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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 June 30, 1996
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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 0-27204
TECHFORCE CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
GEORGIA 58-2082077
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(State of Incorporation) (I.R.S. Employer Identification No.)
15950 Bay Vista Drive, Clearwater, Florida 34620
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (813) 532-3600
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check X 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
Yes X No
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As of August 6, 1996, there were 7,929,562 shares of the issuer's
common stock outstanding.
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TECHFORCE CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 1996
INDEX
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PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1 Financial Statements.................................... 1
.Consolidated Balance Sheet............................. 1
.Consolidated Statements of Income...................... 2
.Consolidated Statements of Cash Flows.................. 3
.Notes to Consolidated Financial Statements............. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 6
PART II. OTHER INFORMATION
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Item 1 Legal Proceedings....................................... 14
Item 2 Changes in Securities................................... 14
Item 3 Defaults Upon Senior Securities......................... 14
Item 4 Submission of Matters to a Vote of Shareholders......... 14
Item 5 Other Information....................................... 14
Item 6 Exhibits and Reports on Form 8-K........................ 14
SIGNATURES
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Signatures............................................................. 15
EXHIBIT INDEX
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TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(In thousands)
<TABLE>
<CAPTION>
ASSETS June 30, 1996 December 31, 1995
------------- -- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,758 $ 565
Investments 3,228 12,424
Accounts receivable, net of Allowance for Doubtful Accounts 12,839 12,137
of $895,000 and $200,000 at June 30, 1996 and Dec 31, 1995 respectively
Inventories 5,035 3,321
Prepaid expenses/Other Assets 2,223 437
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Total current assets 25,083 28,884
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PROPERTY, PLANT AND EQUIPMENT
Leasehold improvements 587 456
Office furniture and fixtures 4,145 3,294
Replacement parts 8,472 7,606
Equipment held for rental 977 453
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14,181 11,809
Less accumulated depreciation (4,744) (3,361)
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Total property, plant and equipment, net 9,437 8,448
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NET INVESTMENT IN SALES TYPE LEASES 4,402 113
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ORGANIZATION COSTS AND OTHER ASSETS 785 861
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Total assets $ 39,707 $ 38,306
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,305 $ 1,253
Accrued expenses 1,786 3,078
Accrued contract labor 778 1,624
Current maturities of long term debt 1,677 1,615
Line of credit - -
Deferred revenue 3,673 1,894
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11,219 9,464
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LONG-TERM DEBT AND DEFERRED REVENUE 1,977 2,735
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STOCKHOLDERS' DEFICIT
Common stock 79 79
Additional paid in capital 27,639 27,634
Retained deficit (1,207) (1,606)
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26,511 26,107
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Total liabilities and stockholders' deficit $ 39,707 $ 38,306
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</TABLE>
1
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TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30
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1996 1995 1996 1995
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Services 7,260 9,035 16,615 15,979
Hardware 6,081 4,075 13,953 6,394
Total revenues 13,341 13,110 30,568 22,373
------------- ------------- ------------- ------------
Direct costs:
Services 5,668 5,905 12,039 10,804
Hardware 4,142 2,912 9,814 4,528
Total direct costs 9,810 8,817 21,853 15,332
------------- ------------- ------------- ------------
Gross Margin:
Services 1,592 3,130 4,576 5,175
Hardware 1,939 1,163 4,139 1,866
Total gross margin 3,531 4,293 8,715 7,041
------------- ------------- ------------- ------------
Gross Margin:
Services 21.9% 34.6% 27.5% 32.4%
Hardware 31.9% 28.5% 29.7% 29.2%
Total gross margin 26.5% 32.7% 28.5% 31.5%
------------- ------------- ------------ ------------
Operating costs
Selling and marketing 2,553 1,831 4,775 3,493
Research and development 432 250 884 428
General and administrative 1,098 969 2,210 1,674
Nonrecurring 244 160 244 160
4,327 3,210 8,113 5,755
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Operating income (796) 1,083 602 1,286
Interest expense, net 67 280 69 574
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Income before taxes (863) 803 533 712
Provision for income taxes 355 (322) (134) (288)
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Net income (508) 481 399 424
============= ============= ============= ============
Net income per common share (0.06) 0.08 0.05 0.07
============= ============= ============= ============
Weighted average common
shares outstanding 7,905,500 6,135,143 8,394,147 6,114,721
============= ============= ============= ============
</TABLE>
2
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TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
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1996 1995
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<S> <C> <C>
Cash flows from operating activities
Net income $399 $424
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,383 932
Changes in operating assets and liabilities (869) (569)
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Net cash provided by operating activities 913 787
Cash Flows from investing activities
Purchase of property and equipment (2,372) (767)
Investment in sales-type leases (5,789) 0
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Net cash used in investing activities (8,161) (767)
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Cash flows from financing activities
Net borrowings under revolving credit facilities 0 523
Repayments of long-term debt (760) (768)
Issuances of Common Stock 5
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Net cash used in financing activities (755) (245)
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Net decrease in cash and cash equivalents (8,003) (225)
Cash and cash equivalents, beginning of period 12,989 460
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Cash and cash equivalents, end of period $4,986 $235
======= =======
</TABLE>
3
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TECHFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
1. NATURE OF BUSINESS
TechForce Corporation and subsidiaries (collectively, the "Company" and
formerly TechForce, a Georgia general partnership) are engaged in the sale,
design, on-site installation and maintenance, depot repair and support of
computer and data communications networking equipment.
