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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[_] 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 0-27204
TECHFORCE CORPORATION
(Exact name of Registrant as specified in its charter)
GEORGIA 58-2082077
(State of Incorporation) (I.R.S. Employer
Identification Number)
15950 BAY VISTA DRIVE, CLEARWATER, FLORIDA 34620
(Address of principal executive offices, including zip code)
(813) 532-3600
(Registrant's telephone, including area code)
____________________
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
____________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
----
The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on March 18, 1997 was $53,309,672. There were
8,046,743 shares of Common Stock outstanding as of March 18, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 15, 1997 are incorporated by reference in Part
III hereof.
____________________
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TECHFORCE CORPORATION
Annual Report on Form 10K
For the Fiscal Year Ended December 31, 1996
TABLE OF CONTENTS
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Item Page
Number Number
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PART I
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1. Business......................................................................................... 1
2. Properties....................................................................................... 9
3. Legal Proceedings................................................................................ 9
4. Submission of Matters to a Vote of Security Holders.............................................. 9
PART II
5. Market for Registrant's Common Equity and Related Stockholder matters 10
6. Selected Financial Data.......................................................................... 11
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
8. Financial Statements and Supplementary Data...................................................... 19
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19
PART III
10. Directors and Executive Officers of the Registrant............................................... 20
11. Executive compensation........................................................................... 20
12. Security Ownership of Certain Beneficial Owners and Management 20
13. Certain Relationships and Related Transactions................................................... 20
PART IV
14. Exhibits, Financial Statements, and Reports on Form 8-K..........................................
SIGNATURES.................................................................................. 29
INDEX OF FINANCIAL STATEMENTS............................................................... 30
EXHIBIT INDEX............................................................................... E-1
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PART I
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ITEM 1. BUSINESS
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GENERAL
TechForce Corporation ("TechForce" or the "Company") provides integrated multi-
vendor network support solutions to corporate clients, and custom support
services to carriers, service providers, integrators and manufacturers of
personal computers and peripherals, networking equipment, and handheld devices
on a selective basis. The Company supports complex multi-vendor enterprise-wide
networks, by combining LAN/WAN internetworking, mainframe channel networking,
and PC support capabilities. TechForce services include remote diagnostics 24
hours a day, 7 days a week, depot maintenance (advanced equipment replacement),
on-site maintenance, equipment/software staging and installation, project
management, network design and capacity planning. The Company also sells data
networking equipment as a part of its integrated support solutions, which serves
as a base for additional long-term support agreements. In 1996, the Company
introduced TechCare(SM), a suite of 7 x 24 pro-active network management
services that include fault management, configuration management, and
performance management.
The Company provides enterprise networking, channel networking and personal
computer support from its Technology Support Center in Clearwater, Florida. For
problems that cannot be resolved remotely, the Company dispatches its own
customer support representatives, as well as non-employee contract personnel
located in the United States, Canada, and the United Kingdom. The Company
manages its personal computer support business to deliver high-quality, timely
and reliable service by centralizing service management and logistics functions
and deploying remote resources to meet end-user customer needs. Through its
logistics management and repair facility in Memphis, Tennessee, the Company
ships and repairs equipment for customers nationwide. TechForce also supports
customers in Canada from its facilities in Toronto and Quebec, and customers in
the European marketplace from its facility in the United Kingdom.
TechForce was organized in 1991 as a Georgia general partnership. In March 1994,
all of the partnership's assets were contributed to, and all of its liabilities
were assumed by, the Company. In December 1995, the Company completed a public
offering of 3,100,000 shares of its Common Stock and the Common Stock began
trading on the NASDAQ National Market System.
MARKET OPPORTUNITY
Data communications networks are playing an increasingly vital role in
companies' business operations. Information technology ("IT") organizations are
confronting additional pressures to maximize network performance, while
encountering rapid changes in technology and growing network complexity. Network
users __ on mainframes, servers, workstations or personal computers __ are also
retrieving, processing, and transmitting information from virtually anywhere.
These changes are placing additional support and logistics burdens on IT
organizations, and are driving companies to selectively outsource data
networking support to service providers.
TechForce views its main market opportunities as (i) corporate end-users -
enterprise networking customers, and those integrating mainframe and open system
architectures - that are selectively outsourcing multi-vendor network support
and management to third parties, and (ii) corporate end-users, integrators,
service providers and telecommunications carriers requiring customized services
that can cost effectively support rapidly emerging remote and "virtual offices"-
the telecommuter, small office/home office ("SOHO"), and mobile computer users.
Selective Outsourcing of Network Management and Support. The rapid growth in
network traffic has led to increased complexity in the technologies that support
and drive these networks. Companies must invest in these new, complex networking
technologies, new computer platforms and applications to remain both competitive
and responsive to customers. Many companies have an enormous investment in
legacy ___ primarily IBM mainframe based-applications and networks, which must
be maintained and updated as well as integrated with emerging open
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systems and networks. As a result, with increasing staff demands, the
information technology managers find it more difficult to manage the
performance, reliability, and security of these large, complex networks. Ongoing
investments are required in tools, equipment, software, personnel and training
to manage these networks. A company often finds that this type of investment can
be very difficult and cost prohibitive.
These pressures are combining to drive more and more companies to a new approach
of outsourcing selected network management and support services to third
parties. Selective outsourcing allows companies to remain actively involved in
managing their computing and networking environments, and outsource a selected
set of services. The companies can take advantage of the third-party vendor's
ability to spread the cost of management systems, diagnostic tools, equipment
and software, personnel and training across multiple third-party providers. In
addition, the support vendor is better equipped to absorb and manage rapid
technology changes.
Custom Services for Remote , Mobile and Virtual Offices. The traditional
boundaries of corporate networks are expanding to include telecommuters, SOHO
workers, and mobile employees who work in "virtual offices." Personal computer
applications and access to corporate information is essential to these workers
and to the business. However, the virtual nature and mobility places tremendous
support and logistics burdens on companies. The management and delivery of
support and on-site services to a corporate user performing a critical job
function working from home or in a distant remote office requires a different
support and cost structure than traditional corporate user support.
In addition, the rapid changes and deployment of computer equipment, software
and networking technologies demand highly coordinated, large-scale roll-outs or
upgrades on a regional or national level. A simple upgrade of a PC software
package can strain resources and create an overwhelming challenge when it
involves hundreds or thousands of remote and mobile computer users. These custom
services can include equipment and software integration, configuration and
staging, hardware and software upgrades, technical support, advance equipment
replacement, and maintenance and installation services __ often in the home.
Companies attempt to perform these services through a variety of sources: (a)
small, localized service providers who are cost effective but limited in
coverage, (2) larger service providers, integrators or manufacturers that have
broad coverage but are not cost effective and are less flexible in packaging
solutions, (3) telecommunication carriers who provide the communication
facilities and some of the equipment, or (4) company's own in-house staff and
resources. In response to the limitations and as an alternative to these
traditional sources, corporate end-users, integrators, and telecommunications
carriers are increasingly turning to third-parties who can deliver cost
effective tailored support services on a national level.
TECHFORCE'S STRATEGY
TechForce's primary business objective is to become one of the leading providers
of integrated networking and personal computer solutions. The key elements of
this strategy are:
Leverage SNA IBM Networking and LAN/WAN Internetworking Expertise. TechForce
will continue to leverage its expertise in both mission-critical SNA and LAN/WAN
internetworking to establish TechForce as a leading provider of network support
solutions for multivendor enterprise network customers.
The Company is focusing on the IBM SNA networking environment. These customers
are not replacing their legacy IBM mainframe networks at the brisk pace
previously anticipated by the industry. Large investments in these systems
remain active today, and these customers are deploying new client-server
applications while continuing to support their mainframes and networks. In 1996
TechForce and Computerm Corporation entered into an agreement under which
TechForce can sell and support the Computerm Corporation VMC 8200 channel
extension systems. These systems offer customers higher bandwidth applications
in which data compression can add the most value and customer savings.
TechForce also believes it can further capitalize on the growing market for
outsourcing network technology support. The Company provides the traditional
service offerings, and is expanding its menu of professional service offerings.
In late 1996, the Company introduced TechCare(SM), a suite of network management
services. Services
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provided under TechCare include fault management, network configuration and
performance management. Management believes that these new services will
contribute significantly to its future growth.
Address Growing Market for Remote and Mobile Computing. With its nationwide
logistics and service delivery capabilities, the Company believes it is well-
positioned to support emerging data networks, which are reaching beyond the
traditional boundaries of corporate headquarters and branch office locations.
Today's new corporate data network includes telecommuters, mobile computer
users, and the SOHO users. These changes are creating "virtual" corporate
networks that magnify the support and logistics burden on corporate IT
organizations. TechForce continues to expand and improve its capacity to perform
cost effective custom services to address the increasing need to support the
"virtual" corporate networks.
Management anticipates that with the Company's service delivery infrastructure
and high volume call management capability __ currently handling up to 10,000
in-home PC support calls monthly __ it is well-positioned to support the virtual
office network.
Explore Acquisition Opportunities. Given the highly fragmented nature of the
technology service industry, management believes that significant acquisition
opportunities exist. Management seeks opportunities to acquire inventory, skills
and capabilities complementary to those of the Company.
Increase Logistical Efficiencies. Management believes its centralized inventory
management proximity to the Federal Express Corporation ("FedEx") hub in Memphis
enhances its ability to provide responsive, high-quality repair service on a
cost effective basis. In addition, by allocating its field support resources
among multiple vendors, subcontracting additional logistical support when
necessary and using its own local field service resources in areas of high
demand, the Company is able to achieve economies of scale that enable it to meet
demand fluctuations and deliver its services on a cost effective basis.
The continued growth of the Company's client 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 continue to successfully
implement enhancements to its business management systems and to adapt those
systems as necessary to respond to changes in its business.
THE TECHFORCE SOLUTION
TechForce, with in-depth experience in both IBM SNA networks, and LAN/WAN
internetworks, is equipped to help organizations meet their networking and
information technology management challenges. TechForce's strategic focus on
enterprise networking has produced a broad array of support solutions to deliver
high-quality multi-vendor support. The Company provides its networking services
from its Technology Support Center, in Clearwater, Florida, to over 1,000
customers throughout the US, Canada, and the United Kingdom. TechForce services
include:
[_] 7X24 remote diagnostics and technical support
[_] Network capacity planning.
[_] Equipment/software staging and installation
[_] On-site and depot maintenance (advance equipment replacement)
[_] Project management
[_] TechCare Network Management
- Fault Management
- Configuration Management
- Performance Management
On-site services are delivered by a network of over 1,400 authorized field
support engineers __ strategically located across the US, Canada, and the United
Kingdom __ the Company can dispatch specific Customer Support Representatives
with specific skills to match customers' specific support requirements.
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The Company supports and sells a variety of new and used networking technologies
from a number of leading manufacturers including:
[_] Internetworking Technologies:
- Routers
- Hubs
- Switches
- Frame Relay Access Devices
[_] Network Access:
- DSU's, CSU's, Modems, ISDN Terminal Adapters
- Multiplexers, Inverse Multiplexers, Bandwidth Controllers
[_] Channel Networking Controllers
- Pixnet-XL Channel Extenders
- OEM Channel Extension Systems
- Channel Interface Processors (CIP)
TechForce forms strategic support and resale relationships with best-in-class
manufacturers to provide the best support and products to its corporate
customers. Some of these manufacturers include Cisco Systems Inc. Computerm
Corporation, Ascend, Sync Research, A T & T Paradyne (now known as Paradyne
Corporation), Micom, TxPort, Premisys, Tellabs, Larscom, LanOptics, Magnalink,
Netcon, and IBM. These relationships provide TechForce access to products and
the manufacturer's technical and engineering resources which allows the Company
to better support its customers.
In 1996, the Company became the first US Company certified to sell and support
the Cisco Systems Inc. Channel Interface Processor (CIP). In addition, TechForce
became a Cisco Systems Inc. Silver Certified Support Partner in the United
States. These distinctions place TechForce in an elite class of support
providers for Cisco Systems Inc. products. In addition, the Company formed an
alliance with Computerm Corporation, a manufacturer of high-end channel
extension technologies. This agreement provides the Company's current Pixnet-XL
channel extension customers a logical growth path, and should allow the Company
to maintain a longer term support relationship with these customers.
The Company leverages its shipping capability ___ its Memphis, Tennessee depot
and proximity and relationship with FedEx ___ to deliver equipment, parts, or
complete units such as a laptop PC overnight anywhere in the US.
SERVICES
The Company provides a wide-variety of services, including network design,
integration, staging and installation; equipment sales and leasing; depot
repair; on-site maintenance; remote, on-line diagnostic and networking support;
and help desk support. These services are described below.
Network Design. TechForce works with corporate clients in designing integrated
networks comprised of multi-protocol routers, access devices such as digital
server units ("DSUs"), channel service units ("CSUs"), modems and frame-relay
access devices, multiplexers, switches and hubs. Design services facilitate the
Company's sale and ongoing support of networking products and assist customers
in implementing complex networks.
Integration, Staging and Installation. The Company provides on-site installation
for products it sells and supports, ranging from a single stand-alone unit or
DSU to complex nationwide networks involving multiple products at each site. To
ensure timely and complete on-site installation, TechForce provides optional
integration and staging services to complement the installation process. The
Company assembles various hardware components, including chassis, network cards,
cables and software, representing multiple discrete products. Complete hardware
and software configurations are integrated and tested prior to repackaging and
shipment to the customer's location for installation.
Equipment Sales and Leasing. The Company offers a variety of new and refurbished
products to its customers on a purchase, lease or short-term rental basis, which
facilitates the sale of support agreements. This capability also enables the
Company to provide a total, integrated customer solution including support and
products and permits it to establish
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strategic reseller relationships with product manufacturers that enhance the
Company's overall support capabilities. In addition, the Company's leasing
capability often allows it to establish a relationship with a customer that
facilitates continued support and equipment revenues over a longer term than a
typical purchase transaction.
Depot Repair. The Company offers depot repair by centralized bench technicians
as a more cost effective way to effect equipment repairs than performing the
repair at a customer's site which is less disruptive for the customer. Depot
repair enables on-site service technicians to replace failed equipment or
components rapidly. The Company's depot repair capabilities, coupled with its
centralized parts and logistics management, allows the Company to offer
manufacturers and users of hand-held devices, such as FedEx, next-day
replacement service coupled with cost effective repair. The Company also
utilizes its repair capabilities to refurbish used technology before placing it
in service.
On-Site Maintenance. TechForce services PCs and a wide-variety of networking
products at customer locations nationwide. For customers requiring rapid repair
of critical networking hardware, the Company offers two-hour and four-hour on-
site service response time on a 7 x 24 basis. Certain complex, mission-critical
products such as routers, multiplexers and channel extenders require this level
of service. Next-day and two-day service is provided for cases in which an
outage will not severely impact the customer's operations. Certain networking
products such as dial modems used for remote diagnostics can also often be
serviced on a next-day basis.
Remote, On-Line Diagnostic and Networking Support. TechForce utilizes on-line
problem resolution tools and emphasizes rapid service restoration. The Company's
ability to access its customers' systems from a centralized location and resolve
many problems while on-line reduces the Company's costs and saves the customer
the delay of an on-site visit. The Company's technical support personnel use a
variety of proprietary and standards-based tools, including SNMP network
managers such as HP OpenView and Cisco Systems Inc. Works, to troubleshoot and
resolve customer problems on a remote basis. Some of these tools automatically
dial into the Technology Support Center without customer intervention to notify
the support technicians of an equipment or network problem. This allows the
Company to begin the problem determination process before the customer is aware
of a problem or during off hours when customer personnel are not on-site.
