<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ________________________
Commission file number 0-27204
TECHFORCE CORPORATION
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(Exact Name of Registrant as Specified in Its Charter
GEORGIA 58-2082077
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(State of Incorporation) (I.R.S. Employer Identification No.)
5741 Rio Vista Drive, Clearwater, Florida 33760
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (727) 533-3600
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicated by check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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As of November 6, 1998, there were 8,261,077 shares of the issuer's
common stock outstanding.
<PAGE>
TECHFORCE CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C> <C>
Item 1
Financial Statements................................................... 1
Consolidated Balance Sheet............................................. 1
Consolidated Statements of Operations.................................. 2
Consolidated Statements of Cash Flows.................................. 3
Notes to Consolidated Financial Statements............................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risks........... 13
PART II. OTHER INFORMATION
- -------- -----------------
Item 1 Legal Proceedings...................................................... 14
Item 2 Changes in Securities.................................................. 14
Item 3 Defaults Upon Senior Securities........................................ 14
Item 4 Submission of Matters to a Vote of Shareholders........................ 14
Item 5 Other Information...................................................... 14
Item 6 Exhibits and Reports on Form 8-K....................................... 14
SIGNATURES
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Signatures...................................................................... 15
EXHIBIT INDEX
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</TABLE>
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1998
(In thousands)
<TABLE>
<CAPTION>
ASSETS September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 462 $ 735
Investments 103 3,175
Accounts receivable, net of Allowance for Doubtful Accounts of
approximately $547,000 and $343,000 at Sep 30, 1998 and
Dec 31, 1997, respectively 17,787 12,829
Inventories 792 3,461
Net Investment in Sales Type Leases (current portion) 4,856 4,100
Prepaid expenses/Other Assets 1,587 1,031
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Total current assets 25,587 25,331
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PROPERTY, PLANT AND EQUIPMENT
Leasehold improvements 1,164 764
Office furniture and fixtures 9,343 7,499
Replacement parts 17,586 17,077
Equipment held for rental 721 592
-------- --------
28,814 25,932
Less accumulated depreciation (14,735) (10,968)
-------- --------
Total property, plant and equipment, net 14,079 14,964
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NET INVESTMENT IN SALES TYPE LEASES,
Less current portion 7,605 10,105
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ORGANIZATION COSTS AND OTHER ASSETS 181 273
-------- --------
Total assets $ 47,452 $ 50,673
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,138 $ 3,906
Accrued expenses 622 1,936
Accrued contract labor 1,038 551
Current maturities of obligations under capital leases,
long-term debt and non-recourse notes payable 2,656 2,770
Line of credit 837 --
Deferred revenue 3,065 2,069
Deferred Taxes -- 81
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11,356 11,313
-------- --------
OTHER LIABILITIES 1,642 1,835
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NON-RECOURSE NOTES PAYABLE, net of current maturities 4,755 6,032
-------- --------
STOCKHOLDERS' EQUITY
Common stock 82 81
Additional paid in capital 28,459 28,031
Retained earnings 1,158 3,381
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29,699 31,493
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Total liabilities and stockholders' equity $ 47,452 $ 50,673
-------- --------
-------- --------
</TABLE>
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
----------------------------------------- ------------------------------------------
1998 1997 1998 1997
------------------- ------------------ --------------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
Services $ 12,916 $ 9,187 $ 35,304 $ 28,008
Hardware 6,036 5,232 15,315 19,216
------------------- ------------------ --------------------- ------------------
Total revenues 18,952 14,419 50,619 47,224
------------------- ------------------ --------------------- ------------------
Direct costs:
Services 9,879 7,013 28,662 20,256
Hardware 4,519 3,331 13,791 12,745
------------------- ------------------ --------------------- ------------------