2. BASIS OF FINANCIAL REPORTING
The condensed consolidated financial statements at June 30, 1996 and for the
three- and six-month periods then ended are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report to Shareholders
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
2. MAJOR CUSTOMERS
During the quarter ended June 30, 1996, the following customers individually
accounted for more than 10% of the Company's revenue:
<TABLE>
<CAPTION>
Quarter Ended June 30, 1996 Quarter Ended June 30, 1995
--------------------------- ---------------------------
Amount ($000) Percentage Amount ($000) Percentage
------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Packard Bell Electronics, Inc. $1,768 13% $4,418 35%
Federal Express Company $1,551 11% $1,456 11%
</TABLE>
The loss of one of these customers could have a severe impact on the results
of the operations of the Company in the near term.
3. TAXES
The Company's effective tax rate of 25% for the six months ended June 30,
1996, was favorably impacted by non-taxable interest income of $166,308.
4. LEGAL MATTERS
The Company is involved in certain litigation and claims arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
4
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5. NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 ("SFAS"), "Accounting for
Stock-Based Compensation," which the Company is required to adopt in fiscal
1996. SFAS No. 123 requires companies to estimate the value of all stock-
based compensation using a recognized pricing model. Companies have the
option of recognizing this value as an expense or of disclosing its pro forma
effects on net income. The Company's management has not yet determined its
method of adoption or the financial statement impact of adopting SFAS No.
123. Other issued but not yet required FASB standard are not currently
applicable or material to the Company's operations.
5
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PART I. FINANCIAL INFORMATION (continued)
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW
TechForce provides integrated network support solutions to corporate
clients and specialized support services to telecommunications carriers,
integrators and manufacturers of PCs, hand-held devices, peripherals and
networking equipment on an outsourced basis. The Company provides integrated
support solutions for complex, multi-vendor, enterprise-wide networks by
combining mainframe channel networking, internetworking, data communications and
PC support capabilities. TechForce services include rapid restoration of
mission-critical network elements, 7x24 diagnostic and technical support, on-
site maintenance, same-day and next-day equipment replacement and depot
maintenance, equipment and software staging and network design and installation.
The Company also resells networking equipment as a part of integrated support
solutions, which provides a base for additional long-term support services
agreements.
The Company began operations in 1991 to outsource various equipment repair
projects for FedEx. In 1992, the Company contracted with Packard Bell to
provide in-home warranty maintenance, including technical support, onsite and
depot repair and on-site call management for Packard Bell PC users. In March
1994, consistent with its strategy to become a provider of integrated support
services, the Company purchased inventory, replacement parts and engineering and
technical support equipment from AT&T Paradyne that formed the basis for the
Company's channel extension product line. This transaction facilitated the
Company's entry into integrated support offerings and expanded its customer base
to include over 500 customers. As a result of these initiatives, the Company's
total revenues have grown from $1.8 million in 1991 to $49.2 million in 1995.
The Company completed the initial public offering of 3,100,000 shares of its
common stock including 880,000 shares offered by Selling Shareholders in
December 1995 with net gross proceeds to the Company of $21.7 million and to the
Selling Shareholders of $9 million.
The Company generates revenues from services provided under maintenance
contracts with terms ranging from one to five years and through the sale of its
channel extension hardware and the resale of various data network hardware
supplied by other manufacturers. In certain cases the Company leases hardware
when such financing facilitates increased support opportunities. Revenues from
service and maintenance contracts are either recognized ratably over the
contract period or on a per call basis, as is the case under the Packard Bell
agreement. Revenues from product sales are recognized at the time of delivery.
When appropriate, revenues from leasing are accounted for as sales-type leases
where the present value of all payments, net of executory costs, are recorded
currently as revenues and the related costs of the equipment are recorded to
cost of sales. The associated interest income is recognized over the term of the
lease. Revenues derived from sales-type leases for the three months and six
months ended June 30, 1996 were $1.9 million and $7.2 million respectively.
Amortized interest on such leases totaled $0.2 million for both the three month
and six month periods ended June 30, 1996.
The Company's cost structure consists of direct costs, which include cost
of services and cost of hardware, and operating costs, which include selling and
marketing, research and development and general and administrative expenses.