Help Desk Support. The Company provides help desk support for end-users of PCs
and other computer and networking equipment who require sophisticated and timely
maintenance and support services. The Company offers such support on a seven
days a week, 24 hours a ("7 x 24"), toll-free basis.
PRODUCTS OFFERED
The Company sells a variety of products to provide a total integrated network
solution from the mainframe channel to the desktop. The Company's proprietary
channel extension technology, Pixnet-XL, allows mainframe users to place
peripherals such as high-speed printers, check sorters and tape drives, that
would normally be limited to distances within 400 feet of the mainframe,
virtually anywhere in the world. The Pixnet-XL channel extender accomplishes
this over a variety of communications facilities ranging from satellites to
standard telephone lines.
For mainframe SNA users migrating to multi-protocol, open-systems networks, the
Company features Cisco Systems Inc. routers with a channel interface processor
that provides high-speed mainframe access for end-users. In addition to Cisco
Systems Inc. routers and other internetworking products, the Company sells
traditional data communications products including multiplexers, inverse
multiplexers and a variety of network access devices including DSUs, CSUs,
modems, frame relay access devices and ISDN inverse multiplexers. The Company
also offers intelligent hubs and switches in a local area network.
The Company also sells refurbished products, particularly in the data
communications products area. Refurbished products coupled with integrated
services often provide attractive, low-cost solutions to end-users.
OPERATIONS
Technology Support Center. The Company's Technology Support Center, located in
Clearwater, Florida, provides customers with toll-free, 7 x 24 technical support
on a mission-critical basis. The Company dispatches customer support
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representatives and other on-site service providers out of the Technology
Support Center. The Center, coupled with field network consultants, also
provides network design, project management and design engineering services.
Technical Operations Center. TechForce provides logistics management,
manufacturing, component and sub-assembly system repair and advance
replacement/disaster recovery services for mission-critical equipment, including
PCs, peripherals, networking products, computer devices and channel extenders,
at its Technical Operations Center in Memphis, Tennessee. The Company's depot
repair service generally features 12 to 24-hour turnaround. The Company's
location in Memphis enables it to process depot repairs quickly and conveniently
through the use of FedEx shipments, although, the Company may employ the
services of other shipping companies as well. Upon request, the Company will
ship replacement parts to its customers as soon as a repair call is received.
This minimizes customer down time and enhances the Company's appeal to customers
with mission-critical applications.
Personal Computer Support. The Company manages its personal computer support
business to deliver high-quality, timely and reliable service by centralizing
service management and logistics functions and deploying remote resources to
meet Packard Bell NEC Inc. ("Packard Bell") customer needs. Centrally located
TechForce operators review trouble notices sent to the Company from Packard
Bell. These operators then contact the Packard Bell customer to coordinate the
two elements of the service call: parts and service. Once a service appointment
has been scheduled, a pre-configured parts package specific to the apparent
problem is sent directly to the appropriate field engineer. At the same time,
the Company's dispatchers select the most cost effective source for customer
support representatives (in-house or other) in that particular location and
dispatch an engineer to make the repairs. After making the repairs, the engineer
ships the defective parts (and the balance of any good parts not used) back to
the Company in the original shipping container. Repairs are thus performed
quickly, inexpensively and with minimal service interruption for the end-user.
The Company also began providing PC support services to another customer in late
1996.
The Company manages its PC parts inventory centrally from its Memphis location,
thus enabling it to use the FedEx transportation hub for a substantial portion
of the Company's distribution requirements; however, the Company may develop
business relationships with other domestic and international shipping companies
whose services the Company employs in addition to those of FedEx. Parts required
for next-day service can be shipped until approximately 11:00 p.m. Central Time.
The Company's practice of centralizing parts inventory reduces the level of
overall inventory in Packard Bell's system, minimizing the problem of highly-
dispersed parcels of parts spread throughout the field force or located in
disparate locations.
Management believes these innovations enable TechForce to deliver high-quality
service while maintaining an efficient infrastructure. Field service engineers
are often outsourced on a flexible basis, minimizing the risk of the build-up of
fixed costs. Inventory levels are minimized and more controllable at the central
site. Overnight delivery and central dispatching minimize engineer downtime and
confusion over the correct parts for a given problem. The Company is therefore
able to offer Packard Bell and other customers premium, cost effective service
at relatively modest expense.
CUSTOMERS
The Company has over 1,000 customers in the United States, Canada and the United
Kingdom. The Company's customers include large corporate clients, PC and
networking equipment manufacturers, telecommunications carriers and integrators.
Corporate clients require integrated support solutions and networking products
and services for local area networks, wide-area networks and channel extenders;
PC and networking equipment manufacturers required rapid cost effective parts
movement, remote diagnostics and support, quick turnaround repair and
replacement and on-site field service; and telecommunications carriers and
integrators require both integrated and specialized support solutions. The
Company's three largest customers were Packard Bell, which accounted for
approximately $17.5 million (35.5% of total revenues) for 1995 and $12.5 million
(19.7% of total revenues) for 1996; FedEx, which accounted for approximately
$5.7 million (11.5% of total revenues) for 1995 and $6.9 million (10.9% of total
revenues) for 1996; and National Medical Care, Inc. (now known as Fresenius
Medical Care North America) a new customer for which the Company provided
network equipment support, installation services, and leased hardware for $8.6
million (13.6% of total revenues) for 1996. No other single customer of the
Company accounted for more than 10% of the Company's total revenues in these
periods. The loss of either Packard Bell, FedEx or Fresenius Medical Care of
North America as a customer, or a significant reduction in their respective
purchases from the Company, would have a material adverse effect on the
Company's results of operations and financial condition in the near term.
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STRATEGIC RELATIONSHIPS
The Company has formed relationships with a variety of companies, including
Packard Bell, FedEx, Paradyne, Cisco Systems Inc., IBM and LogisTechs
Incorporated ("LogisTechs"), that benefit the Company.
Packard Bell. Since 1992, the Company has provided to Packard Bell in-home
warranty maintenance, including technical support, on-site and depot repair and
on-site call management, for Packard Bell PC users. Service is dispatched
centrally from the Company's Technology Support Center and parts are shipped
from the Company's Technical Operations Center. The Company's contract with
Packard Bell expires on November 1, 1997. Management believes that the agreement
will be renewed. Revenues from services provided to Packard Bell increased from
$1.4 million in 1992 to $17.5 million in 1995, or 35.5% of revenues, and then
decreased to $12.5 million, or 19.7% of revenues in 1996. 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. In May 1996, the Company experienced a temporary
disruption in Packard Bell business as the two companies negotiated disputes
related to past due accounts receivable owed by Packard Bell to the Company and
Packard Bell repair parts inventory held by the Company. In resolution of that
dispute, the companies agreed to reduce the volume of business going forward.
Accordingly, the Company expects to reduce its concentration of revenue from
Packard Bell in the future. Pursuant to the agreement reached, the Company
returned substantially all of Packard Bell's inventory and Packard Bell has paid
the Company all but $1.9 million of the dated accounts receivable. The parties
have entered into a written agreement which specifies that the agreed balance
will be paid in full over time. Furthermore, the volume of business from Packard
Bell has resumed to approximately 80% of the average 1995 quarterly volume.
Prior to the dispute the Company had typically received payment from Packard
Bell approximately 90 to 130 days after the billing date, which was generally a
longer payment cycle than experienced under its other service contracts.
Subsequent to the settlement of the dispute, the Company has typically received
payment from Packard Bell on business since the dispute approximately 60 days
after the billing date. Management believes that these payment practices will
continue for the foreseeable future. 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 effect on the Company's cash flow.
FedEx. The Company has serviced certain electronic equipment for FedEx on an
outsourced basis since 1991. TechForce provides FedEx with same-day repair and
return of electronics equipment from its Technical Operations Center in Memphis,
Tennessee. FedEx has begun implementing new technology in some of the areas
where the Company supports FedEx with equipment repair services. Management
believes that this introduction of new technology will likely lead to reductions
in business volumes for repair of the affected equipment. The Company also
provides FedEx with a contract technical labor force that performs mission-
critical equipment maintenance at the FedEx Technical Service Center in Memphis,
Tennessee. The Company's repair contract with FedEx expired on October 31, 1996
and was renewed for an additional three years. FedEx may terminate services
under the agreement upon 90 days' prior written notice. The Company's contract
with FedEx for the provision of contract technical labor expired on June 19,
1996 and was renewed for an additional three years. This contract may be
terminated by FedEx upon written notice. Revenues from services provided to
FedEx increased from $1.8 million in 1991 to $6. 09 million in 1996 or 10.9% of
revenues.
Paradyne Corporation (formerly AT & T Paradyne). Since July 1, 1994, TechForce
has resold Paradyne Corporation access products, including DSUs, modems and
multiplexers, on an individual basis or as part of an integrated network
solution. TechForce also supports these products, although support is outside
the scope of its agreement with Paradyne. The original agreement expired March
31, 1995, and was replaced by a new distributor agreement in November 1995. The
new agreement expires on March 31, 1997 and automatically renews for successive
one year periods. Either party may terminate the agreement without cause on 60
days' prior written notice.
Cisco Systems Inc. - In June 1995, the Company entered into a reseller agreement
with Cisco Systems Inc. to resell and provide support for Cisco Systems Inc.
entire line of products throughout North America. TechForce features Cisco
Systems Inc. internetworking products as part of its integrated network solution
and supports Cisco Systems Inc. Channel Interface Processor, which provides
high-speed network access to the IBM and IBM compatible mainframe channel. The
term of the agreement is one year and it may be terminated by either party upon
30 days' prior written notice.
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IBM and Other Field Service Relationships. Since January 1, 1995, the Company
has subcontracted a substantial portion of its field service for its channel
extension products to IBM. Under this contract, the Company refers its channel
extension field service calls to IBM, with IBM dispatching its employees to
perform the required field service. Since 1992 and prior to 1996 the Company had
also subcontracted a large portion of its Packard Bell field service to FedEx.
Under this contract, the Company referred its Packard Bell field service calls
to FedEx, with FedEx dispatching its employees to perform the required field
service. These relationships enabled the Company to meet demand fluctuations
while giving IBM and FedEx the opportunity to increase revenue from their
existing field service organizations. The Company's contract with IBM expired on
January 1, 1997 and was extended through March 31, 1997. The Company is
currently re-negotiating this contract and expects to renew the agreement under
substantially similar terms for a one-year period. Early in the third quarter of
1995, the Company implemented a program to establish a network of local
authorized service providers ("ASPs") with whom it contracted for PC field
repair services. Subsequently the Company has eliminated its reliance on FedEx
for Packard Bell field calls and currently provides for all PC repair field
calls via its network of ASPs.
The Company currently has approximately 60 ASPs in place in order to fulfill its
Packard Bell field service obligations. ASPs range in size from small businesses
covering a limited geographic area to large companies covering several cities.
Although the Company incurs additional administrative costs as a result of the
need to contract with and supervise several ASPs instead of relying on a single
third-party service provider, management believes these costs are outweighed by
the savings resulting from the use of ASPs. The Company has experienced
consistent overall quality, reliability and responsiveness of its field service
subsequent to the transition from reliance on FedEx. The Company's reliance on
ASPs has not had a material adverse effect on its competitive position.
LogisTechs. The Company is able to deliver spare and replacement parts
efficiently on an overnight basis to meet next-day delivery requirements.
However, the internal cost of making deliveries in time to meet a two-hour or
four-hour response deadline is currently prohibitive. Consequently, in 1994, the
Company contracted with LogisTechs, which focuses on providing rapid local
delivery and logistical support, to provide such services for the Company in
connection with its same-day service requirements. This enables the Company to
meet its customers' mission-critical response requirements on a cost effective
basis. The Company's contract with LogisTechs expired on December 29, 1996 and
was renewed for a one-year period, subject to written notice by either party at
least 90 days prior to the end of the term of its intent not to renew.
SALES AND MARKETING
As of December 31, 1996 the Company's sales organization consisted of 47 direct
sales and sales support personnel located in the United States, Canada and the
United Kingdom. The Company's sales force has an average of over 15 years of
experience in the sale of networking products and support services. The Company
operates in three primary sales channels: (i) direct "end-user" sales, which
provide integrated support and equipment solutions to large corporate accounts;
(ii) sales to manufacturers, and other integrators that provide customized
support solutions; and (iii) international sales, which provide channel
networking and other networking support and equipment solutions to corporate
clients and distributor partners. The Company relies primarily on direct sales,
but uses other channels, including, in addition to those listed above, agents
with particular customer or geographic specialties and subcontractor
relationships with systems integrators and prime contractors.
COMPETITION
While many companies provide support services to users and manufacturers of
electronic equipment, management believes no one company is dominant. Management
believes competition is based primarily on service quality, reliability,
responsiveness and convenience and to a lesser extent on price. Management
believes the Company competes with three types of service providers: (i)
equipment vendors and manufacturers; (ii) VARs and distributors with repair
capabilities; and (iii) third party service providers. Many of these
competitors, particularly vendors and manufacturers, have longer operating
histories; greater financial, technical, sales, marketing and other resources;
greater name recognition; more extensive distribution and sales networks; and a
larger, more established customer base than the Company.
8
<PAGE>
EMPLOYEES
As of December 31, 1996, the Company had 439 employees, of whom 316 were full-
time employees, 75 were full-time contract employees and 48 were temporary or
part-time employees. The Company also uses a significant number of contract
personnel in its field service operations. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and considers its employee relations to be good.
ITEM 2. PROPERTIES
- ------------------
The Company conducts its operations in the United States principally out of its
facilities in Clearwater, Florida; Memphis, Tennessee; and Chicago, Illinois;
and in Europe out of its facilities in Reading, England. The Company occupies
approximately 24,500 square feet at its Clearwater, Florida facility, its
administrative headquarters and home to the Company's technical support
services; approximately 52,000 square feet at its Memphis, Tennessee facility,
which includes approximately 18,000 square feet of office and repair work space
and approximately 34,000 square feet of warehouse space that houses the
Company's depot repair, staging and logistics operations; and approximately
4,245 square feet of office space in its Chicago, Illinois facility which is
used for sales and marketing operations. The Company's facilities in the United
Kingdom consist of approximately 7,000 square feet of office and warehouse space
that is used to support the Company's European operations. The Company also
maintains a number of smaller remote sales offices in the United States and
Canada. As of March 11, 1997, the Company executed a lease for a new 30,000
square feet corporate office facility to be located in a new building to be
constructed in the same business park as its current corporate headquarters.
Under the terms of this new 5 year lease the Company would take occupancy in
February 1998 and, concurrent with occupancy, its present headquarter's lease
would be terminated with no further obligation on the part of the Company.
Otherwise the Company anticipates that its current facilities will adequately
support its operations in the near future. All of the Company's facilities are
subject to leases with the following expiration dates: Clearwater, Florida -
January 31, 2003; Memphis, Tennessee - August 1, 2000; Chicago, Illinois - June
30, 1998; Reading, England - September 29, 1999.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
From time to time, the Company is involved in routine litigation and proceedings
in the ordinary course of its business. Management believes that such litigation
and proceedings would not, if decided adversely to the Company, have a material
adverse effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
9
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
The Company's Common Stock is traded on the NASDAQ National Market System under
the symbol "TRFC" The Company has never declared or paid any cash dividends on
its Common Stock. The Company anticipates that all of its earnings will be
retained for the operation and expansion of the Company's business and does not
anticipate paying any cash dividends in the foreseeable future. The Company's
credit facility contains certain restrictive covenants which, among other
things, require the Company to maintain certain financial ratios and restricts
the Company's ability to pay dividends. The chart below sets forth the high and
low stock prices for the time period since the commencement of the Company's
initial public offering on December 14, 1995.
