities are translated into U.S. dollars using current rates. Resulting foreign currency translation adjustments are recorded in stockholders' equity. NOTE B ---EQUITY On July 29, 1996, the Company effected an initial public offering (the Offering) in which 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 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 the Company from the Offering increased to $25,238,372. Contemporaneous 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 generally 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 Nine-Month Periods Ended September 29, 1996, compared to the Three- and Nine-Month Periods Ended September 30, 1995. Net Service Revenue. Net service revenues for the three month period ended September 29, 1996 increased 45.9% to $ 54.0 million, from $37.0 million for the three month period ended September 30, 1995. Net service revenues increased 40.8% to $ 142.8 million for the nine month period ended September 29, 1996, from $101.4 million for the nine month period ended September 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 its existing markets. Net service revenues from flexible staffing services grew 49.6% to $ 33.8 million for the three months ended September 29, 1996, from $ 22.6 million for the three months ended September 30, 1995. Net service revenue from flexible staffing services grew 42.8% to $ 88.4 million for the nine month period ended September 29, 1996, from $ 61.9 million for the nine month period ended September 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 40.3% to $ 20.2 million for the three month period ended September 29, 1996, from $14.4 million for the three month period ended September 30, 1995. Permanent placement net service revenue increased 37.5% to $ 54.3 million for the nine month period ended September 29, 1996, from $ 39.5 million for the nine month period ended September 30, 1995. The growth in permanent placement net service revenue is primarily the 9 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 44.9% to $ 29.6 million for the three month period ended September 29, 1996, from $20.4 million for the three month period ended September 30, 1995. Gross profit as a percentage of net service revenues decreased slightly to 54.8% for the three month period ended September 29, 1996, from 55.2% for the three month period ended September 30, 1995. Gross profit increased 40.8% to $ 79.1 million for the nine month period ended September 29, 1996, from $56.2 million for the nine month period ended September 30, 1995. Gross profit as a percentage of net service revenues stayed constant at 55.4% for the nine month periods ended September 30, 1995 and 1996. The increase in gross profit was primarily a result of the factors described above relating to net service revenues. Operating expenses. Operating expenses increased 44.5% to $ 26.3 million for the three months ended September 29, 1996, from $18.2 million for the three months ended September 30, 1995. Operating expenses as a percentage of net service revenues decreased slightly to 48.6% for the three months ended September 29, 1996, from 49.0% for the three months ended September 30, 1995. Operating expenses increased 41.1% to $$ 71.9 million for the nine months ended September 29, 1996, from $50.9 million for the nine months ended September 30, 1995. Operating expenses as a percentage of net service revenues increased slightly to 50.4% for the nine months ended September 29, 1996, from 50.2% for the nine months ended September 30, 1995. This increase in operating expense as a percentage of net service revenues resulted primarily 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 decreased to $ 0.007 million of expense for the three months ended September 29, 1996, from $ 0.18 million of expense for the three months ended September 30, 1995. Other (income) expense decreased to approximately $0.27 million of expense for the nine months ended September 29, 1996 from approximately $0.38 million of expense for the nine months ended September 30, 1995. The decreases in other (income) expense are primarily due to interest income earned on the proceeds from the Company's initial public offering effective July 29, 1996. Income Before Taxes. Income before taxes increased 57.6% to $ 3.3 million for the three month period ended September 29, 1996, from $ 2.1 million for the three month period ended September 30, 1995. Income before taxes increased 43.7% to $ 6.9 million for the nine month period ended September 29, 1996, from $ 4.8 million for the nine month period ended September 30, 1995. The increase in income before taxes is primarily a result of the factors described above. Income Taxes. The effective tax rate increased to 41% for the three months ended September 29, 1996, and 39% for the nine months ended September 29, 1996, compared to 37% for both the three and nine months ended September 30, 1995. Net Income. Net income increased to $ 1.9 million for the three months ended September 29, 1996, and $ 4.2 million for the nine months ended September 29, 1996, from $1.3 million for the three months ended September 30, 1995, and $3.0 million for the nine months ended September 30, 1995. The increase was primarily a result of the factors described above relating to net service revenues. Liquidity and Capital Resources As of September 29, 1996 the Company's sources of liquidity included approximately $ 39.8 million in net working capital. In addition, as of September 29, 1996, $ 10.0 million was available for borrowing under the Company's line of credit. During the first nine months of 1996, cash flow used by operations was approximately $ 4.3 million, resulting primarily from an increase in accounts receivable and income taxes receivable, an increase in 401-K plan contribution and a decrease in accounts payable and accrued expenses. During the first nine months of 1996, cash flow used by investing activities was approximately $ 4.0 million, resulting primarily from expenditures for property, plant and equipment. 10 As a result of the Offering, the Company received total proceeds of $25.2 million. At September 29, 1996, after underwriting commissions and other costs of the Offering were paid amounting to approximately $ 3.0 million, $3.6 million had been used to repay short-term borrowings, $ 3.9 million had been used for capital improvements, and the remainder was invested in money market instruments. 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 11 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: Richard Dupont ---------------------------------------------------- Richard Dupont, Chief Financial Officer and Secretary Date: November 12, 1996 12 EXHIBIT INDEX Exhibit Method of Filing - ------- ---------------- 27. Financial Data Schedule . . . . . . Filed herewith electronically