Cost of service includes all program costs associated with service delivery as
well as depreciation on spares inventories held for customer repair
requirements, while cost of hardware consists of amounts paid by the Company for
the hardware products it sells or leases and related costs. The Company's
general and administrative expenses consist primarily of corporate overhead,
including salary expense of administrative personnel, office rental expense and
legal and accounting fees.
Management anticipates that revenues from its proprietary channel extension
products and services will gradually decrease over the next several years at a
rate of less than 10% per year primarily as a result of a steady trend toward
open-systems environments. Management does not believe that this gradual
decline in revenues will have a material adverse effect on the Company's results
of operations and financial condition.
6
<PAGE>
Although revenues attributable to Packard Bell grew steadily over the past
few years, the Company experienced a substantial decline in revenues from
Packard Bell during the three months and six months ended June 30, 1996 as
compared to the same periods in 1995. Revenues from Packard Bell represented
13% of total Company revenues for the three months ended June 30, 1996 compared
to 26% for the three months ended March 31, 1996. This decline in revenue
was due to the suspension of new call volumes from Packard Bell during the
Company's negotiation with Packard Bell of certain contractual issues related
to: payment of invoices, level of accounts receivable from Packard Bell and
level of consigned Packard Bell inventory held by the Company. These
negotiations culminated in an agreement between the Company and Packard Bell
whereby Packard Bell has paid the Company approximately $4.6 million of
approximately $8.6 million of dated accounts receivable under discussion at that
time and the Company has returned to Packard Bell a substantial portion of
Packard Bell consigned inventory held by the Company at that time. The
agreement also calls for continued partial payment by Packard Bell based upon
the rate at which the Company returns consigned inventory. Finally, the parties
have agreed to reconcile their respective records relating to the amount of
consigned Packard Bell inventory held by the Company. Operating results for the
three months and six months ended June 30, 1996 include a reserve taken by the
Company which reflects management's assessment of possible losses related to
accounts receivable and/or consigned inventory from Packard Bell. During the
negotiations with Packard Bell and in subsequent discussions, Packard Bell has
confirmed to the Company its intent to use the Company for approximately 60% of
the average monthly call volume experienced by the Company during the three
months ended March 31, 1996. As of August 5, 1996, the Company has experienced
resumed call volumes at approximately 50% of previous levels and believes that
the new call volume levels indicated by Packard Bell will be reached during the
three months ending September 30, 1996.
The Company utilizes a network of independent service providers ("ISPs")
with whom it contracts for field service for Packard Bell customers. The
company's reliance on ISPs could have a material adverse effect on the Company's
competitive position, and as a result, on its results of operations and
financial condition, if such ISPs were unable to fulfill their field service
obligations in a timely or satisfactory manner and the Company was unable to
arrange for other ISPs to perform the obligations of such non-performing ISPs.
Packard Bell is invoiced monthly and payment is due no later than 30 days
after the invoice date, with a penalty of 1.5% of the unpaid balance accruing
monthly beginning 60 days after the invoice date. The Company typically has
received payment from Packard Bell approximately 100 to 130 days after the
billing date, which is generally a longer payment cycle than experienced under
the Company's other service contracts. As of June 30, 1996, the Company's
receivable from Packard Bell represented approximately 144 days of revenue based
on an average day's sales for the six month period ending June 30, 1996. In
light of the substantial amount of the Company's total revenues that are
attributable to Packard Bell, failure to receive payment in accordance with past
practice under the Packard Bell contract could have a material adverse on the
Company's cash flow.
Continued growth of the Company's customer base and its services can be
expected to continue to place a significant strain on its administrative,
operational and financial resources. The Company's future performance and
profitability will depend in part on its ability to successfully implement
enhancements to its business management systems and to adapt those systems as
necessary to respond to changes in its business. Furthermore, although the
Company has experienced rapid growth in total revenues and has previously been
profitable, its limited operating history makes the prediction of future
operations difficult. There can be no assurance that the Company's revenue
growth will continue in the future or that profitable operating results can be
sustained.
PURCHASE OF ASSETS FROM AT&T PARADYNE
In March 1994, the Company purchased Pixnet XL inventory and replacement
parts and various engineering equipment from one of AT&T Paradyne's product
divisions and assumed obligations of AT&T Paradyne's Customer Service
Organization ("CSO") division to deliver channel extension support services for
those products. The Company also acquired a license to the then current Pixnet
XL product technology. This transaction facilitated the Company's entry into
integrated network support offerings and expanded its customer base to over 500
customers. The purchase price for the assets acquired from AT&T Paradyne was
approximately $11 million, comprised of cash payments of approximately $3.1
7
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million, issuance of an 8.0% note payable to AT&T Paradyne in the principal
amount of $6.6 million and assumption of certain liabilities. The Company has
the right to repay the note at any time.