<TABLE>
<CAPTION>
HIGH LOW
----- ----
<C> <C>
<S>
1995
----
December 14, 1995__ December 31, 1995 11.50 8.25
1996
----
First Quarter 11.75 8.00
Second Quarter 13.25 5.75
Third Quarter 8.00 4.00
Fourth Quarter 8.63 5.00
At March 18, 1997, there were approximately 82 shareholders of record.
</TABLE>
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following selected financial data is derived from the consolidated financial
statements of the Company. The data should be read in conjunction with
consolidated financial statements, related notes and other financial information
herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- ------------- ---------- ----------
STATEMENT OF OPERATIONS DATA: (in thousands, except share data and percentages)
<S> <C> <C> <C> <C> <C>
Revenues:
Services (Note 1)............................ $ 35,191 $ 35,466 $ 20,882 $8,899 $4,858
Hardware..................................... $ 28,082 $ 13,766 9,856 -------- --------
---------- ---------- ---------- ------ ------
Total revenues.......................... 63,273 49,232 30,738 8,899 4,858
---------- ---------- ---------- ------ ------
Direct costs:
Services..................................... 23,250 24,391 16,559 5,604 2,696
Hardware..................................... 19,504 9,173 4,242 -------- --------
---------- ---------- ---------- ------ ------
Total direct costs...................... 42,754 33,564 20,801 5,604 2,696
---------- ---------- ---------- ------ ------
Gross margin:
Service...................................... 11,941 11,075 4,323 3,295 2,162
Hardware..................................... 8,578 4,593 5,614 -------- --------
---------- ---------- ---------- ------ ------
Total gross margin...................... 20,519 15,668 9,937 3,259 2,162
---------- ---------- ---------- ------ ------
Operating costs:
Selling and marketing........................ 10,330 7,754 4,278 354 115
Research and development..................... 1,718 1,147 585 ------- --------
General and administrative................... 4,490 3,379 2,843 917 719
Nonrecurring charges........... 243 600 -------- -------- --------
---------- ---------- ---------- ------ ------
Total operating costs................... 16,781 12,880 7,706 1,271 834
---------- ---------- ---------- ------ ------
Operating income.................................. 3,738 2,788 2,231 2,024 1,328
Interest income, net.............................. 103 1,106 834 11 3
---------- ---------- ---------- ------ ------
Income before income taxes and
minority interest............................ 3,635 1,682 1,397 2,013 1,325
---------- ---------- ---------- ------ ------
Income tax provision (benefit).................... 1,312 671 (259) ------- -------
Minority interest............................ ------- ------- 66 ------- -------
---------- ---------- ---------- ------ ------
Net income........................................ $ 2,323 $ 1,011 $ 1,590 $2,013 $1,325
========== ========== ========== ====== ======
Pro forma net income.............................. $ 2,323 $ 1,011 $ 771 $1,020 $ 686
========== ========== ========== ====== ======
Pro forma net income per common share............. $0.28 $0.16 $0.13
========== ========== ==========
Pro forma weighted average
8,355,058 ========== ==========
common shares outstanding................. ========== 6,266,267 5,909,369
========== ==========
OTHER DATA:
Gross margin %
Service..................................... 33.9% 31.2% 20.7% 37.0% 44.5%
Hardware.................................... 30.5% 33.4% 57.0% 0.0% 0.0%
Gross margin...................................... 32.4% 31.8% 32.3% 37.0% 44.5%
BALANCE SHEET DATA:
Working Capital................................... $ 14,746 $ 19,420 $ 3,666 $1,926 $1,066
Total assets...................................... $ 46,483 $ 38,307 $ 25,017 $2,954 $1,559
Long-term obligations............................. $ 6,180 $ 2,735 $ 9,231 ------ ------
Redeemable convertible
Preferred stock............................. ------ ------ 4,259 ------ ------
Partner's capital /
shareholders' (deficit) equity.............. $ 28,494 $ 26,017 ($802) $2,010 $1,110
</TABLE>
Note 1: Change from 1995 to 1996 included 28.6% decrease in PC Support Revenues
offset by 26.6% increase in Enterprise Support Revenues
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
OVERVIEW
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, on-site and depot
repair and on-site call management, to Packard Bell PC users. In March 1994,
consistent with its strategy to become a provider of integrated support
services, the Company purchased Pixnet-XL inventory and replacement parts and
various engineering equipment from one of Paradyne's product divisions and
assumed obligations of 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 support offerings
and expanded its customer base to over 500 customers at that time. The Company
developed a product management and sales force, a field support service network
using primarily contracted third parties, an administrative support network
using the Company's information systems and administrative staff. The Company
emphasizes the sale of a broad-range of integrated support services to customers
who may also require channel extension products. The Company 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 does not foresee that the sale of Pixnet-XL
products is a source of future revenue growth and development.
As a result of these initiatives, the Company's total revenues have grown from
$1.8 million in 1991 to $63.3 million in 1996. The Company completed the initial
public offering of 3,100,000 shares of its common stock including 880,000 shares
sold by selling shareholders in December 1995. The Company has expanded from
providing specialized services to providing a combination of maintenance and
repair services and increasingly sophisticated networking and other value-added
service offerings. Services provided to manufacturers such as Packard Bell and
end-users such as FedEx constitute an important part of the Company's overall
support solution and have helped provide the Company with the infrastructure
necessary to offer increasingly complex, value-added networking services to end-
users while continuing to provide customized support to manufacturers and
integrators.
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 as
cost of sales. The associated interest income is recognized over the term of the
lease. Revenues derived from sales-type leases in 1995 and 1996 were
approximately $150,000 and $12,948,000, respectively. There were no sales-type
lease activities in 1994.
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 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.
In October 1995, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," which the Company adopted 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 and earnings per share. The Company's management has disclosed the
pro forma effect on net income and earnings per share in its notes to its
financial statements. Other issued but not yet required FASB standards are not
currently applicable or material to the Company's operations.
12
<PAGE>
Management anticipates that revenues from its proprietary channel extension
products and services will gradually decrease over the next several years at a
rate of approximately 10% to 15% 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. Revenues attributable to Packard
Bell grew from $1.9 million in 1992 to $17.5 million in 1995 and then declined
to $12.5 million in 1996 representing a 29% decrease from 1995 to 1996 primarily
as the result of second quarter issues related to past due accounts receivable
from Packard Bell to the Company and levels of Packard Bell inventory held by
the Company. The resolution of these issues resulted in a plan of agreement
between the companies for the reduction of accounts receivable by Packard Bell
and the return of inventory by the Company. As of March 13, 1997, the companies
agreed to a final resolution and a payment plan whereby Packard Bell would pay
its agreed obligations to the Company. Although revenues from Packard Bell for
the three months ended December 31, 1996 increased to approximately 84% of the
average 1995 quarterly revenue, there is no assurance that this volume of PC
support business will continue. This market continues to be extremely
competitive. Furthermore, the Company's reliance on authorized service providers
("ASPs") 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 ASPs are unable to fulfill their field service obligations in a timely
or satisfactory manner.
The Company operates in two geographic areas -- North America and Europe.
Revenues from North American operations were $47.1 million for 1995 and $61.6
million for 1996, while revenues from European operations were $2.1 million and
$1.7 million for the respective periods. Management has no immediate plans
regarding further expansion into foreign markets. (See Note 8 of Notes to
Consolidated Financial Statements.)
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 been profitable, its limited operating
history makes the prediction of future operating results difficult. There can be
no assurance that the Company's revenue growth will continue in the future or
that recent 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. The Company does not intend to grow its market for the Pixnet-XL
product line acquired from AT&T Paradyne 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. 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.
The transaction described above has facilitated the Company's entry into
integrated support offerings and expanded its customer base to over 500
customers at that time. Revenues from the sale of channel extension hardware
products totaled approximately $7.1 million, $3.3 million and $2.7 million,
respectively, during 1994, 1995 and 1996. Service revenues related to channel
extension products totaled approximately $9.3 million, $12.0 million and $12.3
million, respectively, during 1994, 1995 and 1996.
13
<PAGE>
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth the percentage of
total revenues represented by certain items in the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Services 67.9% 72.0% 55.6%
Hardware 32.1 28.0 44.4
---- ---- ----
Total revenues 100.0 100.0 100.0
Direct costs:
Services 53.9 49.6 36.7
Hardware 13.8 18.6 30.8
---- ---- ----
Total direct costs 67.7 68.2 67.6
---- ---- ----
Gross margin 32.3 31.8 32.4
---- ---- ----
Operating costs:
Selling and marketing 13.9 15.7 16.3
Research and development 1.9 2.3 2.7
General and administrative 9.2 6.9 7.1
Nonrecurring charges 0.0 1.2 .4
--- --- --
Total operating costs 25.0 26.1 26.5
---- ---- ----
Operating income 7.3 5.7 5.9
Interest expense, net 2.7 2.2 .2
--- --- --
Income before income taxes 4.5 3.5 5.7
Income tax provision (benefit) (0.8) 1.4 2.1
Minority interest 0.2 0.0 0.0
--- --- ---
Net income 5.2% 2.1% 3.7%
==== ==== ====
Pro forma net income 2.5% ---- ----
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.
Total Revenues. Total revenues increased 28.7% from $49.2 million for 1995 to
$63.3 million for 1996. Substantially all of the increase was represented by
increased hardware revenues. Increased enterprise support revenues were offset
by decreased revenues from PC support resulting in no overall increase in
service revenues.
Service Revenues. Revenues from services decreased 0.8% from $35.5 million
(72.2% of total revenues) in 1995 to $35.2 million (55.6% total revenues) in
1996. This decrease was caused by a significant decrease in PC support revenues
related to the Company's second quarter Packard Bell issues. This decrease was
substantially offset by equally significant increases in enterprise support
revenues. PC support revenues decreased by 28.6% from $17.5 million for 1995 to
$12.5 million for 1996.
Hardware Revenues. Revenues from hardware products increased 103.6% from $13.8
million (28.0% of total revenues) in 1995 to $28.1 million (44.4% of total
revenues) in 1996. The increase in hardware revenues was attributable primarily
to the increased resale of other manufacturers' hardware and included revenues
from the Company's hardware leasing activities.
14
<PAGE>
Cost of Service. Cost of service decreased 4.5% from $24.4 million (68.7% of
service revenues) for 1995 to $23.3 million (66.2% of service revenues) for
1996. The decrease was caused by decreased PC support business volumes offset by
an increased volume of enterprise service business.
Cost of Hardware. Cost of hardware increased 112.0% from $9.2 million (66.7% of
hardware revenue) in 1995 to $19.5 million (69.4% of hardware revenue) in 1996
primarily due to the increased volume of hardware revenues.
Gross Margin. Overall gross margin increased 30.6% from $15.7 million for 1995
to $20.5 million for 1996, and increased as a percent of revenues from 31.9% in
1995 to 32.4% in 1996. Gross margin for services increased 7.2% from $11.1
million in 1995 to $11.9 million in 1996. This increase was caused by increased
higher margin enterprise service revenues offset by reduced lower margin PC
support revenues. Gross margin for hardware increased 86.7% from $4.6 million
for 1995 to $8.6 million for 1996 primarily due to increased hardware volumes.
Hardware gross margin as a percent of hardware revenue decreased slightly due to
the increased mix of revenues from the resale of other manufacturers' hardware.
Selling and Marketing Expenses. Selling and marketing expenses increased 32.1%
from $7.8 million (15.9% of total revenues in 1995) to $10.3 million (16.3% of
total revenues in 1996). The increase in selling costs was primarily due to
increased selling activity in both enterprise support service contracts and
hardware.
Research and Development Expenses. Research and development expenses increased
54.5% from $1.1 million (2.2% of total revenues) in 1995 to $1.7 million (2.7%
of total revenues) in 1996 as a result of expanded service and systems
development activities.
General and Administrative Expenses. General and administrative expenses
increased 32.4% from $3.4 million (6.9% of total revenues) in 1995 to $4.5
million (7.1% of total revenues) in 1996. This increase was due to an increased
volume of business and increases in staff and related expenses associated with
the continuing development and expansion of the Company's business support
infrastructure programs to handle the growing volume of business.
Operating Income. Operating income increased 32.1% from $2.8 million (5.7% of
total revenues) in 1995 to $3.7 million (5.9% of total revenues) in 1996 as a
result of the factors listed above.
Interest Expense, Net. Interest expense decreased 90.6% from $1.1 million (2.2%
of total revenues) in 1995 to $103,000 (0.2% of total revenues) in 1996. This
decrease in net interest expense resulted from decreased interest bearing long-
term borrowings, decreases in the Company's average working capital loan balance
and increased interest income on invested funds.
Income Taxes. Income tax expense increased 93.7% from $671,000 (1.4% of total
revenues) in 1995 to $1.3 million (2.1% of total revenues) in 1996. The
Company's effective income tax rate was 39.9% for 1995 and 36.1% for 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
Total Revenues. Total revenues increased 60.2% from $30.7 million for 1994 to
$49.2 million for 1995 due to increased revenues from services and hardware
sales. Approximately 78.9% of the increase was represented by increased service
revenues, while the remaining 21.1% was represented by increased hardware
revenues.
Service Revenues. Revenues from services increased 69.8% from $20.9 million
(67.9% of total revenues) for 1994 to $35.5 million (72.2% of total revenues)
for 1995. This increase was attributable to: (i) increased service revenues
associated with the Company's channel extension product line; (ii) increases in
Packard Bell service revenues; (iii) increases in FedEx service revenues; and
(iv) increases in revenues from new services developed by the Company.
Hardware Revenues. Revenues from hardware products increased 39.7% from $9.9
million (32.1% of total revenues) for 1994 to $13.8 million (28.0% of total
revenues) for 1995 due to an increase in revenues from the resale of other
manufacturers' hardware of $7.7 million offset by a decrease in revenues from
channel extension product sales of $3.8 million.
15
<PAGE>
Cost of Service. Cost of service increased 61.4% from $16.6 million (79.3% of
service revenues) for 1994 to $24.4 million (68.7% of service revenues) for
1995. This increase was caused by an increased volume of service business
related to channel extension products and services and Packard Bell and FedEx
support agreements.
Cost of Hardware. Cost of hardware increased 116.2% from $4.3 million (43.0% of
hardware revenues) for 1994 to $9.2 million (66.6% of hardware revenues) for
1995. These changes were caused by increased hardware product sales combined
with changes in the mix of hardware revenues. For 1994, sales of the Company's
channel extension hardware comprised a majority of its hardware revenues. For
1995, however, the majority of hardware revenues resulted from the sale of other
manufacturers' hardware, which yields a lower margin than the sale of the
Company's proprietary channel extension products.
Gross Margin. Overall gross margin increased 57.7% from $9.9 million (32.3% of
total revenues) for 1994 to $15.7 million ( 31.9% of total revenues) for 1995.
Gross margin on services increased 156.2% from $4.3 million in 1994 to $11.1
million in 1995. This increase was caused by increased service revenues combined
with reductions in field service costs per call for both channel extension
product support and Packard Bell repairs. Gross margin on hardware revenues
decreased 18.2% from $5.6 million in 1994 to $4.6 million in 1995. This decrease
was caused by a change in the mix of hardware revenues from a greater proportion
of revenues from sales of higher margin channel extension hardware which is
proprietary in nature (72.0% of total hardware revenues) in 1994 to a greater
proportion of revenues from sales of lower margin hardware provided by other
manufacturers (76.0% of total hardware revenues) in 1995 partially offset by
higher total hardware revenues. Service margins as a percent of service revenues
increased from 20.7% from 1994 to 31.2% in 1995 primarily due to improved unit
costs for both channel extension product support and Packard Bell field repairs.
Hardware margins as a percentage of hardware revenues decreased from 57.0% for
1994 to 33.4% in 1995 primarily as a result of the change in the mix of hardware
revenues described above.