Total direct costs 14,398 10,344 42,453 33,001
------------------- ------------------ --------------------- ------------------
Gross Margin:
Services 3,037 2,174 6,642 7,752
Hardware 1,517 1,901 1,524 6,471
------------------- ------------------ --------------------- ------------------
Total gross margin 4,554 4,075 8,166 14,223
------------------- ------------------ --------------------- ------------------
Operating costs
Selling and marketing 2,148 2,230 6,834 6,952
General and administrative 1,443 1,341 4,427 3,736
Non recurring expense from
restructuring -- -- 338 --
------------------- ------------------ --------------------- ------------------
3,591 3,571 11,599 10,688
------------------- ------------------ --------------------- ------------------
Operating (loss) income 963 504 (3,433) 3,535
Interest (income) expense, net 33 (8) 104 49
------------------- ------------------ --------------------- ------------------
(Loss) Income before taxes 930 512 (3,537) 3,486
Benefit (Provision) for income taxes (367) (180) 1,314 (1,261)
------------------- ------------------ --------------------- ------------------
Net (loss) income $ 563 $ 332 $ (2,223) $ 2,225
------------------- ------------------ --------------------- ------------------
Basic earnings (loss) per common share $0.07 $ 0.04 $ (0.27) $ 0.28
------------------- ------------------ --------------------- ------------------
Diluted earnings (loss) per common share $0.07 $ 0.04 $ (0.27) $ 0.27
------------------- ------------------ --------------------- ------------------
Weighted average number of common
shares outstanding 8,203,028 8,042,115 8,159,462 8,016,704
------------------- ------------------ --------------------- ------------------
Weighted average number of common
and common equivalent shares 8,386,560 8,472,620 8,159,462 8,375,173
------------------- ------------------ --------------------- ------------------
</TABLE>
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------
1998 1997
-------- --------
Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net (loss) income ($ 2,223) $ 2,225
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,859 2,893
Changes in operating assets and liabilities (3,100) 3,159
-------- --------
Net cash (used in) provided by operating activities (1,464) 8,277
Cash Flows from investing activities
Purchase of property and equipment (3,729) (6,316)
Investment in sales-type leases 1,744 (2,863)
(Purchase) Sale of Investments 3,072 (1,835)
Purchase of Other Assets -- (120)
-------- --------
Net cash provided by (used in) investing activities 1,087 (11,134)
-------- --------
Cash flows from financing activities
Net borrowings under revolving credit facilities 837 --
Repayment of long term debt (1,162) 1,418
Issuances of Common Stock, net 429 115
-------- --------
Net cash provided by financing activities 104 1,533
-------- --------
Net decrease in cash and cash equivalents (273) (1,324)
Cash and cash equivalents, beginning of period 735 3,943
-------- --------
Cash and cash equivalents, end of period $ 462 $ 2,619
-------- --------
-------- --------
</TABLE>
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. NATURE OF BUSINESS
TechForce Corporation and subsidiaries (collectively, the "Company")
are engaged in the sale, design, on-site installation and maintenance,
and support of computer and data communications networking equipment.
2. BASIS OF FINANCIAL REPORTING
The condensed consolidated financial statements at September 30, 1998
and for the three and the nine month periods then ended are unaudited
and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for
fair presentation of the financial position and operating results for
the interim period. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion
and analysis of financial condition and results of operations,
contained in the Company's Annual Report to Shareholders incorporated
by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
3. MAJOR CUSTOMERS
During the quarters ended September 30, 1998, and September 30, 1997,
the following customers individually accounted for more than 10% of
the Company's revenue:
<TABLE>
<CAPTION>
Quarter Ended September 30, 1998 Quarter Ended September 30, 1997
------------------------------- --------------------------------------
Amount ($000) Percentage Amount ($000) Percentage
------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Packard Bell Electronics, Inc. $ 243 1% $ 2,886 20%
General Electric Corporation $ 1,939 10% $ -
Best Buy Company, Inc $ 2,211 12% $ -
Sears Roebuck and Company $ 1,971 10% $ 4 Less than 1%
</TABLE>
The loss of revenues from General Electric Corporation, Best Buy
Company, Inc., or Sears Roebuck and Company could have a material
impact on the results of operations and financial conditions of the
Company. Management believes that the loss of revenue from Packard Bell
would not have a material impact on such results.
4. EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share" (SFAS 128). Basic
earnings per share is based upon the weighted average number
<PAGE>
of common shares and the diluted earnings per share is based upon the
weighted average number of common shares plus the dilutive common
equivalent shares outstanding during the period. The following is a
reconciliation of the denominators of the basic and diluted earnings
per share computations shown on the face of the accompanying
consolidated statements of operations:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1998 1997 1998 1997
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Basic weighted average number of common
shares ...................................... 8,203,028 8,042,115 8,159,462 8,016,704
Dilutive effect of options outstanding ........... 183,532 430,505 - 358,469
Dilutive weighted average number of common
and common equivalent shares outstanding ..... 8,386,560 8,472,620 8,159,462 8,375,173
</TABLE>
The following options were outstanding at September 30, 1998 and 1997,
but, were not included in the computation of diluted earnings per share
for the three month periods ended September 30, 1998 and 1997 and the
nine month period ended September 30, 1997 because the options'
exercise price were greater than the average market price of the
common shares for those periods:
<TABLE>
Three months ended September 30, Nine months ended
September 30,
1998 1997 1997
------------ ------------- ------------------
<S> <C> <C> <C>
Number of options ................................ 898,087 149,200 229,533
Range of exercise prices ......................... $6.13-9.63 $9.63 $8.75-9.83
Range of expiration dates ........................ 2005-2008 2005-2006 2005-2007
</TABLE>
The following options were outstanding at September 30, 1998 but were
not included in the computation of diluted earnings per share for the
nine months ended September 30, 1998 because the Company incurred a net
loss for that period:
<TABLE>
Nine months ended September 30,
1998
----------------
<S> <C>
Number of options ......................................... 1,174,826
Range of exercise prices .................................. $0.38 - 9.63
Range of expiration dates ................................. 2004 - 2008
</TABLE>
As a result of adopting SFAS 128, the Company's earnings per share
have been restated for the three months and nine months ended
September 30, 1997. The effects of this accounting change on previously
reported primary earnings per share data are as follows:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1997 1997
---- ----
<S> <C> <C>
Primary earnings per share as previously
reported .................................. $0.04 $0.27
Effects of SFAS 128 ............................. $0.00 $0.01
--------- ---------
Basic earnings per share restated ............... $0.04 $0.28
--------- ---------
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</TABLE>
The previously reported fully diluted earnings per share for the three
months and nine months ended September 30, 1997 did not differ from the
diluted earnings per share calculated under SFAS 128.
<PAGE>
5. LEGAL MATTERS
From time to time, 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 any such matters will not have
a material adverse effect on the Company's financial position at
September 30, 1998 or results of operations for the three and nine
months then ended.
6. RECLASSIFICATIONS
Certain amounts included in the 1997 financial statements have been
reclassified to conform with the 1998 financial statements.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131).
SFAS 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments
and related information. SFAS 131 is effective for financial
statements relating to annual periods beginning after December 15,
1997. Management has determined that the adoption of SFAS 131 will not
have a material effect on the accompanying consolidated financial
statements.
In February 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 132 "Employers disclosures about
Pensions and Other Postretirement Benefits" (SFAS 132) which
standardizes the disclosure requirements for defined contribution
plans and defined benefit plans. The statement is effective for
financial statements relating to annual periods beginning after
December 15, 1997. Management has determined that the adoption of SFAS
132 will not have a material effect on the accompanying consolidated
financial statements.
Other issued but not yet required FASB standards are not currently
applicable or material to the Company's operations.
8. RESTRUCTURING OF HARDWARE SALES BUSINESS
During the second quarter, in response to the declining performance
from its hardware sales business, the Company restructured its
business operations away from this business segment by reducing the
infrastructure and resources allocated to it. As a result of these
second quarter actions and the Company's strategy shift related to the
sale of hardware, the Company incurred one-time charges of $0.3
million related to staff reductions and $1.6 million related to
finished goods inventory valuation adjustments. Such charges for the
second quarter also included valuation adjustments of $0.9 million
related to replacement parts due to the Company's planned move to a
fee-based spares access program rather than owning a portion of its
low volume, high cost replacement parts. The valuation adjustments to
finished goods inventory and replacement parts were included in the
cost of hardware and the cost of service, respectively, for the nine
month period ended September 30, 1998, and contributed to the
unfavorable cost and margin variances.
<PAGE>
This Report contains certain forward-looking statements with respect to
the Company's operations, industry, financial condition and liquidity. These
statements, which are typically introduced by phrases such as "the Company
believes", "anticipates", "estimates" or "expects" certain conditions to exist,
reflect management's best current assessment of a number of risks and
uncertainties. The Company's actual result could differ materially from the
results anticipated in these forward-looking financial statements as a result of
certain factors described in this report. See "Safe Harbor Statement".