The Company did not acquire any management or CSO employees, product
managers or infrastructure necessary for the support of the channel extension
products. Accordingly, the Company was required to develop and implement an
infrastructure to support the acquired assets following the consummation of the
transaction. For example, the Company developed a product management and sales
force dedicated to the acquired inventory, a field support service network using
primarily contracted employees of IBM, an administrative support network using
the Company's information systems and administrative staff and a market
distribution system compatible with that of the Company. In addition, the
Company did not acquire any technology for follow-on products such as the Pixnet
XL 5000 product, which was intended by AT&T Paradyne to be the successor to the
inventory of Pixnet XL product units purchased by the Company.
The Company's use of the acquired assets since the consummation of the AT&T
Paradyne transaction reflects a different strategy from that used by AT&T
Paradyne with respect to those assets. While AT&T Paradyne emphasized the sale
of channel extension products and made channel extension services available
principally to support the sale of such products, the Company emphasizes the
sale of a broader range of integrated support services to customers who may also
require channel extension products. The Company does not intend to grow its
market for the Pixnet XL product line acquired from AT&T, but instead seeks to
leverage corporate customer relationships established through the sale of Pixnet
XL product offerings into sales of integrated support service offerings to the
same customer base. As such, the Company has not manufactured new entries in
the Pixnet XL product line and has devoted only limited research and development
efforts to sustaining development of the Pixnet XL product line.
However, to enhance its competitive position in the channel extension
marketplace and to provide the Company's Pixnet XL customers with the ability to
migrate to higher bandwidth applications, the Company entered into a partnership
arrangement with Computerm Corporation in June of 1996, whereby the Company may
market and service Computerm's Virtual Mainframe Channel products. Computerm
Virtual Mainframe Channel products provide for these higher bandwidth
applications, where data compression can add the most value and results in
significant cost savings to the customer.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Total revenues. Total revenues increased 1.8% from $13.1 million for the
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three months ended June 30, 1995 to $13.3 million for the three months ended
June 30, 1996 due to increased revenues from hardware sales and leases offset by
declines in service revenues from Packard Bell.
Service revenues. Revenues from services decreased 19.6% from $9.0
-----------------
million (68.9% of total revenues) for the three months ended June 30, 1995 to
$7.3 million (54.4% of total revenues) for the three months ended June 30, 1996.
This decrease was attributable to decreases in Packard Bell service revenues
offset by increased service revenues associated with the Company's channel
extension product line and from new enterprise network support services
developed by the Company. Revenues from Packard Bell for the three months ended
June 30, 1996 decreased by 60.0% while revenues from the channel extension and
new enterprise network support service offerings increased by 24.7% as compared
to revenues from these services for the three months ended June 30, 1995.
Hardware revenues. Revenues from hardware products increased 49.2% from
-------------------
$4.1 million (31.1% of total revenue) for the three months ended June 30, 1995
to $6.1 million (45.6% of total revenues) for the three months ended June 30,
1996 due to an increase in revenues from the resale and lease of other
manufacturers' hardware of $2.2 million.
Cost of Service. Cost of service decreased 4.2% from $5.9 million (65.5% of
---------------
service revenues) for the three months ended June 30, 1995 to $5.7 million
(78.1% of service revenues) for the three months ended June 30, 1996. This
8
<PAGE>
decrease was caused primarily by the decline in business volumes from Packard
Bell. Service costs related to Packard Bell did not decrease proportionately
with decreases in revenues, however, due to the Company's decision to leave in
place certain infrastructure to support future Packard Bell business during its
negotiations with Packard Bell. Packard Bell service costs were also impacted
by reserves for losses related to accounts receivable and/or consigned inventory
taken by the Company for the three months ended June 30, 1996.
Cost of Hardware. Cost of hardware increased 42.9% from $2.9 million (71.1%
----------------
of hardware revenues) for the three months ended June 30, 1995 to $4.1 million
(68.1% of hardware revenue) for the three months ended June 30, 1996. This
increase was caused primarily by increased hardware sales.
Gross Margin. Overall gross margin decreased 17.7% from $4.3 million, or
------------
32.7% of total revenues, for the three months ended June 30, 1995 to $3.5
million, or 26.5% of total revenues for the three months ended June 30, 1996.
Gross margin on services decreased 48.9% from $3.1 million for the three months
ended June 30, 1995 to $1.6 million for the three months ended June 30, 1996.
This decrease was caused by decreased Packard Bell service revenues combined
with decreased gross margins from Packard Bell revenues (See Cost of Service).