Selling and Marketing Expenses. Selling and marketing expenses increased 81.3%
from $4.3 million (13.9% of total revenues) for 1994 to $7.8 million (15.9% of
total revenues) for 1995. In April 1994, the Company implemented its first field
sales organization. As a result, selling costs attributed to the increased
staffing and travel expenses associated with the Company's expanded sales
organization are reflected for a full year from 1995, but are only reflected
from April for 1994.
Research and Development Expenses. Research and development expenses increased
96.1% from $0.6 million, (1.9% of total revenues) for 1994 to $1.1 million (2.2%
of total revenues) for 1995. This increase was due to increased 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 18.9% from $2.8 million, (9.2% of total revenues) for 1994 to $3.4
million ( 6.9% of total revenues) for 1995. This increase was due to an
increased volume of business and increases in staff and related expenses
associated with upgraded business support infrastructure programs that were
initiated in mid-1994.
Non-recurring Charges (Relocation and Termination Costs). The Company
recognized non-recurring relocation and termination costs of $600,000 during
1995 as a result of the Company's relocation of its Atlanta, Georgia
headquarters to its Clearwater, Florida facility. Management does not expect to
incur any additional expenses in connection with the relocation.
Operating Income. Operating income increased 25.0% from $2.2 million (7.3% of
total revenues) for 1994 to $2.8 million (5.7% of total revenues) for 1995 as a
result of the factors listed above.
Interest Expense, Net. Interest expense increased 32.6% from $8.0 million (2.7%
of total revenues)for 1994 to $1.1 million (2.2% of total revenues) for 1995.
The Company's Subordinated Notes and another promissory note were issued in
March 1994. The increase in interest expense resulted from the recognition of
interest on these obligations for a full year for 1995 and on increased
borrowings under the Company's line of credit. Interest income was not material
for either period. In December 1995, the Company repaid all amounts due under
both the Subordinated Notes and the line of credit from proceeds from its
initial public offering.
16
<PAGE>
Income Taxes. The Company recognized a $718,000 tax benefit for 1994 that
included a $788,000 deferred income tax benefit relating to the conversion of
the Company's predecessor partnership to a corporation and excluded a $35,000
pro forma provision on the non-taxable income of the partnership prior to the
conversion. The Company's pro forma effective income tax rate was 40.1% for 1994
and the income tax rate was 39.9% for 1995.
QUARTERLY RESULTS
The following table presents certain unaudited quarterly financial information
for each of the eight preceding quarters through December 31, 1996. In the
opinion of management, this information has been prepared on the same basis as
the audited financial statements appearing elsewhere herein and all necessary
adjustments (consisting only of normal recurring adjustments) have been included
in the amounts stated below to present fairly the unaudited quarterly results
when read in conjunction with the audited financial statements of the Company
and notes thereto. The Company's quarterly results have in the past been subject
to fluctuations, and thus the operating results for any quarter are not
necessarily indicative of results for any future periods. All amounts shown
(except per share amounts) are expressed in thousands.
<TABLE>
<CAPTION>
==================================================================================================
SUMMARY OF QUARTERLY RESULTS
(UNAUDITED)
==================================================================================================
(IN THOUSANDS, EXCEPT FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
1995 1995 1995 1995 1996 1996 1996 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $9,263 $13,110 $12,238 $14,621 $17,227 $13,341 $14,892 $17,813
Gross Margin 2,748 4,293 4,132 4,495 5,184 3,531 5,087 6,717
Operating Income 203 1,083 414 1,088 1,398 (796) 1,417 1,719
Net Income (loss) (57) 481 81 506 907 (508) 864 1,060
Net Income (loss) per ($.01) $ .08 $ .01 $ .08 $ .11 $ (.06) $ .10 $ .13
common and common
equivalent share
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of $504,000 in 1994, and provided
cash of $2.7 million in 1995 and $6.3 million in 1996. The use of cash resulting
from the Company's operating activities in 1994 was due to increased working
capital requirements associated with the Company's new channel extension product
line. The Company generated cash from operating activities in 1995 as a result
of improved management of working capital and in 1996 as a result of improved
operating results and improved management of working capital.
17
<PAGE>
The Company's investing activities used cash of $5.4 million in 1994, $14.8
million in 1995 and $6.7 million in 1996. Cash used in the Company's investing
activities in 1994 related to the Company's purchase of 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 and the
purchase of property and equipment. Cash used in the Company's investing
activities for 1995 related to the purchase of property, plant and equipment and
the investment in marketable securities by the Company of a portion of the
proceeds from its initial public offering. Cash used in the Company's investing
activities for 1996 related to the purchase of property, plant and equipment and
investment in capitalized leases related to hardware leased to customers. ( See
Note 1 of Notes to Consolidated Financial Statements.)
Financing activities provided cash of $5.8 million in 1994, $12.2 million in
1995 and $3.8 million in 1996. The Company's financing activities generated cash
in 1994 as a result of the issuance of $4.3 million in Convertible Redeemable
Preferred Stock, $5.0 million in Subordinated Notes and net additional
borrowings of $2.2 million under the Company's credit facility. These activities
were offset by payment of a $4.1 million common stock dividend to the founding
shareholders, repayments of long-term debt in the amount of $1.2 million and
partnership distributions of $415,000. The Company's financing activities
generated cash in 1995 as a result of its initial public offering with net
proceeds of $21.7 million. These activities were offset by repayment of the
Subordinated Notes and net repayments of borrowings under its credit facility.
(See Notes 3 and 5 of Notes to Consolidated Financial Statements.) Cash
generated from the Company's financing activity in 1996 resulted from the
Company's lease discounting activity which included the issuance of certain non-
recourse notes payable to banks. Per Staff Accounting Bulletin (SAB 70) such
non-recourse debt, when related to sold financial assets (the related lease
revenues receivable) must be reported as debt and amortized together with the
related lease receivable rather than deducted from the related lease receivable
balance at the time of the discounting transaction. First Union National Bank,
in the calculation of the Company's debt to earnings covenants does not consider
such non-recourse notes in the determination of the Company's debt.
The Company's cash requirements have been financed with cash flow from
operations and borrowings under its revolving credit facility with First Union
National Bank of Florida (the "Bank") since October 1996. Prior to October 1996,
the Company's credit facility was with SouthTrust Bank of Georgia, N.A. The
credit facility with the Bank provides for borrowings of up to $15.0 million
based on the value and aging of the Company's eligible accounts receivable and
eligible leases. Borrowings under the line of credit bear interest at the Bank's
quoted variable base rate, which has ranged from 6.87% to 9.00% and was 7.15% as
of December 31, 1996. As of December 31, 1996, the Company had no outstanding
balance under the line of credit and approximately $5.3 million was available
for borrowing thereunder based upon the Company's qualifying accounts receivable
and lease balances. The Company intends to use its borrowing capacity under the
line of credit on a limited basis primarily for working capital requirements.
The credit facility expires in September, 1998. Although there can be no
assurances that the Bank will do so, the Company believes that the Bank will
agree to renew the facility.
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
the common stock dividend. (See Note 2 of Notes to Consolidated Financial
Statements.) 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 (subsequently sold by AT&T and now known as Paradyne
Corporation, "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 Paradyne
(the "Paradyne Note") in the principal amount of $6.6 million and the assumption
of liabilities of approximately $1.3 million. The Paradyne 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 Paradyne Note are
approximately $151,000. (See Note 6 of Notes to Consolidated Financial
Statements.)
18
<PAGE>
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 shares 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. (See Note 4 of Notes to Consolidated Financial
Statements.)
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 the customer
prefers lease over purchase and where 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 and the end of the
initial term of the lease. 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 inventories which can be deployed to reduce
future capital commitments for enterprise network support contracts. As of
December 31, 1996, the Company's investment in capital leases included $6.5
million of leases which had been discounted via non-recourse notes payable to
banks. An additional $2.2 million represented the undiscounted balance of the
large 1996 lease which the Company expects to discount in the near future.
Additionally, investment in capital leases included $4.5 million of fourth
quarter 1996 leases, a substantial portion of which management anticipates
discounting over the next quarter. The Company intends to discount leases to
banks and expects to reduce its working capital committed to this activity. From
time to time this leasing activity places demands on the company's working
capital based on the timing and availability of discounting activities with
financial institutions.
Management believes that its cash balances 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.
The above "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The information required by this item appears in a subsequent section of this
Report (See Items 14 (a) (1) and (2)).
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ----------------------------------------------------------------------------
None.
19
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information relating to management's nominees for director of the Company will
be set forth under the captions "Proposal 1 - Election of Directors - Nominees"
and "Proposal 1 - Election of Directors - Information Regarding Nominees for
Director" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held on May 15, 1997. Information relating to the executive
officers of the Company will be set forth under the caption "Executive Officers"
in the above-referenced Proxy Statement. Such information is incorporated herein
by reference. Information regarding compliance by directors and executive
officers of the Company and owners of more than ten percent of the Company's
Common Stock with the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended, is set forth under the caption "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" in the above-
referenced Proxy Statement. Such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information relating to management compensation is set forth under the captions
"Proposal 1 - Election of Directors - Additional Information Concerning the
Board of Directors - Director Compensation" and "Executive Compensation" in the
Company's Proxy Statement referred to in Item 10 above. Such information is
incorporated herein by reference, except for the information set forth under the
captions "Executive Compensation - Compensation Committee Report on Executive
Compensation" and "Stock Performance Graph," which specifically is not so
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information regarding ownership of the Company's $0.01 par value Common Stock by
certain persons is set forth under the caption "Beneficial Ownership of Common
Stock" in the Company's Proxy statement referred to in Item 10 above. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information regarding certain relationships and transactions between the Company
and certain of its affiliates is set forth under the caption "Certain
Relationships and Certain Transactions" in the Company's Proxy Statement
referred to in Item 10 above. Such information is incorporated herein by
reference.
20
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(A) DOCUMENTS FILED AS PART OF THIS REPORT.
1. CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and the
related reports of the Company's independent public accountants
thereon are set forth immediately following the Index of Financial
Statements which appears on page F-1 of this Report:
Report of Independent Public Accountants - Arthur Andersen LLP
Report of Independent Public Accountants - Pridie Brewster
Consolidated Balance Sheets at December 31, 1995 and 1996
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1996
Consolidated Statements of Stockholders Equity (Deficit)/ Partners'
Capital for each of the three years in the period ended December 31,
1996
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1996
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts
21
<PAGE>
3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 -- Amended and Restated Articles of Incorporation (Exhibit
3.1 to the Company's Registration Statement on Form
S-1, No. 33-98716).
3.2 -- Articles of Amendment to Amended and Restated Articles
of Incorporation (Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-98716).
3.3 -- Form of Second Amended and Restated Articles of
Incorporation (Exhibit 3.3 to the Company's
Registration Statement on Form S-1, No. 33-98716).
3.4 -- Bylaws of the Company (Exhibit 3.4 to the Company's
Registration Statement on Form S-1, No. 33-98716).
3.5 -- Amendment to Bylaws of the Company (Exhibit 3.5 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
4.1 -- Specimen Common Stock Certificate (Exhibit 4.1 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
4.2 -- See Exhibits 3.1 through 3.5 for the provisions of the
Company's Amended and Restated Articles of
Incorporation and Bylaws governing the rights of
holders of securities of the Company.
10.1 -- Equipment Service Agreement dated November 1, 1994,
between the Company and FedEx Corporation (Exhibit 10.1
to the Company's Registration Statement on Form S-1,
No. 33-98716).
10.2 -- Equipment Service Agreement dated March 13, 1995
between the Company and Packard Bell, Inc. (Exhibit
10.2 to the Company's Registration Statement on Form
S-1, No. 33-98716).
10.3 -- Telecommunications Service Agreement dated January 27,
1992 between the Company and Federal Express
Corporation (Exhibit 10.3 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.4 -- Termination of Telecommunications Service Agreement
dated September 1, 1995 between the Company and FedEx
Corporation (Exhibit 10.4 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.5 -- General Services Agreement dated June 19, 1992 between
the Company and Federal Express Corporation (Exhibit
10.5 to the Company's Registration Statement on Form
S-1, No. 33-98716).
22
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.6 -- Change Order Extending General Services Agreement dated
August 1, 1994 between the Company and Federal Express
Corporation (Exhibit 10.6 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.7 -- Systems Integrator Agreement dated June 1, 1995 between
the Company and Cisco Systems Inc. (Exhibit 10.7 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.8 -- Technology Transfer Agreement dated March 25, 1994
between the Company and AT&T Paradyne Corporation
(Exhibit 10.8 to the Company's Registration Statement
on Form S-1, No. 33-98716).
10.9 -- Manufacturing Contracted Services Agreement dated March
25, 1994 between the Company and AT &T Paradyne
Corporation (Exhibit 10.9 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.10 -- Co-marketing Agreement dated March 25, 1994 between the
Company and AT &T Paradyne Latin America (Exhibit 10.10
to the Company's Registration Statement on Form S-1,
No. 33-98716).
10.11 -- Co-marketing Agreement dated March 25, 1994 between the
Company and AT &T Federal Business Unit (Exhibit 10.11
to the Company's Registration Statement on Form S-1,
No. 33-98716).
10.12 -- Contracted Services Agreement dated March 25, 1994
between the Company and AT&T Paradyne Corporation
(Exhibit 10.12 to the Company's Registration Statement
on Form S-1, No. 33-98716).
10.13 -- Contracted Services Agreement dated March 25, 1994
between the Company and AT &T Paradyne Information
Systems (Exhibit 10.13 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.14 -- Contracted Services Agreement dated March 25, 1994
between the Company and A T & T Paradyne Japan (Exhibit
10.14 to the Company's Registration Statement on Form
S-1, No. 33-98716).
10.15 -- Contracted Services Agreement dated March 25, 1994
between the Company and AT&T Paradyne Corporate Direct
Marketing Services (Exhibit 10.15 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.16 -- Contracted Services Agreement dated March 25, 1994
between the Company and AT &T Paradyne Customer
Administration Business Unit (Exhibit 10.16 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
23
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.17 -- Non-Competition and Right-of-First-Refusal Agreement
dated March 25, 1994 between the Company and AT &T
Paradyne Corporation (Exhibit 10.17 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.18 -- Contracted Services Agreement dated March 25, 1994
between the Company and AT &T Paradyne Canada, LTD
(Exhibit 10.18 to the Company's Registration Statement
on Form S-1, No. 33-98716).
10.19 -- Contracted Service Agreement for Field Service between
the Company and IBM dated February 23, 1995 (Exhibit
10.19 to the Company's Registration Statement on Form
S-1, No. 33-98716).
10.20 -- Contracted Service Agreement for Inventory Management
and Logistics dated December 29, 1994 between the
Company and LogisTechs dated December 29, 1994 (Exhibit
10.20 to the Company's Registration Statement on Form
S-1, No. 33-98716).
10.21 -- Global Roam Rental Agreement dated July 17, 1995
between the Company and GTE Mobile Communication
Service Corporation (Exhibit 10.21 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.22 -- Equipment Service Agreement dated August 18, 1995
between the Company and TxPort, Inc. (Exhibit 10.22 to
the Company's Registration Statement on Form S-1, No.
33-98716).
10.23 -- Loan and Security Agreement dated November 29, 1994
between the Company and SouthTrust Bank of Georgia,
N.A. (Exhibit 10.23 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.24 -- Installment Note dated March 25, 1994 issued by the
Company payable to AT & T Paradyne Corporation (Exhibit
10.24 to the Company's Registration Statement on Form
S-1, No. 33-98716).
10.25 -- Security Agreement dated March 25, 1994 between the
Company and AT &T Paradyne Corporation (Exhibit 10.25
to the Company's Registration Statement on Form S-1,
No. 33-98716).