Gross margin on hardware revenues increased 64.7% from $1.2 million for the
three months ended June 30, 1995 to $1.9 million for the three months ended June
30, 1996. This increase was caused primarily by increased revenues from resale
and lease of other manufacturers' equipment. Service margins as a percent of
service revenues decreased from 34.5% for the three months ended June 30, 1995
to 21.9% for the three months ended June 30, 1996 primarily due to reductions in
Packard Bell business volumes which were not accompanied by corresponding
reductions in related costs. Hardware margins as a percentage of hardware
revenues increased from 28.9% for the three months ended June 30, 1995 to 31.9%
for the three months ended June 30, 1996 primarily as a result of improved
margins including amortized interest income related to the Company's hardware
leasing activity. The Company has experienced competitive pressure on resale
hardware margins and anticipates continued pressure due to increasing price
competition.
Selling and Marketing Expenses. Selling and marketing expenses increased
------------------------------
39.4% from $1.8 million, or 14.0% of total revenues, for the three months ended
June 30, 1995 to $2.6 million, or 19.1% of total revenues, for the three months
ended June 30, 1996. This increase was due to increases in Company resources
dedicated to sales and marketing efforts combined with increased sales costs
associated with increased hardware revenues.
Research and Development Expenses. Research and development expenses
---------------------------------
increased 72.8% from $0.3 million, or 1.9% of total revenues, for the three
months ended June 30, 1995 to $0.4 million, or 3.2% of total revenues, for the
three months ended June 30, 1996. This increase was due to continued program
development activity relating primarily to continued remote network management
tools and systems development and new product support offerings.
General and Administrative Expenses. General and administrative expenses
-----------------------------------
increased 13.3% from $1.0 million, or 7.4% of total revenues, for the three
months ended June 30, 1995 to $1.1 million, or 8.2% of total revenues, for the
three months ended June 30, 1996. This increase was due to increases in staff
and related expenses associated with the increased volume of non- Packard Bell
business.
Nonrecurring Charges. The Company recognized non-recurring relocation costs
--------------------
of $160,000 during three months ended June 30, 1995 as a result of the Company's
relocation of its Atlanta, Georgia headquarters to its Clearwater, Florida
facility. For the three months ended June 30, 1996, the Company recognized
non-recurring restructuring costs of $244,000 related to reductions in staff.
Management identified these personnel cost savings opportunities in various
areas throughout the Company in response to the decline in Packard Bell revenues
and gross margins.
Operating Income. Operating income decreased 173.4% from $1.1 million, or
----------------
8.3% of total revenues, for the three months ended June 30, 1995 to an operating
loss of $0.8 million, or 6.0% or total revenues, for the three months ended June
30, 1996 as a result of the factors listed above.
9
<PAGE>
Interest Expense, Net. Interest expense decreased 75.7% from $0.3 million,
---------------------
or 2.1% of total revenues, for the three months ended June 30, 1995 to $0.1
million, or 0.5% of total revenues, for the three months ended June 30, 1996.
The decrease in interest expense resulted from the December 1995 payment of
certain indebtedness from proceeds from the Company's initial public offering.
Interest income totaled $0.1 million for the three months ended June 30, 1996
and was not material for the three months ended June 30, 1995.
Income Taxes. The Company experienced a 41.l percent tax benefit for the
------------
three months ended June 30, 1996, as compared to 40.0 percent in the same period
of the prior fiscal year. The increase resulted from the utilization of a
taxable operating loss, further benefitted by $51,000 of non-taxable interest
income and a $24,000 refund of prior year federal income tax.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Total revenues. Total revenues increased 36.6% from $22.4 million for the
--------------
six months ended June 30, 1995 to $30.6 million for the six months ended June
30, 1996 primarily due to increases in enterprise network support revenues and
hardware sales and lease revenues somewhat offset by declines in service
revenues from Packard Bell.
Service revenues. Revenues from services increased 4.0% from $16.0
-----------------
million (71.4% of total revenues) for the six months ended June 30, 1995 to
$16.6 million (54.4% of total revenues) for the six months ended June 30, 1996.
This increase was attributable to increased service revenues associated with the
Company's enterprise network support services offset by decreases in Packard
Bell service revenues. Revenues from the enterprise network support services
offerings increased by 17.3% while revenues from Packard Bell for the six months
ended June 30, 1996 decreased by 11.9% as compared to revenues from these
services for the six months ended June 30, 1995 as compared to revenues from
these services for the six months ended June 30, 1995.
Hardware revenues. Revenues from hardware products increased 118.2% from
------------------
$6.4 million (28.6% of total revenue) for the six months ended June 30, 1995 to
$14.0 million (45.6% of total revenues) for the six months ended June 30, 1996
due to increased revenues from the resale and lease of other manufacturers'
hardware of $7.1 million and an increase in revenues from channel extension
product sales of $0.4 million.