10.26 -- 10% Subordinated Promissory Note dated March 25, 1994
among the Company, AT &T Paradyne Corporation, United
American Bank of Memphis and the Holders of the
Company's 10% Subordinated Promissory Notes (Exhibit
10.26 to the Company's Registration Statement on Form
S-1, No. 33-98716).
24
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.27 -- Agreement Revising Installment Note dated March 25,
1995 between the Company and AT &T Paradyne dated March
25, 1995 (Exhibit 10.27 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.28 -- 401 (k) Plan of the Company (Exhibit 10.28 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.29 -- Stock Option Plan of the Company, as amended (Exhibit
10.29 to the Company's Registration Statement on Form
S-1, No. 33-98716).
10.30 -- Form of Non-Competition and Non-Disclosure Agreement
dated March 25, 1994, between the Company and each of
John A. Koehler, Anthony M. Ramunno, Jr., Derek S.
Beveridge and Michael R. Jones (Exhibit 10.30 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.31 -- Employment Agreement dated December 7, 1994, between
the Company and Allan Siders (Exhibit 10.31 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.32 -- Employment Agreement dated December 7, 1994, between
the Company and L. James Bradshaw (Exhibit 10.32 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.33 -- Employment Agreement dated December 7, 1994, between
the Company and Peter Reagan (Exhibit 10.33 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.34 -- Form of Indemnification Agreement dated May 9, 1995,
between the Company and each of its directors and
executive officers (Exhibit 10.34 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.35 -- Consulting Agreement dated January 1, 1995, between the
Company and Anthony M. Ramunno, Jr. (Exhibit 10.35 to
the Company's Registration Statement on Form S-1, No.
33-98716).
10.36 -- Consulting Agreement dated August 24, 1994, between the
Company and Derek S. Beveridge (Exhibit 10.36 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.37 -- Letter Agreement dated July 19, 1994 between the
Company and Bertil D. Nordin (Exhibit 10.37 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
25
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.38 -- Lease Agreement dated March 4, 1994, between 3901
Roswell Road Associates, T.C. and the Company for
premises located at 3901 Roswell Road, N.E., Suite 310,
Marietta, Georgia (Exhibit 10.38 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.39 -- Lease Agreement dated March 31, 1994, between the
Company and PNC Realty Holding Corp., of Florida for
premises located at 15950 Bay Vista Drive, Suite 340,
Clearwater, Florida (Exhibit 10.39 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.40 -- Lease Agreement dated June 20, 1994, between the
Company and Holiday Inns, Inc. for premises located at
Commerce Center, HOB Building, 3781 3797 Lamar Avenue,
Memphis, Tennessee (Exhibit 10.40 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.41 -- Lease Renewal/Expansion Proposal dated October 18,
1994, for 747 Church Road, Suite C-1, Elmhurst,
Illinois issued by Morgan Realty Partners to TechNet,
Inc. (Exhibit 10.41 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.42 -- Lease Amendment Agreement dated December 9, 1994,
between Banyan/Morgan Milwaukee Limited Partnership and
TechForce/TechNet for premises located at Suite C-1,
Elmhurst Metro Court, Elmhurst, Illinois (Exhibit 10.42
to the Company's Registration Statement on Form S-1,
No. 33-98716).
10.43 -- Addendum to Lease Agreement dated 1995, between the
Company and PNC Realty Holding Corp. of Florida for
premises located at 15950 Bay Vista Drive, Suite 340,
Clearwater, Florida (Exhibit 10.43 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.44 -- Form of Option Agreement between the Company and
optionees under the Company's Stock Option Plan
(Exhibit 10.44 to the Company's Registration Statement
on Form S-1, No. 33-98716).
10.45 -- Agreement of Reorganization dated November 30, 1994
among the Company, TechNet, Inc. and the TechNet
Stockholders (Exhibit 10.45 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.46 -- Agreement for the Purchase and Sale of Assets dated
March 24, 1994 between the Company and AT &T Paradyne
Corporation (Exhibit 10.46 to the Company's
Registration Statement on Form S-1, No. 33-98716).
26
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.47 -- Assignment and Assumption Agreement dated March 25,
1994 between the Company and AT &T Paradyne Corporation
(Exhibit 10.47 to the Company's Registration Statement
on Form S-1, No. 33-98716).
10.48 -- Contribution Agreement and Amendment to Partnership
Agreement dated March 24, 1994 between the Company and
TechForce, a Georgia General Partnership (Exhibit 10.48
to the Company's Registration Statement on Form S-1,
No. 33-98716).
10.49 -- Investment and Stockholders' Agreement dated March 25,
1994 between the Company and Investors listed in
Exhibit A thereto Corporation (Exhibit 10.49 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.50 -- Management Stockholder Participation Agreement dated
November 1994 between the Company and Messrs. Bradshaw,
Siders and Reagan (Exhibit 10.50 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.51 -- Investment Agreement dated November 4, 1994 between the
Company and Bertil D. Nordin (Exhibit 10.51 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.52 -- 1995 Stock Incentive Plan (Exhibit 10.52 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.53 -- Directors' Stock Option Plan (Exhibit 10.53 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.54 -- Employee Stock Purchase Plan (Exhibit 10.54 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
10.55 -- Value Added Distributor Agreement between Paradyne
Corporation and the Company executed November 10,
1995 - (Exhibit 10.55 to the Company's annual report on
Form 10-K for the period ended December 31, 1995),
10.56 -- Second Lease Amendment Agreement dated October 25, 1995
between Banyan/Morgan Milwaukee Limited Partnership and
the Company (Exhibit 10.56 to the Company's annual
report on Form 10-K for the period ended December 31,
1995).
10.57 -- Commencement Notice dated November 3, 1995 between
Banyan/Morgan Milwaukee Limited Partnership and the
Company -. (Exhibit 10.57 to the Company's annual
report on Form 10-K for the period ended December 31,
1995).
27
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.58 -- Sublease between Witness Systems, Inc. and the Company
dated January 3, 1996 (Exhibit 10.58 to the Company's
annual report on Form 10-K for the period ended
December 31, 1995).
10.59 -- Lease Agreement between 3901 Roswell Road Associates,
T.C. and the Company dated January 24, 1996 - (Exhibit
10.59 to the Company's annual report on Form 10-K for
the period ended December 31, 1995).
10.60 -- Services Level Agreement for Installation and Support
Services between the Company and National Medical Care,
Inc., dated March 1, 1996 (Exhibit 10 to the Company's
Report on Form 10-Q for the period ended March 31,
1996).
10.61 -- General Services Agreement between the Company and
Federal Express, dated June 19, 1996 (Exhibit 10.1 to
the Company's Report on Form 10-Q for the period ended
September 30, 1996).
10.62 (a) -- Loan Agreement between the Company and First Union
National Bank, dated September 23, 1996 (Exhibit
10.2 (a) to the Company's Report on Form 10-Q for the
period ended September 30, 1996).
10.62 (b) -- Security Agreement between the Company and First Union
National Bank, dated September 23, 1996 (Exhibit
10.2 (b) to the Company's Report on Form 10-Q for the
period ended September 30, 1996).
10.62 (c) -- Promissory Note between the Company and First Union
National Bank, dated September 23, 1996 (Exhibit
10.2 (c) to the Company's Report on Form 10-Q for the
period ended September 30, 1996).
11.1 -- Statement Regarding Computation of Earnings per
share - filed herewith.
16.1 -- Letter from Langford de Kock & Co. (Exhibit 16.1 to the
Company's Registration Statement on Form S-1, No. 33-
98716).
21.1 -- List of Subsidiaries of the Registrant (Exhibit 21.1 to
the Company's Registration Statement on Form S-1, No.
33-98716).
23.1 -- Consent of Arthur Andersen LLP - filed herewith.
23.2 -- Consent of Pridie Brewster - filed herewith.
27 -- Financial Data Schedule - filed herewith.
(B) REPORTS ON FORM 8-K.
None
----
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TECHFORCE CORPORATION
/s/ John A. Koehler
--------------------------------------------------
John A. Koehler, President & CEO
Date: March 28 ,1997
---------------------------------------
Each person whose signature appears below hereby constitutes and appoints John
A. Koehler and Jerrel W. Kee the true and lawful attorneys-in-fact and agents of
the undersigned, with full power of substitution and re-substitution, for and in
the name, place and stead of the undersigned, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this Report, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Commission, and hereby grants to such attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date: March 28 , 1997 /s/ John A. Koehler
---------- ------------------------------------------------
John A. Koehler, President, Chief Executive
Officer and Director
Date: March 28 , 1997 /s/ Jerrel W. Kee
---------- -------------------------------------------------
Jerrel, W. Kee, Senior Vice President -- Finance
and Chief Financial Officer
Date: March 28 , 1997 /s/ Paul J. Ferri
---------- -------------------------------------------------
Paul J. Ferri, Director
Date: March 28 , 1997 /s/ Richard D. Tadler
---------- -------------------------------------------------
Richard D. Tadler, Director
Date: March 28 , 1997 /s/ Bertil D. Nordin
---------- -------------------------------------------------
Bertil D. Nordin, Director
Date: March 28 , 1997 /s/ William E. Bassett
---------- -------------------------------------------------
William E. Bassett, Director
29
<PAGE>
TECHFORCE CORPORATION
---------------------
INDEX OF FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Public Accountants -- Arthur Andersen LLP................ F-1
Report of Independent Public Accountants -- Pridie Brewster.................... F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets.................................................... F-3
Consolidated Statements of Income.............................................. F-5
Consolidated Statements of Stockholders Equity (Deficit) / Partners' Capital... F-6
Consolidated Statements of Cash Flows.......................................... F-7
Notes to Consolidated Financial Statements..................................... F-9
Valuation and Qualifying Accounts (Schedule II)................................ F-21
</TABLE>
30
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
TechForce Corporation:
We have audited the accompanying consolidated balance sheets of TechForce
Corporation (a Georgia corporation, formerly TechForce, a Georgia general
partnership) and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity (deficit)/partners'
capital and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
TechForce UK Limited for the year ended December 31, 1994, which statements
reflect total revenues of 5 percent of the consolidated total. That statement
was audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for that entity, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of TechForce Corporation and subsidiaries as of December
31, 1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule (Schedule II - Valuation
and Qualifying Accounts) listed in the index to the financial statements is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Tampa, Florida,
February 14, 1997
F-1
<PAGE>
TECHFORCE UK LIMITED
--------------------
REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF
---------------------------------------------
TECHFORCE UK LIMITED
--------------------
We have audited the financial statements on pages five to eleven which have been
prepared under the historical cost convention and the accounting policies set
out on page seven.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page two the Company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing standards issued by the
Auditing Practices Board. An audit includes examination, on test basis, of
evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgments made
by the directors in the preparation of the financial statements, and of whether
the accounting policies are appropriate to the company's circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the Company's affairs as at 31 December 1994 and of its profit for the period
then ended and have been properly prepared in accordance with the Companies Act
1985.
Pridie Brewster
Chartered Accountants
Registered Auditor
Anstey Park House
Anstey Road
Alto, Hants
GU34 2RL Dated: 12 October 1995
* Pages referenced to above refer to the 1994 report.