Cost of Service. Cost of service increased 11.6% from $10.8 million (67.5%
---------------
of service revenues) for the six months ended June 30, 1995 to $12.0 million
(72.5% of service revenues) for the six months ended June 30, 1996. This
increase was caused primarily by the increase in the enterprise network support
business combined with higher costs related to Packard Bell. Service costs
related to Packard Bell did not decrease proportionately with decreases in
revenues due to the Company's decision to leave in place certain infrastructure
to support future Packard Bell business during its negotiations with Packard
Bell. Packard Bell service costs were also impacted by reserves for losses
related to accounts receivable and/or consigned inventory taken by the Company
in 1996.
Cost of Hardware. Cost of hardware increased 116.1% from $4.5 million
----------------
(71.0% of hardware revenues) for the six months ended June 30, 1995 to $9.8
million (70.3% of hardware revenue) for the six months ended June 30, 1996.
This increase was caused primarily by increased hardware sales and leases.
Gross Margin. Overall gross margin increased 23.8% from $7.0 million, or
------------
31.5% of total revenues, for the six months ended June 30, 1995 to $8.7 million,
or 28.5% of total revenues for the six months ended June 30, 1996. Gross margin
on services decreased 11.8% from $5.2 million for the six months ended June 30,
1995 to $4.6 million for the six months ended June 30, 1996. This decrease was
caused by a decline in Packard Bell service revenues combined with decreased
gross margins from Packard Bell revenues (See Cost of Service) somewhat offset
by increased gross margin on enterprise network support services and repair
services provided to FedEx. Gross margin on hardware revenues increased 123.3%
from $1.9 million for the six months ended June 30, 1995 to $4.1 million for the
six months ended June 30, 1996. This increase was caused by increased revenues
from the resale and lease of other manufacturers' equipment. Service margins as
a percent of service revenues decreased from 32.5% for the six months ended
June 30, 1995 to 27.5% for the six months ended June 30, 1996 primarily due to
reductions in Packard Bell business volumes which were not accompanied by
corresponding reductions in related costs. Hardware margins as a percentage of
10
<PAGE>
hardware revenues increased from 29.0% for the six months ended June 30, 1995 to
29.7% for the six months ended June 30, 1996 primarily as a result of improved
margins including amortized interest income related to the Company's hardware
leasing activity. The Company has experienced competitive pressure on resale
hardware margins and anticipates continued pressure due to increasing price
competition.
Selling and Marketing Expenses. Selling and marketing expenses increased
------------------------------
36.7% from $3.5 million, or 15.6% of total revenues, for the six months ended
June 30, 1995 to $4.8 million, or 15.6% of total revenues, for the six months
ended June 30, 1996. This increase was due to increases in Company resources
dedicated to sales and marketing efforts combined with increased sales costs
associated with increased hardware revenues.
Research and Development Expenses. Research and development expenses
---------------------------------
increased 106.5% from $0.4 million, or 1.9% of total revenues, for the six
months ended June 30, 1995 to $0.9 million, or 2.9% of total revenues, for the
six months ended June 30, 1996. This increase was due to continued program
development activity relating primarily to remote network management tools and
systems development and new product support offerings.
General and Administrative Expenses. General and administrative expenses
-----------------------------------
increased 32.0% from $1.7 million, or 7.5% of total revenues, for the six months
ended June 30, 1995 to $2.2 million, or 7.2% of total revenues, for the six
months ended June 30, 1996. This increase was due to increases in staff and
related expenses associated with the increased volume of new Packard Bell
business.
Nonrecurring Charges. The Company recognized non-recurring relocation costs
--------------------
of $160,000 during six months ended June 30, 1995 as a result of the Company's
relocation of its Atlanta, Georgia headquarters to its Clearwater, Florida
facility. For the six months ended June 30, 1996, the Company recognized non-
recurring restructuring costs of $244,000 related to reductions in staff.
Management identified these personnel cost savings opportunities in various
areas throughout the Company in response to the decline in Packard Bell revenues
and gross margins.
Operating Income. Operating income decreased 53.1% from $1.3 million, or
----------------
5.7% of total revenues, for the six months ended June 30, 1995 to $0.6 million,
or 2.0% or total revenues, for the six months ended June 30, 1996 as a result of
the factors listed above.
Interest Expense, Net. Interest expense decreased 87.8% from $.6 million,
---------------------
or 2.6% of total revenues, for the six months ended June 30, 1995 to $0.1
million for the six months ended June 30, 1996. The decrease in interest
expense resulted from the December 1995 payment of certain indebtedness from
proceeds from the Company's initial public offering. Interest income totaled
$0.2 million for the six months ended June 30, 1996 and was not material for the
six months ended June 30, 1995.
Income Taxes. The Company's effective tax rate was 25.1 percent for the
------------
six months ended June 30, 1996 as compared to 40.0 percent for the same period
of the prior fiscal year. The reduction in fiscal year 1996 is principally the
result of recording $166,000 of non-taxable interest income, as well as a
$24,000 refund of prior year federal income tax.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of $1.0 million and of $1.2
million for the three months ended June 30, 1995 and 1996, respectively. Cash
used by operating activities for the 1995 period was primarily due to increases
in accounts receivable partially offset by net income and increases in accrued
liabilities and deferred revenue. Cash used by operating activities for the 1996
period was primarily due to net income losses and decreases in accounts
receivable offset by increases in inventory and deferred revenue.
The Company's operating activities provided cash of $0.8 million and $0.9
million for the six months ended June 30, 1995 and 1996, respectively. The cash
provided by operating activities for both periods was generated by net income
and changes in current liabilities and deferred revenue.
The Company's investing activities used cash of $0.8 million and $8.1
million for the six month period ended June 30, 1995 and 1996, respectively.
Cash used in the Company's investing activity in 1995 related solely to the
purchase of property, plant and equipment. Cash used in the Company's investing
activity in 1996 related to the Company's capitalization of leases receivable
from customers pending the Company's discounting of such leases, where possible,
to third party lending institutions partially offset by the purchase of
property, plant and equipment.
Financing activities used cash of $0.2 million and $0.8 million for the six
months ended June 30, 1995 and 1996, respectively. For the six months ended
June 30, 1995, cash was used to repay long term debt partially offset by
increased short term borrowing. Cash used in financing activities for the six
months ended June 30, 1996 was related to the repayment of long term debt and
issuances of common stock.
The Company's cash requirements have been financed with cash flow from
operations and borrowings under its revolving credit facility with SouthTrust
Bank of Georgia, N.A. (the "Bank"), which provides for borrowings of up to $5.5
million based on the value and aging of the Company's accounts receivable.
Borrowings under the line of credit bear interest at the Bank's quoted variable
base rate, which has ranged from 8.25% to 9.0.% and was 8.25% at June 30, 1996.
As of June 30, 1996, the Company had no outstanding borrowings under the line of
credit and approximately $5.5 million was available for additional borrowing.
The credit facility expired by its terms on May 1, 1996 and was extended by the
bank for an additional ninety days while the Company concluded arrangements with
another bank regarding the transition of its banking relationship to a bank with
a greater established presence in Florida. On July 26, 1996, the Company signed
a commitment letter from First Union National Bank of Florida (First Union)
whereby the Company and First Union agreed to enter into a new credit facility
for $15.0 million of which $8.0 million will be earmarked as an acquisition line
of credit. The Company is in the process of completing its formal credit
agreement with First Union. The Company intends to use its borrowing capacity
under its line of credit on a limited basis primarily for working capital
requirements.
Prior to March 1994, the Company was organized as a Georgia general
partnership. In March 1994, all of the assets of the partnership were
contributed to, and all of its liabilities were assumed by, the Company. In
connection with this transaction, the partners of the general partnership,
including certain officers and directors of the Company, received, in exchange
for their interests in such partnership, an aggregate of 2,679,268 shares of
Common Stock of the Company and a common stock dividend. In addition, the
Company issued 4,225,000 shares of Convertible Redeemable Preferred Stock for an
aggregate purchase price of $4.2 million and $5.0 million in principal amount of
Subordinated Notes. The Subordinated Notes were redeemed with a portion of the
net proceeds of the Company's initial public offering completed in December,
1995.
Simultaneously with the issuance of the Common Stock, Convertible
Redeemable Preferred Stock and Subordinated Notes in March 1994, the Company
purchased inventory, replacement parts and engineering and technical support
equipment from AT&T Paradyne that formed the basis for the Company's channel
extension product line. The aggregate purchase price for these assets was $11.0
million, constituting a cash payment of $3.1 million, a note payable to AT&T
Paradyne (the "AT&T Paradyne Note") in the principal amount of $6.6 million and
the assumption of liabilities of approximately $1.3 million. The AT&T Paradyne
12
<PAGE>
Note bears interest at a rate of 8% and is payable in equal monthly installments
over a 48-month period. The monthly payments made by the Company on the AT&T
Paradyne Note are approximately $151,000.
In March 1994, the Company provided start-up financing in the form of
equity in an aggregate amount of approximately $59,000 for TechNet, a hardware
integrator. TechNet was founded to sell channel extension hardware and
maintenance contracts on behalf of the Company and to resell third party
manufacturers' hardware. Upon the incorporation of TechNet in September 1994,
the Company received a 51% ownership interest in that company. In November
1994, the Company acquired the remaining 49% of TechNet in exchange for 134,783
share of Common Stock valued at approximately $101,000, bringing the Company's
total investment in TechNet to approximately $160,000. TechNet merged with and
into the Company immediately following this transaction.
In November 1994, the Company issued 34,350 shares of Convertible
Redeemable Preferred Stock for an aggregate purchase price of approximately
$34,000 and a Subordinated Note in the principal amount of approximately $41,000
to one of its directors. The Subordinated Note was redeemed with proceeds from
the Company's initial public offering.