F-2
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
---------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,943,096 $ 565,377
Investments 2,298,758 12,423,830
Receivables, net of allowance of $845,000 and $200,000 for doubtful
accounts in 1996 and 1995, respectively 12,687,227 12,137,052
Inventories 4,445,812 3,320,615
Prepaid expenses and other current assets 601,178 250,970
Net investment in sales-type leases, current portion (Note 1) 2,438,045 33,141
Deferred income tax 140,000 153,000
Total current assets 26,554,116 28,883,985
----------- -----------
PROPERTY AND EQUIPMENT:
Leasehold improvements 582,088 455,628
Furniture, fixtures and equipment 4,884,625 3,325,899
Equipment held for rental 1,037,412 453,755
Replacement parts 11,542,142 7,769,303
----------- -----------
18,046,267 12,004,585
Less -- Accumulated depreciation (6,736,182) (3,556,869)
----------- -----------
Property and equipment, net 11,310,085 8,447,716
----------- -----------
NET INVESTMENT IN SALES-TYPE LEASES,
less current portion (Note 1) 8,545,363 113,875
DEFERRED INCOME TAXES - 754,000
OTHER ASSETS 73,170 106,940
Total assets $46,482,734 $38,306,516
=========== ===========
</TABLE>
F-3
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
---------------------------------------------------------
(continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------------ ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,582,641 $ 1,586,797
Accrued expenses 3,259,378 2,744,738
Accrued contract labor 599,797 1,623,553
Current maturities of obligations under capital leases,
long-term debt and non-recourse notes payable 2,644,038 1,614,534
Deferred revenue 2,722,461 1,894,360
----------- -----------
Total current liabilities 11,808,315 9,463,982
OBLIGATIONS UNDER CAPITAL LEASES,
net of current maturities 221,095 264,130
LONG-TERM DEBT, net of current maturities 740,018 2,418,902
NON-RECOURSE NOTES PAYABLE, net of current maturities (Note 6) 4,455,444 -
DEFERRED REVENUE 46,583 52,278
DEFERRED INCOME TAXES 717,000 -
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 9,400,234 shares authorized, 7,970,277
and 7,905,500 issued and outstanding at December 31, 1996 and
1995, respectively 79,702 79,055
Additional paid-in capital 27,697,641 27,634,333
Retained earnings (deficit) 716,936 (1,606,164)
----------- -----------
Total stockholders' equity 28,494,279 26,107,224
----------- -----------
Total liabilities and stockholder's equity $46,482,734 $38,306,516
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Services (Note 8) $35,191,848 $35,465,558 $20,881,443
Hardware 28,081,581 13,766,299 9,856,282
----------- ----------- -----------
Total revenues 63,273,429 49,231,857 30,737,725
----------- ----------- -----------
DIRECT COSTS:
Services 23,250,079 24,390,583 16,559,167
Hardware 19,504,406 9,172,987 4,241,606
----------- ----------- -----------
Total direct costs 42,754,485 33,563,570 20,800,773
----------- ----------- -----------
Gross profit 20,518,944 15,668,287 9,936,952
----------- ----------- -----------
OPERATING COSTS:
Selling and marketing 10,329,889 7,753,868 4,278,419
Research and development 1,717,864 1,147,030 585,171
General and administrative 4,489,926 3,379,252 2,842,672
Nonrecurring charges 243,493 600,000 -
----------- ----------- -----------
Total operating costs 16,781,172 12,880,150 7,706,262
----------- ----------- -----------
Operating income 3,737,772 2,788,137 2,230,690
INTEREST EXPENSE, net (102,672) (1,106,447) (833,675)
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES AND
MINORITY INTEREST 3,635,100 1,681,690 1,397,015
PROVISION FOR INCOME TAXES (1,312,000) (671,000) 259,000
MINORITY INTEREST - - (65,540)
----------- ----------- -----------
NET INCOME $ 2,323,100 $ 1,010,690 $ 1,590,475
=========== =========== ===========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
$0.28 $0.16 $ -
=========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 8,335,058 6,226,267 -
=========== =========== ===========
PRO FORMA DATA (Unaudited):
Pro forma income before provision for income taxes and
minority interest $ 1,397,015
Pro forma provision for income taxes (560,000)
Historical minority interest (65,540)
-----------
Pro forma net income $ 771,475
===========
PRO FORMA NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $0.13
===========
PRO FORMA WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 5,913,609
===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) / PARTNERS' CAPITAL
----------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Partners'
----------------------------------
Shares Amount Capital Capital
--------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993 - $ - $ - $ 1,300
Partnership distributions - - - -
Issuance of common stock in exchange for partnership 2,679,268 26,792 1,662,936 (1,300)
capital
Dividends paid to founding common stockholders - - - -
Issuance of common stock 166,666 1,667 123,333 -
Net income - - - -
--------------- ----------- ---------------- -----------
BALANCE, December 31, 1994 2,845,934 28,459 1,786,269 -
Conversion of redeemable convertible preferred 2,839,566 28,396 4,230,954 -
stock to common stock
Issuance of common stock through public offering 2,220,000 22,200 21,617,110 -
Net income - - - -
--------------- ----------- ---------------- -----------
BALANCE, December 31, 1995 7,905,500 79,055 27,634,333 -
Issuance of common stock through exercises of 64,777 647 63,308 -
common stock options
Net income - - - -
--------------- ----------- ---------------- -----------
BALANCE, December 31, 1996 7,970,277 $79,702 $27,697,641 $ -
=============== =========== ================ ===========
<CAPTION>
Retained
Earnings
(Deficit) Total
---------------- ---------------
<S> <C> <C>
BALANCE, December 31, 1993 $ 2,008,400 $ 2,009,700
Partnership distributions (414,801) (414,801)
Issuance of common stock in exchange for partnership (1,688,428) -
capital
Dividends paid to founding common stockholders (4,112,500) (4,112,500)
Issuance of common stock - 125,000
Net income 1,590,475 1,590,475
-------------- ---------------
BALANCE, December 31, 1994 (2,616,854) (802,126)
Conversion of redeemable convertible preferred - 4,259,350
stock to common stock
Issuance of common stock through public offering - 21,639,310
Net income 1,010,690 1,010,690
-------------- ---------------
BALANCE, December 31, 1995 (1,606,164) 26,107,224
Issuance of common stock through exercises of - 63,955
common stock options
Net income 2,323,100 2,323,100
-------------- ---------------
BALANCE, December 31, 1996 $ 716,936 $28,494,279
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,323,100 $ 1,010,690 $ 1,590,475
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation 3,179,313 2,104,241 1,372,239
Amortization 33,770 33,972 28,140
Deferred income taxes 1,484,000 107,000 (1,014,000)
Minority interest - - 65,540
Changes in assets and liabilities-
Accounts receivable (550,175) (55,623) (8,586,451)
Inventories (1,125,197) (363,311) (118,094)
Prepaid expenses and other current assets (350,208) (190,094) (54,409)
Accounts payable 995,844 (2,272,699) 3,565,586
Accrued expenses 514,640 1,518,106 129,166
Accrued contract labor (1,023,756) 495,765 1,127,788
Deferred revenue 822,406 335,667 1,389,845
------------ ------------ ------------
Net cash provided by (used in)
operating activities 6,303,737 2,723,714 (504,175)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,041,682) (2,267,224) (864,878)
Sale (purchase) of investments 10,125,072 (12,423,830) -
Purchase of inventory for sales-type leases (13,565,728) (158,840) -
Payments received for sales-type leases 1,612,051 11,824 -
Sale of sales-type leases 1,117,285 - -
Cash paid for purchase transactions - - (4,347,678)
Purchase of other assets - - (169,052)
------------ ------------ ------------
Net cash provided by (used in) investing activities (6,753,002) (14,838,070) (5,381,608)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend paid to founding common stockholders - - (4,112,500)
Proceeds from stock options exercised 63,955 - -
Repayments of capital lease obligations (53,962) - -
Proceeds from issuance of common stock - 21,639,310 -
Cash received from issuance of preferred stock - - 4,259,350
Partnership distributions - - (414,801)
Repayments under revolving credit facilities (11,629,955) (31,191,516) (15,553,800)
Borrowings under revolving credit facilities 11,629,955 28,312,497 17,782,819
Repayments of long-term note payable (1,550,217) (1,499,766) (1,156,116)
Borrowings of non-recourse notes payable 5,367,208 - -
(Repayments) borrowings on subordinated debt - (5,040,650) 5,040,650
------------ ------------ ------------
Net cash provided by financing activities 3,826,984 12,219,875 5,845,602
------------ ------------ ------------
</TABLE>
F-7
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
(continued)
-----------
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
NET CHANGE IN CASH AND CASH EQUIVALENTS $ 3,377,719 105,519 (40,181)
CASH AND CASH EQUIVALENTS, beginning of year 565,377 459,858 500,039
CASH AND CASH EQUIVALENTS, end of year $ 3,943,096 $ 565,377 $ 459,858
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 407,124 $ 1,175,798 $ 628,207
Cash paid during the year for income taxes $ 391,000 $ 47,000 $ 1,102,000
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Lease obligation capitalized $ - $ 328,448 $ -
Conversion of Class A preferred stock to common stock $ - $ 28,396 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1996 AND 1995
--------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------------------------------
TechForce Corporation (the Company) (formerly TechForce, a Georgia general
partnership) and subsidiaries are engaged in the sale, design, on-site
installation and maintenance, depot repair and support of computer and data
communications networking equipment.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated.
Cash and Cash Equivalents
- -------------------------
The Company considers cash on deposit and certificates of deposit with a
purchased original maturity of three months or less to be cash equivalents.
Investments
- -----------
Investments consist of preferred shares in a mutual fund which invests in
municipal obligations. Investments are readily convertible to cash and are
stated at fair value which approximates cost.
Inventories
- -----------
Inventories are recorded at the lower of cost or market. Cost is determined by
the first-in, first-out method. Market is defined as replacement cost or net
realizable value. Inventories are evaluated periodically by Company personnel to
identify and reserve for obsolete, slow moving or non-salable inventory.
Inventories at December 31, 1996 and 1995, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Raw materials $ 715,707 $ 856,359
Finished goods 3,730,105 2,464,256
------------ -------------
$4,445,812 $3,320,615
============ =============
</TABLE>
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation and amortization have
been computed using the straight-line method over the assets' estimated useful
lives as follows:
<TABLE>
<CAPTION>
Description Years
----------------------------------- ---------
<S> <C>
Leasehold improvements 1- 3
Furniture, fixtures and equipment 3-10
Equipment held for rental 3
Replacement parts 5
</TABLE>
F-9
<PAGE>
As the lessor, the Company leases certain of its equipment under non-cancelable
operating lease contracts.
Future minimum rentals on these leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
----------------- ------------
<S> <C>
1997 $245,962
1998 84,143
1999 64,763
2000 626
------------
$395,494
============
</TABLE>
The net book value of the leased equipment was approximately $579,000 as of
December 31, 1996.
Sales-type Leases
- -----------------
Revenues from certain qualifying non-cancelable equipment lease contracts are
accounted for as sales-type leases wherein the present values 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, using
the effective interest method, is charged over the term of the lease agreement.
Revenues from sales-type leases for the years ended December 31, 1996 and 1995,
were approximately $12,948,000 and $150,000, respectively, and are included in
hardware revenues in the consolidated statements of income. The Company had no
sales-type leases in 1994.
Future minimum lease payments to be received by the Company, as lessor, pursuant
to its sales-type leases at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
----------------- --------------
<S> <C>
1997 $ 3,322,039
1998 3,191,716
1999 2,803,789
2000 2,192,977
2001 1,758,506
--------------
$13,269,027
==============
</TABLE>
The net investment in sales-type leases at December 31, 1996 and 1995, consisted
of the following:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Future minimum lease payments $13,269,027 $ 173,230
Less--Unearned income (2,285,619) (26,214)
--------------- ---------------
Net investment in sales-type leases $10,983,408 $ 147,016
=============== ===============
</TABLE>
Included in the December 31, 1996, balance of net investment in sales-type
leases is sales-type leases of $5,367,208, which secure non-recourse notes
payable of $5,367,208 (see Note 6).
Concentration of Credit Risk
- ----------------------------
Most of the Company's net investment in sales-type leases at December 31, 1996,
was with National Medical Care, Inc. NMC, now known as Fresenius Medical Care
North America). The net investment in sales-type leases includes approximately
$7,057,000 at December 31, 1996, attributable to NMC.
F-10
<PAGE>
Revenue Recognition
- -------------------
Revenues from hardware sales are recognized at time of delivery. Revenues from
network design and on-site installation of hardware products are recognized as
the services are performed. Revenues from services, including depot repair,
network support and on-site maintenance, are recognized as the services are
performed or ratably over the non-cancelable service contract period. Deferred
revenue represents payments received in advance under non-cancelable service
contracts or amounts billed for which services have not been performed.
Earnings Per Share
- ------------------
Earnings per share are computed based upon the weighted average number of common
shares and dilutive common equivalent shares outstanding after certain
adjustments described below. The weighted average number of common shares
outstanding assumes the initial capitalization of the Company and related common
stock issuances, as well as the conversion of the Company's convertible
redeemable preferred stock into common stock, occurred effective January 1,
1994, and the common stock issuances upon the exercises of stock options.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amount of net investment of sales-type leases, long-term debt, and
non-recourse notes payable approximate fair value due to market rates of
interest and related maturities.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain amounts included in the 1995 and 1994 financial statements have been
reclassified to conform with the current-year presentation.
2. INITIAL CAPITALIZATION:
-----------------------
Effective March 24, 1994, the partners of the predecessor partnership exchanged
their partnership units for 2,679,268 shares of common stock of the Company,
representing 100 percent of the ownership of the Company. Accordingly, the
partners' capital of $1,689,728 at the time of the exchange was reclassified to
stockholders' equity at its historical basis, and no adjustment to the carrying
value of assets and liabilities of the partnership was made. As a result of the
exchange, the Company recognized a deferred tax asset of approximately $788,000,
which is included as a component of the benefit for income taxes for the year
ended December 31, 1994 (see Note 10).
Simultaneous with the exchange, the Company sold 4,225,000 shares of Class A
convertible redeemable preferred stock (Class A preferred stock) for $4,225,000.
Proceeds from the sale of the Class A preferred stock were used to pay a common
stock dividend of $4,112,500. The Company also issued $5,000,000 of 10 percent
subordinated notes to the Class A preferred stockholders.
F-11
<PAGE>
In addition to the 4,225,000 shares of Class A preferred stock issued as part of
the initial capitalization of the Company, during September 1994, the Company
issued 34,350 shares of Class A preferred stock to a director for $34,350. In
connection with the issuance of this preferred stock, the Company also issued
$40,650 of 10 percent subordinated notes to the director. All of the
subordinated notes were repaid during 1995 with the proceeds of the initial
public stock offering.
During 1994, the Company authorized and issued 4,259,350 shares of $.01 par
value, $1 stated value Class A preferred stock. Each share of Class A preferred
stock was convertible at any time, at the option of the stockholder, into one
share of common stock. Each share of Class A preferred stock was automatically
converted into .667 shares of common stock upon an initial public stock offering
in which the offering price equaled or exceeded $6.56 per share of common stock
and results in proceeds to the Company of a minimum of $10,000,000. In
connection with the Company's initial public stock offering completed in
December 1995, all outstanding shares of Class A preferred stock were converted
into 2,839,566 shares of common stock.
3. STOCKHOLDERS' EQUITY:
---------------------
Stock Split
- -----------
In November 1995, the Company's Board of Directors (the Board) approved a two-
for-three reverse stock split of common stock. The reverse stock split has been
reflected in all periods subsequent to the initial capitalization of the Company
(see Note 2). Accordingly, all previously-reported common stock shares and per
share and stock option data have been restated.
Initial Public Stock Offering
- -----------------------------
In December 1995, the Company offered 3,100,000 shares of common stock in an
initial public stock offering. Of the shares offered, 880,000 were those of
selling stockholders. Offering proceeds to the Company, net of underwriting fees
and other expenses, totaled approximately $21,639,000. The Company used the
proceeds to repay amounts due under its line of credit (see Note 5) and
subordinated notes payable (see Note 2) and accumulate working capital.
4. ACQUISITION OF MINORITY INTEREST:
---------------------------------
During March 1994, the Company paid $59,375 to acquire a 51 percent interest in
TechNet, a newly-formed venture engaged in the sale of products and services of
the Company and other suppliers. The results of TechNet have been consolidated
since the date of acquisition with recognition of the minority interest in the
earnings of TechNet. During November 1994, the Company acquired the 49 percent
minority interest in TechNet in exchange for 134,783 shares of the Company's
common stock valued at approximately $101,000. The acquisition of this minority
interest has been accounted for as a purchase. TechNet merged with and into the
Company immediately following this transaction.
5. LINE OF CREDIT:
---------------
The Company had a line-of-credit facility outstanding at December 31, 1996, with
the following features:
<TABLE>
<CAPTION>
Description
-----------------------------------------------------------------------------------------
<S> <C>
Maximum borrowings: 15,000,000
Base of borrowings: Eligible accounts receivable and eligible leases, as defined
Amount outstanding: None
Interest rate: One-month LIBOR rate plus 150 basis points (7.03 percent at
December 31, 1996)
Payment of interest: Monthly
Security of borrowings: Accounts receivable and all other assets not otherwise encumbered
Available borrowings: $ 5,300,000
</TABLE>
F-12
<PAGE>
The line-of-credit facility includes certain restrictive covenants on the part
of the Company, including, but not limited to, restriction on mergers and
acquisitions, investments, incurrence of additional indebtedness and maintenance
of certain financial ratios, as defined. The Company was in compliance with the
covenants for 1996 and 1995.
6. LONG-TERM DEBT AND NON-RECOURSE NOTES PAYABLE:
----------------------------------------------
At December 31, 1996 and 1995, the Company's long-term debt and non-recourse
notes payable consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Note payable to AT&T Paradyne, interest at 8%, payable in equal monthly
installments of $150,977, including interest, through June 1998, secured by
certain inventory, property and equipment and personal guarantees of certain
stockholders limited to $1,500,000 $2,418,901 $3,969,118
Non-recourse notes payable to financial institutions, interest ranging from 7.75% to
8.50%, payable in equal monthly installments of $109,017, including interest,
through December 2001, secured by net lease receivables and the related
equipment thereunder
5,367,208 -
-------------- --------------
7,786,109 3,969,118
Less current maturities of long-term debt 1,678,883 1,550,216
Less current maturities of non-recourse notes payable 911,764 -
-------------- --------------
$5,195,462 $2,418,902
============== ==============
</TABLE>
During 1996, the Company assigned and granted a security interest in the
majority of one of its sales-type leases to certain financial institutions in
return for the non-recourse notes payable. According to the terms of the notes
payable and related security agreements, the financial institutions' only
recourse in the event of default by the lessee is the underlying leased
equipment.
Interest expense for long-term debt was $261,506, $383,268 and $399,907 for the
years ended December 31, 1996, 1995 and 1994, respectively. Interest expense for
non-recourse notes payable was insignificant to the 1996 consolidated financial
statements.
The note payable to AT&T Paradyne includes certain restrictive covenants on the
part of the Company, including, but not limited to, restriction on mergers and
acquisitions, investments, incurrence of additional indebtedness, and
maintenance of certain financial ratios, as defined. The Company was in
compliance with the covenants for 1996 and 1995.
F-13
<PAGE>
Maturities of long-term debt and non-recourse notes payable as of December 31,
1996, are as follows:
<TABLE>
<CAPTION>
Year Ending Long-term Non-recourse
December 31, Debt Notes Payable Total
--------------- ----------- --------------- ------------
<S> <C> <C> <C>
1997 $1,678,883 $ 911,764 $2,590,647
1998 740,018 988,716 1,728,734
1999 - 1,070,336 1,070,336
2000 - 1,158,726 1,158,726
2001 - 1,237,666 1,237,666
----------- --------------- ------------
$2,418,901 $5,367,208 $7,786,109
=========== =============== ============
</TABLE>
7. BENEFIT PLANS:
--------------
Stock Plans
- -----------
During 1994, the Board of the Company approved an incentive stock option plan
(the "Plan") for certain key employees and the Board. Under the terms of the
Plan, up to 613,204 shares of common stock can be issued at exercise prices of
not less than fair value at the grant date, as determined by the Board. Options
granted under the Plan may be either non-qualified or incentive stock options
and vest ratably over a five-year period unless otherwise stated. Options may be
exercised for 10 years from the grant date. The Company has granted, net of
forfeitures, 563,352 shares under the Plan through December 31, 1996.