The Company leases hardware to customers in certain cases in which such
financing facilitates increased support opportunities. The Company believes
that leasing provides a key competitive advantage in the sale of long term
support agreements and that there are significant extended lease and used
equipment resale opportunities combined with long term support agreement renewal
opportunities at the end of the initial term of leases. In addition, the
Company views leasing as a source of low cost future replacement spares
inventories which can be deployed to reduce future capital commitments for
enterprises network support contracts. The Company customarily discounts such
leases to banks and intends to limit its working capital committed to this
activity. From time to time this leasing activity may place demands on the
Company's working capital based on the timing and availability of discounting
activities with financial institutions. The Company's capital investment at
June 30, 1996 in leases not yet discounted included the addition of a number of
leases entered into during the second quarter. One significant lease purchased
from AT&T Paradyne during the first quarter was discounted during the second
quarter, with the remaining balance under review at quarter end for potential
discounting.
Management believes the net proceeds to the Company from its initial public
offering together with cash from operations and borrowings available under its
revolving credit facility will be sufficient to finance its working capital
needs and capital expenditure requirements for at least the next 12 months.
Although no assurance can be given, management believes that cash from
operations together with available sources of financing, including additional
bank debt, will be sufficient to fund the company's capital requirements for the
foreseeable future beyond such 12 month period. The Company does not currently
have any material commitments for capital expenditures.
13
<PAGE>
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Shareholders
At the company's annual meeting of shareholders held on May 22, 1996, the
following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
--------- --------------
<S> <C> <C>
1. Paul J. Ferri 7,388,069 337
2. John A. Koehler 6,364,636 1,023,770
3. Bertil D. Nordin 7,388,069 337
4. Anthony M. Rammuno, Jr. 7,379,097 9,309
5. Richard D. Tadler 7,388,069 337
</TABLE>
The following proposal was approved at the Company's annual meeting:
<TABLE>
<CAPTION>
VOTES
VOTES FOR VOTES AGAINST WITHHELD
--------- ------------- --------
<S> <C> <C> <C>
Ratificaton of the appointment 7,382,989 4,817 600
of Arthur Andersen LLP as the
company's independent auditors
for 1996.
</TABLE>
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
No exhibits or reports.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHFORCE CORPORATION
Date: August 7, 1996 /s/ Jerrel W. Kee
--------------------------------------------
Jerrel W. Kee
Chief Financial Officer
(principal financial and accounting officer)
15
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO. PAGE
- ----------- ----
11.1 Computation of Earnings Per Share of Common Stock 17
27 Summary Financial Data 18
16
<PAGE>
EXHIBIT 11.1
TECHFORCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995 AND THE THREE MONTHS
ENDED JUNE 30, 1996 AND JUNE 30, 1995
<TABLE>
<CAPTION>
Quarter ended Quarter ended Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 7,905,500 2,845,934 7,905,500 2,845,934
ADD - Shares of common stock assumed issued upon
exercise of stock options using the "treasury stock"
method as it applies to the computation of primary
earnings per share 0 449,643 488,647 429,221
ADD - Shares of preferred stock assumed issued upon
the conversion from redeemable convertible preferred
stock upon completion of public offering 0 2,839,566 0 2,839,566
----------- ---------- ---------- ----------
Number of common and common equivalent shares
outstanding 7,905,500 6,135,143 8,394,147 6,114,721
ADD - Additional shares of common stock assumed
issued upon exercise of stock options using the
"treasury stock" method as it applies to the
computation of fully diluted earnings per share 0 0 0 0
----------- ---------- ---------- ----------
Number of common and common equivalent shares
outstanding 7,905,500 6,135,143 8,394,147 6,114,721
=========== ========== ========== ==========
Net earnings for primary and fully diluted earnings
per share ($508,195) $481,000 $398,803 $424,000
Earnings per share:
Primary ($0.06) $0.08 $0.05 $0.07
Fully diluted ($0.06) $0.08 $0.05 $0.07
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TECHFORCE
CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 1996(IN
THOUSANDS) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUN-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 1,758
<SECURITIES> 3,228
<RECEIVABLES> 13,734
<ALLOWANCES> 895
<INVENTORY> 5,035
<CURRENT-ASSETS> 25,083
<PP&E> 14,181
<DEPRECIATION> 4,744
<TOTAL-ASSETS> 39,707
<CURRENT-LIABILITIES> 11,219
<BONDS> 1,977
0
0
<COMMON> 79
<OTHER-SE> 26,432
<TOTAL-LIABILITY-AND-EQUITY> 39,707
<SALES> 6,081
<TOTAL-REVENUES> 13,341
<CGS> 4,142
<TOTAL-COSTS> 9,810
<OTHER-EXPENSES> 3,682
<LOSS-PROVISION> 645
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> (863)
<INCOME-TAX> 355
<INCOME-CONTINUING> (508)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (508)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