On November 21, 1995, the Board of the Company approved the adoption of the 1995
Stock Incentive Plan (the Incentive Plan), the Stock Option Plan for the Board
(the Option Plan) and the Employee Stock Purchase Plan (the Employee Plan). The
Incentive Plan provides for the grant of restricted stock, incentive or non-
qualified stock options, stock appreciation rights and other similar awards on
an annual basis subject to certain maximums, as defined. The grants are at the
fair market value of the shares on the grant date. Total awards issued under the
Incentive Plan are limited to a percentage of outstanding common shares, as
defined, which vest ratably over the incentive period to be determined by the
Company upon grant. Options may be exercised for 10 years from the grant date if
the participant does not own greater than 10 percent of the Company. Options may
be exercised for five years from the grant date if the participant does own
greater than 10 percent of the Company. The Company has granted, net of
forfeitures, 223,632 shares under the Plan through December 31, 1996.
Under the terms of the Option Plan, non-qualified stock options to purchase up
to 100,000 shares of common stock may be granted to Board members who are not
also employees of the Company at the fair market value of the shares on the
grant date. Under the Option Plan, eligible Board members receive options to
purchase 5,000 common shares upon appointment to the Board and options to
purchase 1,000 shares upon completion of each year of service on the Board. The
options become vested upon the first anniversary of the grant date. The Company
has granted 20,000 shares under the Option Plan through December 31, 1996.
All stock options issued under the above-mentioned plans have been incentive or
non-qualified stock options.
The Employee Plan permits eligible employees to purchase, through payroll
deductions of up to 10 percent of their annual earnings, common stock at 85
percent of the fair market value of the common stock. The fair market value is
determined at the lesser of the market value of such shares at the beginning or
end of the semi-annual subscription period. Up to 800,000 shares of common stock
can be purchased under the Employee Plan. No purchases under the Employee Plan
were made through December 31, 1996.
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25 (APB 25), under which no compensation expense
has been recognized. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), which was effective for fiscal years
beginning after December 15, 1995. SFAS 123 allows companies to continue
following the accounting guidance of APB 25, but requires pro forma disclosure
of
F-14
<PAGE>
net income and earnings per share for the effects on compensation expense had
the accounting guidance of SFAS 123 been adopted. The pro forma disclosures are
required only for options granted subsequent to December 31, 1994, and for
employee stock purchase plans.
The Company adopted SFAS 123 for disclosure purposes in 1996. For SFAS 123
purposes, the fair value of each option granted has been estimated as of the
grant date using the Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rate of 6.2 percent, expected
life of five years, no expected dividends, and expected volatility of 50
percent. Using these assumptions, the fair value of the stock options granted in
1996 and 1995 was $1,357,826 and $251,820, respectively, which would be
amortized as compensation expense over the vesting period of the options.
Options vest ratably over five years. Had compensation expense been determined
consistent with SFAS 123, utilizing the assumptions detailed above, the
Company's net income and earnings per share (EPS) would have been changed to the
following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C> <C>
Net income: As reported $2,323,100 $1,010,690
Pro forma 2,164,434 998,562
EPS: As reported $ .28 $ .16
Pro forma .26 .16
</TABLE>
Had compensation expense for the Employee Plan been determined consistent with
SFAS 123, it would have had an immaterial effect on the Company's net income and
earnings per share for the years ended December 31, 1996 and 1995.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation expense
may not be representative of that to be expected in future years.
The following table summarizes stock option activity for the years ended
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- ------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 575,426 $1.29 316,667 $0.47 - $ -
Granted 389,007 7.94 267,426 2.25 348,550 0.49
Exercised (64,777) 0.79 - - (31,883) 0.75
Forfeited (189,332) 4.35 (8,667) 1.01 - -
------------ ----------- ------------ ----------- ----------- ----------
Outstanding,
end of year 710,324 $4.16 575,426 $1.29 316,667 $0.47
============ ============ ===========
Options vested at year-
end 170,662 $1.00 99,000 $0.45 - -
Weighted-average fair
value of options
granted during the
year - $4.05 - $1.35 - $ -
</TABLE>
F-15
<PAGE>
The following table summarizes information about stock options at December 31,
1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- -----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Ranges of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
------------------ ------------- -------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$0.375-$0.75 319,250 8.10 $0.60 153,882 $0.55
$2.25 29,329 8.66 2.25 5,799 2.25
$5.00-$7.19 162,545 9.36 5.46 8,314 6.00
$9.00-$9.625 199,200 9.11 9.08 2,667 9.00
--------- ------ ------ --------- --------
710,324 8.69 $4.16 170,662 $1.00
========= ====== ====== ========= ========
</TABLE>
Employee Savings Plan
- ---------------------
The Company has a 401(k) savings plan which covers substantially all of its
eligible employees. Employees may contribute up to 15 percent of their annual
compensation, subject to certain limits. Employee contributions are matched by
the Company at 25 percent of up to 4 percent of the employees' contributions.
Employees are eligible to participate after attaining the age of 21. Company
contributions vest ratably over a five-year period. Company contributions to the
plan totaled $82,599, $41,600 and $17,595 during 1996, 1995 and 1994,
respectively.
8. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISKS:
--------------------------------------------------
During the years ended December 31, 1996, 1995 and 1994, the following customers
individually accounted for more than 10 percent of the Company's revenue:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- --------------------- ------------------
Amount % Amount % Amount %
------------ ----- ------------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Packard Bell Electronics, Inc. (Packard Bell) $12,473,000 20% $17,497,000 36% $7,412,000 24%
Federal Express Company 6,906,000 11 5,672,000 12 3,928,000 13
NMC 8,601,000 14 - - - -
</TABLE>
The loss of one of these customers could have a significant impact on the
results of operations of the Company in the near term.
During 1996, the Company experienced a substantial decline in revenues from
Packard Bell 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 the payment of invoices, level of accounts receivable from Packard
Bell, and level of consigned Packard Bell inventory held by the Company. Prior
to December 31, 1996, the Company agreed with Packard Bell to reduce its volume
of business with Packard Bell going forward, returned substantially all of
Packard Bell's inventory, and entered into a written agreement with Packard Bell
which specified that the agreed balance of accounts receivable would be paid.
Packard Bell revenues are included in service revenues in the accompanying
consolidated statements of income. The decrease in service revenues associated
with Packard Bell was substantially offset by equally significant increases in
enterprise support revenues.
F-16
<PAGE>
The Company operates in two geographic areas: North America and Europe.
Revenues, operating income, and income before provision for income taxes and
minority interest for the years ended December 31, 1995 and 1994, for each
geographic area are detailed as follows:
<TABLE>
<CAPTION>
Income Before
Provision for
Income Taxes
Operating and Minority
Revenues Income Interest
------------- ------------- ----------------
<S> <C> <C> <C>
Year ended December 31, 1995:
North America $47,130,106 $2,247,280 $1,139,722
Europe 2,101,751 540,857 541,968
------------- ------------- ----------------
$49,231,857 $2,788,137 $1,681,690
============= ============= ================
Year ended December 31, 1994:
North America $29,213,436 $1,931,806 $1,098,209
Europe 1,524,289 298,884 298,806
------------- ------------- ----------------
$30,737,725 $2,230,690 $1,397,015
============= ============= ================
</TABLE>
As of December 31, 1995 and 1994, the Company had total assets of approximately
$1,596,000 and $1,415,000, respectively, denominated in Canadian dollars and
British pound sterling. Revenues, operating income, income before provision for
income taxes and minority interest, and total assets for the European operations
for the year ended December 31, 1996, were insignificant to the financial
statements.
9. COMMITMENTS AND CONTINGENCIES:
------------------------------
Operating Leases
- ----------------
The Company leases certain offices, production facilities and equipment under
non-cancelable operating lease agreements expiring at various dates through the
year 2000. Certain leases contain escalations in rent payments at defined dates
during the lease term. The effect of the lease escalations is not material to
the financial position or results of operations of the Company. Rent expense for
the years ended December 31, 1996, 1995 and 1994, totaled approximately
$1,040,000, $963,000 and $565,000, respectively.
Future minimum operating lease payments as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
-------------- ------------
<S> <C>
1997 $ 718,940
1998 614,877
1999 355,307
2000 163,020
------------
$ 1,852,144
============
</TABLE>
Obligations Under Capital Leases
- --------------------------------
The Company leases certain equipment under capital leases.
F-17
<PAGE>
Future minimum lease payments under capital leases as of December 31, 1996,
together with the present value of the minimum lease payments, are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
--------------- ----------
<S> <C>
1997 $ 78,285
1998 78,285
1999 78,285
2000 77,331
2001 13,888
----------
Total minimum lease payments 326,074
Less--Amount representing interest (51,588)
----------
Present value of minimum lease payments 274,486
Less--Current maturities (53,391)
----------
Obligations under capital leases $221,095
==========
</TABLE>
Interest expense for obligations under capital leases was $24,326 for the year
ended December 31, 1996. The Company had immaterial interest expense for the
obligations under capital leases or no obligations under capital leases for the
years ended December 31, 1995 and 1994, respectively.
Assets recorded under capital leases are included in property and equipment at
December 31, 1996 and 1995, as follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Furniture, fixtures and equipment $328,448 $328,448
Less-Accumulated depreciation (65,690) -
---------- -----------
$262,758 $328,448
========== ===========
</TABLE>
Amortization of the capital leases is included in depreciation expense for the
years ended December 31, 1996 and 1995.
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.
10. INCOME TAXES:
-------------
The Company accounts for income taxes under provisions of SFAS Number 109,
"Accounting for Income Taxes," which requires the use of the liability method of
accounting for deferred income taxes. The predecessor partnership was not a
taxable entity for federal and state income taxes. All taxable income or loss of
the predecessor partnership is included in the separate tax returns of the
partners, and no provision for income taxes related to the income of the
predecessor partnership is included in the accompanying consolidated statements
of income.
F-18
<PAGE>
The provision for income taxes for the years ended December 31, 1996, 1995 and
1994, consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ----------- -------------
<S> <C> <C> <C>
Current:
Federal $ (162,000) $395,000 $ 569,000
State (30,000) 74,000 96,000
Foreign 20,000 95,000 90,000
------------- ----------- -------------
(172,000) 564,000 755,000
------------- ----------- -------------
1996 1995 1994
------------- ----------- -------------
Deferred:
Federal 1,250,000 90,000 (854,000)
State 234,000 17,000 (160,000)
Foreign - - -
------------- ----------- -------------
1,484,000 107,000 (1,014,000)
------------- ----------- -------------
$1,312,000 $671,000 $ (259,000)
============= =========== =============
</TABLE>
The principal differences between the federal statutory tax rate and the
effective tax rate are as follows for the years ended December 31, 1996, 1995
and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 4.0 4.0 4.0
Impact of conversion of the predecessor partnership to the
Company - - (56.4)
Non-taxable income of the predecessor partnership - - (2.2)
Non-taxable income from investments (1.9) - -
Other - 1.9 2.1
-------- -------- ---------
36.1% 39.9% (18.5)%
======== ======== =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the corresponding amounts used for income tax reporting purposes.
Significant components of the Company's deferred income tax assets and
liabilities as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Goodwill $ 930,000 $1,006,000
Deferred income recognition 91,000 35,000
Allowance for doubtful accounts 321,000 76,000
Net operating loss 693,000 -
Other 96,000 -
------------ ------------
2,131,000 1,117,000
============ ============
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Deferred income tax liabilities:
Depreciation and amortization (1,374,000) (210,000)
Sales-type leases (1,321,000) -
Other (13,000) -
------------- -----------
(2,708,000) (210,000)
------------- -----------
$ (577,000) $ 907,000
============= ===========
</TABLE>
The accompanying consolidated statement of income for the year ended December
31, 1994, includes an unaudited pro forma provision for income taxes to reflect
the estimated amounts which would have been recorded if the Company had not
operated as a non-taxable partnership through March 24, 1994, and had not
recognized a deferred tax benefit of approximately $788,000 during the year
ended December 31, 1994, as a result of the partnership conversion to a
corporation (see Note 2).
The principal differences between the federal statutory rate and the unaudited
pro forma effective tax rate for the year ended December 31, 1994, are as
follows:
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
Federal statutory rate 34.0%
State taxes, net of federal benefit 4.0
Other 2.1
--------
40.1%
========
</TABLE>
11. NONRECURRING CHARGES:
---------------------
During fiscal year 1996, the Company adopted a plan to restructure certain of
its operations in Memphis, Tennessee. Restructuring costs of $243,493, primarily
related to employee termination benefits, were incurred and are reflected in the
accompanying consolidated statements of income. All costs related to the
restructuring were paid as of December 31, 1996.
During fiscal year 1995, the Company adopted a plan to consolidate the Company's
administrative office in Atlanta, Georgia, with the facilities located in
Clearwater, Florida. In connection with the consolidation, the Company
recognized certain costs estimated by management at $600,000 relating to
relocation of certain employees, the termination of the Atlanta office lease,
and termination benefits due seven identified employees not being relocated. All
costs related to the relocation of certain employees (approximately $440,000),
lease termination (approximately $62,000), and employee termination benefits
(approximately $98,000) were either paid or obligated for payment as of December
31, 1995.
F-20
<PAGE>
SCHEDULE II
TECHFORCE CORPORATION AND SUBSIDIARIES
--------------------------------------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
<TABLE>
<CAPTION>
Additions
Balance, Charged to Balance,
Beginning of Costs and End of
Period Expenses Deductions Period
--------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $200,000 $694,217 $(49,217) $845,000
Year ended December 31, 1995:
Allowance for doubtful accounts 30,000 170,000 - 200,000
Year ended December 31, 1994:
Allowance for doubtful accounts - 30,000 - 30,000
</TABLE>
The preceding notes are an integral part of this schedule.
F-21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
- ------ -----------
PAGE
----
<S> <C> <C>
3.1 -- Amended and Restated Articles of Incorporation (Exhibit 3.1 to the
Company's Registration Statement on Form S-1, No. 33-98716).
3.2 -- Articles of Amendment to Amended and Restated Articles of
Incorporation (Exhibit 3.2 to the Company's Registration Statement
on Form S-1, No. 33-98716).
3.3 -- Form of Second Amended and Restated Articles of Incorporation
(Exhibit 3.3 to the Company's Registration Statement on Form S-1,
No. 33-98716).
3.4 -- Bylaws of the Company (Exhibit 3.4 to the Company's Registration
Statement on Form S-1, No. 33-98716).
3.5 -- Amendment to Bylaws of the Company (Exhibit 3.5 to the Company's
Registration Statement on Form S-1, No. 33-98716).
4.1 -- Specimen Common Stock Certificate (Exhibit 4.1 to the Company's
Registration Statement on Form S-1, No. 33-98716).
4.2 -- See Exhibits 3.1 through 3.5 for the provisions of the Company's
Amended and Restated Articles of Incorporation and Bylaws
governing the rights of holders of securities of the Company.
10.1 -- Equipment Service Agreement dated November 1, 1994, between the
Company and FedEx Corporation (Exhibit 10.1 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.2 -- Equipment Service Agreement dated March 13, 1995 between the
Company and Packard Bell, Inc. (Exhibit 10.2 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.3 -- Telecommunications Service Agreement dated January 27, 1992
between the Company and Federal Express Corporation (Exhibit 10.3
to the Company's Registration Statement on Form S-1, No. 33-
98716).
10.4 -- Termination of Telecommunications Service Agreement dated
September 1, 1995 between the Company and FedEx Corporation
(Exhibit 10.4 to the Company's Registration Statement on Form S-1,
No. 33-98716).
10.5 -- General Services Agreement dated June 19, 1992 between the Company
and Federal Express Corporation (Exhibit 10.5 to the Company's
Registration Statement on Form S-1, No. 33-98716).
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
- ------ -----------
PAGE
----
<S> <C> <C>
10.6 -- Change Order Extending General Services Agreement dated August 1,
1994 between the Company and Federal Express Corporation (Exhibit
10.6 to the Company's Registration Statement on Form S-1, No. 33-
98716).
10.7 -- Systems Integrator Agreement dated June 1, 1995 between the
Company and Cisco Systems Inc. (Exhibit 10.7 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.8 -- Technology Transfer Agreement dated March 25, 1994 between the
Company and AT&T Paradyne Corporation (Exhibit 10.8 to the
Company's Registration Statement on Form S-1, No. 33-98716).
10.9 -- Manufacturing Contracted Services Agreement dated March 25, 1994
between the Company and AT &T Paradyne Corporation (Exhibit 10.9
to the Company's Registration Statement on Form S-1, No. 33-
98716).
10.10 -- Co-marketing Agreement dated March 25, 1994 between the Company
and AT &T Paradyne Latin America (Exhibit 10.10 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.11 -- Co-marketing Agreement dated March 25, 1994 between the Company
and AT &T Federal Business Unit (Exhibit 10.11 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.12 -- Contracted Services Agreement dated March 25, 1994 between the
Company and AT&T Paradyne Corporation (Exhibit 10.12 to the
Company's Registration Statement on Form S-1, No. 33-98716).
10.13 -- Contracted Services Agreement dated March 25, 1994 between the
Company and AT &T Paradyne Information Systems (Exhibit 10.13 to
the Company's Registration Statement on Form S-1, No. 33-98716).
10.14 -- Contracted Services Agreement dated March 25, 1994 between the
Company and A T & T Paradyne Japan (Exhibit 10.14 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.15 -- Contracted Services Agreement dated March 25, 1994 between the
Company and AT&T Paradyne Corporate Direct Marketing Services
(Exhibit 10.15 to the Company's Registration Statement on Form S-
1, No. 33-98716).
10.16 -- Contracted Services Agreement dated March 25, 1994 between the
Company and AT &T Paradyne Customer Administration Business Unit
(Exhibit 10.16 to the Company's Registration Statement on Form S-
1, No. 33-98716).
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
- ------ -----------
PAGE
----
<S> <C> <C>
10.17 -- Non-Competition and Right-of-First-Refusal Agreement dated March
25, 1994 between the Company and AT &T Paradyne Corporation
(Exhibit 10.17 to the Company's Registration Statement on Form S-
1, No. 33-98716).
10.18 -- Contracted Services Agreement dated March 25, 1994 between the
Company and AT &T Paradyne Canada, LTD (Exhibit 10.18 to the
Company's Registration Statement on Form S-1, No. 33-98716).
10.19 -- Contracted Service Agreement for Field Service between the Company
and IBM dated February 23, 1995 (Exhibit 10.19 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.20 -- Contracted Service Agreement for Inventory Management and
Logistics dated December 29, 1994 between the Company and
LogisTechs dated December 29, 1994 (Exhibit 10.20 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.21 -- Global Roam Rental Agreement dated July 17, 1995 between the
Company and GTE Mobile Communication Service Corporation (Exhibit
10.21 to the Company's Registration Statement on Form S-1, No. 33-
98716).
10.22 -- Equipment Service Agreement dated August 18, 1995 between the
Company and TxPort, Inc. (Exhibit 10.22 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.23 -- Loan and Security Agreement dated November 29, 1994 between the
Company and SouthTrust Bank of Georgia, N.A. (Exhibit 10.23 to the
Company's Registration Statement on Form S-1, No. 33-98716).
10.24 -- Installment Note dated March 25, 1994 issued by the Company
payable to AT & T Paradyne Corporation (Exhibit 10.24 to the
Company's Registration Statement on Form S-1, No. 33-98716).
10.25 -- Security Agreement dated March 25, 1994 between. the Company and
AT &T Paradyne Corporation (Exhibit 10.25 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.26 -- 10% Subordinated Promissory Note dated March 25, 1994 among the
Company, AT &T Paradyne Corporation, United American Bank of
Memphis and the Holders of the Company's 10% Subordinated
Promissory Notes (Exhibit 10.26 to the Company's Registration
Statement on Form S-1, No. 33-98716).
</TABLE>
E-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
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PAGE
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<S> <C> <C>
10.27 -- Agreement Revising Installment Note dated March 25, 1995 between
the Company and AT &T Paradyne dated March 25, 1995 (Exhibit 10.27
to the Company's Registration Statement on Form S-1, No. 33-
98716).
10.28 -- 401 (k) Plan of the Company (Exhibit 10.28 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.29 -- Stock Option Plan of the Company, as amended (Exhibit 10.29 to the
Company's Registration Statement on Form S-1, No. 33-98716).
10.30 -- Form of Non-Competition and Non-Disclosure Agreement dated March
25, 1994, between the Company and each of John A. Koehler, Anthony
M. Ramunno, Jr., Derek S. Beveridge and Michael R. Jones (Exhibit
10.30 to the Company's Registration Statement on Form S-1, No. 33-
98716).
10.31 -- Employment Agreement dated December 7, 1994, between the Company
and Allan Siders (Exhibit 10.31 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.32 -- Employment Agreement dated December 7, 1994, between the Company
and L. James Bradshaw (Exhibit 10.32 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.33 -- Employment Agreement dated December 7, 1994, between the Company
and Peter Reagan (Exhibit 10.33 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.34 -- Form of Indemnification Agreement dated May 9, 1995, between the
Company and each of its directors and executive officers (Exhibit
10.34 to the Company's Registration Statement on Form S-1, No. 33-
98716).
10.35 -- Consulting Agreement dated January 1, 1995, between the Company
and Anthony M. Ramunno, Jr. (Exhibit 10.35 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.36 -- Consulting Agreement dated August 24, 1994, between the Company
and Derek S. Beveridge (Exhibit 10.36 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.37 -- Letter Agreement dated July 19, 1994 between the Company and
Bertil D. Nordin (Exhibit 10.37 to the Company's Registration
Statement on Form S-1, No. 33-98716).
</TABLE>
E-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
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----
<S> <C> <C>
10.38 -- Lease Agreement dated March 4, 1994, between 3901 Roswell Road
Associates, T.C. and the Company for premises located at 3901
Roswell Road, N.E., Suite 310, Marietta, Georgia (Exhibit 10.38 to
the Company's Registration Statement on Form S-1, No. 33-98716).
10.39 -- Lease Agreement dated March 31, 1994, between the Company and PNC
Realty Holding Corp., of Florida for premises located at 15950 Bay
Vista Drive, Suite 340, Clearwater, Florida (Exhibit 10.39 to the
Company's Registration Statement on Form S-1, No. 33-98716).
10.40 -- Lease Agreement dated June 20, 1994, between the Company and
Holiday Inns, Inc. for premises located at Commerce Center, HOB
Building, 3781 3797 Lamar Avenue, Memphis, Tennessee (Exhibit
10.40 to the Company's Registration Statement on Form S-1, No. 33-
98716).
10.41 -- Lease Renewal/Expansion Proposal dated October 18, 1994, for 747
Church Road, Suite C-1, Elmhurst, Illinois issued by Morgan Realty
Partners to TechNet, Inc. (Exhibit 10.41 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.42 -- Lease Amendment Agreement dated December 9, 1994, between
Banyan/Morgan Milwaukee Limited Partnership and TechForce/TechNet
for premises located at Suite C-1, Elmhurst Metro Court, Elmhurst,
Illinois (Exhibit 10.42 to the Company's Registration Statement on
Form S-1, No. 33-98716).
10.43 -- Addendum to Lease Agreement dated 1995, between the Company and
PNC Realty Holding Corp. of Florida for premises located at 15950
Bay Vista Drive, Suite 340, Clearwater, Florida (Exhibit 10.43 to
the Company's Registration Statement on Form S-1, No. 33-98716).
10.44 -- Form of Option Agreement between the Company and optionees under
the Company's Stock Option Plan (Exhibit 10.44 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.45 -- Agreement of Reorganization dated November 30, 1994 among the
Company, TechNet, Inc. and the TechNet Stockholders (Exhibit 10.45
to the Company's Registration Statement on Form S-1, No. 33-
98716).
10.46 -- Agreement for the Purchase and Sale of Assets dated March 24, 1994
between the Company and AT &T Paradyne Corporation (Exhibit 10.46
to the Company's Registration Statement on Form S-1, No. 33-
98716).
</TABLE>
E-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
- ------ -----------
PAGE
----
<S> <C> <C>
10.47 -- Assignment and Assumption Agreement dated March 25, 1994 between
the Company and AT &T Paradyne Corporation (Exhibit 10.47 to the
Company's Registration Statement on Form S-1, No. 33-98716).
10.48 -- Contribution Agreement and Amendment to Partnership Agreement
dated March 24, 1994 between the Company and TechForce, a Georgia
General Partnership (Exhibit 10.48 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.49 -- Investment and Stockholders' Agreement dated March 25, 1994
between the Company and Investors listed in Exhibit A thereto
Corporation (Exhibit 10.49 to the Company's Registration Statement
on Form S-1, No. 33-98716).
10.50 -- Management Stockholder Participation Agreement dated November 1994
between the Company and Messrs. Bradshaw, Siders and Reagan
(Exhibit 10.50 to the Company's Registration Statement on Form S-
1, No. 33-98716).
10.51 -- Investment Agreement dated November 4, 1994 between the Company
and Bertil D. Nordin (Exhibit 10.51 to the Company's Registration
Statement on Form S-1, No. 33-98716).
10.52 -- 1995 Stock Incentive Plan (Exhibit 10.52 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.53 -- Directors' Stock Option Plan (Exhibit 10.53 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.54 -- Employee Stock Purchase Plan (Exhibit 10.54 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.55 -- Value Added Distributor Agreement between Paradyne Corporation and
the Company executed November 10, 1995 - (Exhibit 10.55 to the
Company's annual report on Form 10-K for the period ended December
31, 1995),
10.56 -- Second Lease Amendment Agreement dated October 25, 1995 between
Banyan/Morgan Milwaukee Limited Partnership and the Company
(Exhibit 10.56 to the Company's annual report on Form 10-K for the
period ended December 31, 1995).
10.57 -- Commencement Notice dated November 3, 1995 between Banyan/Morgan
Milwaukee Limited Partnership and the Company -. (Exhibit 10.57 to
the Company's annual report on Form 10-K for the period ended
December 31, 1995).
</TABLE>
E-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
- ------ -----------
PAGE
----
<S> <C> <C>
10.58 -- Sublease between Witness Systems, Inc. and the Company dated
January 3, 1996 (Exhibit 10.58 to the Company's annual report on
Form 10-K for the period ended December 31, 1995).
10.59 -- Lease Agreement between 3901 Roswell Road Associates, T.C. and the
Company dated January 24, 1996 -(Exhibit 10.59 to the Company's
annual report on Form 10-K for the period ended December 31,
1995).
10.60 -- Services Level Agreement for Installation and Support Services
between the Company and National Medical Care, Inc., dated March
1, 1996 (Exhibit 10 to the Company's Report on Form 10-Q for the
period ended March 31, 1996).
10.61 -- General Services Agreement between the Company and Federal
Express, dated June 19, 1996 (Exhibit 10.1 to the Company's Report
on Form 10-Q for the period ended September 30, 1996).
10.62 (a) -- Loan Agreement between the Company and First Union National Bank,
dated September 23, 1996 (Exhibit 10.2 (a) to the Company's Report
on Form 10-Q for the period ended September 30, 1996).
10.62 (b) -- Security Agreement between the Company and First Union National
Bank, dated September 23, 1996 (Exhibit 10.2 (b) to the Company's
Report on Form 10-Q for the period ended September 30, 1996).
10.62 (x) -- Promissory Note between the Company and First Union National Bank,
dated September 23, 1996 (Exhibit 10.2 (c) to the Company's Report
on Form 10-Q for the period ended September 30, 1996).
11.1 -- Statement Regarding Computation of Earnings per share - filed
herewith.
16.1 -- Letter from Langford de Kock & Co. (Exhibit 16.1 to the Company's
Registration Statement on Form S-1, No. 33-98716).
21.1 -- List of Subsidiaries of the Registrant (Exhibit 21.1 to the
Company's Registration Statement on Form S-1, No. 33-98716).
23.1 -- Consent of Arthur Andersen LLP - filed herewith.
23.2 -- Consent of Pridie Brewster - filed herewith
27 -- Financial Data Schedule - filed herewith
</TABLE>
E-7
<PAGE>
TECHFORCE CORPORATION
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
1996 - EXHIBIT 11.1
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Primary:
Weighted average shares outstanding........... 7,931,554 2,950,768 2,733,615
Net effect of dilutive securities,
based on the treasury stock and
if-converted methods........................ 403,504 475,933 340,428
Shares of preferred stock assumed issued
the conversion from redeemable convertible
preferred stock upon completion of
public offering............................. 0 2,839,566 2,839,566
---------- ---------- ----------
Total shares used in computation................... 8,335,058 6,266,267 5,913,609
Net income......................................... $2,323,100 $1,010,690 $ 771,475
Net income per common and common
equivalent share.............................. $ 0.28 $ 0.16 $ 0.13
Fully diluted:
Weighted average shares outstanding........... 7,931,554 2,950,768 2,733,615
Net effect of dilutive securities, based
on the treasury stock and if-converted
methods..................................... 403,504 475,933 340,428
the conversion from redeemable convertible
preferred stock upon completion of
public offering............................. 0 2,839,566 2,839,566
---------- ---------- ----------
Total shares used in computation................... 8,335,058 6,266,267 5,913,609
Net income......................................... $2,323,100 $1,010,690 $ 771,475
Net income per common and common
equivalent share.............................. $ 0.28 $ 0.16 0.13
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report dated February 14, 1997, included in this Form 10-K
into TechForce Corporation's previously filed Registration Statements (File Nos.
333-1936, 333-1938, 333-1940 and 333-1942).
ARTHUR ANDERSEN LLP
Tampa, Florida,
March 31, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC AUDITORS
As independent public accountants, we hereby consent to the incorporation of our
report dated 12th October 1995 on the Financial Statements for the year ended
31st December 1994 included in this Form 10-K into the Company's previously
filed Registration Statements on Form S-8 (File No. 33-31942, File No. 33-31938,
File No. 33-31940 and File No. 33-31936).
Pridie Brewster
London
6th March 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TECHFORCE
CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1996 (IN
THOUSANDS) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,943
<SECURITIES> 2,298
<RECEIVABLES> 13,532
<ALLOWANCES> 845
<INVENTORY> 4,445
<CURRENT-ASSETS> 26,554
<PP&E> 18,046
<DEPRECIATION> 6,736
<TOTAL-ASSETS> 46,482
<CURRENT-LIABILITIES> 11,808
<BONDS> 3,384
0
0
<COMMON> 79
<OTHER-SE> 28,414
<TOTAL-LIABILITY-AND-EQUITY> 46,482
<SALES> 28,081
<TOTAL-REVENUES> 63,273
<CGS> 19,504
<TOTAL-COSTS> 42,754
<OTHER-EXPENSES> 16,781
<LOSS-PROVISION> 845
<INTEREST-EXPENSE> 102
<INCOME-PRETAX> 3,635
<INCOME-TAX> 1,312
<INCOME-CONTINUING> 2,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,323
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