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company provides network support services focusing on mission
critical technologies such as LAN/WAN internetworking, data networking,
mainframe channel networking and workstation support. The Company's support
solutions include network monitoring services, 7X24 diagnostic and technical
support from the Technology Support Center in Clearwater, Florida, on-site
maintenance, remote and on-site equipment software installation and network
design on complex multi-vendor enterprise networks. The Company's maintenance
contracts with customers range from one to five years. The Company also sells
and leases various data network hardware supplied by other manufacturers, as
well as its own channel extension hardware. The Company's Custom PC Services
provide repairs to extended warranty retailers and manufacturers of personal
computers and peripherals. Field service operations are conducted through a
combination of the Company's field support personnel and a network of authorized
service providers that are certified by the Company to provide local on-site
repair or parts replacement services under the direction of the Company's
Technical Support Center.
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 Company's workstation support agreements. Revenues from
product sales are recognized at the time of shipment. When appropriate,
revenues from leasing are accounted for as sales-type leases where the
present value of all payments are recorded currently as revenues and the
related costs of the equipment less the present value of any appropriate
unguaranteed residual value are recorded to cost of sales. The associated
interest income is recognized over the term of the lease. Revenues derived
from sales-type leases for the three months ended September 30, 1998 and
September 30, 1997, respectively were $0.5 million and $0.7 million.
Amortized interest on sales-type leases totaled $0.17 million and $0.1
million for the three month periods ended September 30, 1998 and September
30, 1997, respectively.
During the second quarter of 1998, in response to the declining
performance from its hardware sales business, the Company restructured its
business operations away from this business segment by reducing the
infrastructure and resources allocated to it. As a result of these second
quarter actions and the Company's strategy shift related to the sale of
hardware, the Company incurred one-time charges of $0.3 million related to
staff reductions and $1.6 million related to finished goods valuation
adjustments. Such charges for the second quarter also included valuation
adjustments of $0.9 million related to replacement parts inventories due to
the Company's planned move to a fee-based spares access program rather than
owning a portion of its low volume, high cost replacement parts.
Management anticipates that revenues from its proprietary channel
extension products and services will continue to decrease at a rate of
approximately 10% to 20% per year primarily as a result of an industry trend
toward open-systems environments. Management does not believe that this
gradual decline in such revenues will have a material adverse effect on the
Company's results of operations and financial condition.
Revenues from Packard Bell represented 1% of total Company revenues
for the three months ended September 30, 1998 as compared to 20% for the
three months ended September 30, 1997. The decrease in call volume level
resulted from changes made by Packard Bell in its end user product warranty.
During the third quarter of 1998, the Company provided services to two
significant customers which it did not have in the prior year period, General
Electric and Best Buy. Revenues from General Electric represented 10% of
total Company revenues for the quarter and Best Buy represented 12% of total
Company revenues for the quarter.
<PAGE>
Sears Roebuck and Company, an existing customer, also increased its demand
for the Company's service. As a result, revenues from Sears Roebuck and
Company increased to 10% of total Company revenues for the quarter, compared
with less than 1% of total Company revenues for the three months ended
September 30, 1997.
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 continue to increase the
number and productivity of its channels to market, to successfully implement
enhancements to its business management systems and to adapt those systems as
necessary to respond to changes in its business. Furthermore, although the
Company has experienced rapid growth in total revenues and has previously
been profitable, its limited operating history makes the prediction of future
operating results difficult. There can be no assurance that the Company's
revenue growth will continue in the future or that profitable operating
results can be sustained.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments and related information.
SFAS 131 is effective for financial statements relating to annual periods
beginning after December 15, 1997. Management has determined that the
adoption of SFAS 131 will not have a material effect on the accompanying
consolidated financial statements.
In February 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 132, "Employers Disclosures about Pensions
and Other Postretirement Benefits" (SFAS 132) which standardizes the
disclosure requirements for defined contribution plans and defined benefit
plans. The statement is effective for financial statements relating to annual
periods beginning after December 15, 1997. Management has determined that the
adoption of SFAS 132 will not have a material effect on the accompanying
consolidated financial statements.
Other issued but not yet required FASB standards are not currently
applicable or material to the Company's operations.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
TOTAL REVENUES. Total revenues increased 31.4% from the three months
ended September 30, 1997 to the three months ended September 30, 1998 largely
due to increased hardware sales, enterprise network support and workstation
support revenues. This increase was partially offset by decreased revenues
from leasing activity and FedEx repair revenues.
SERVICE REVENUES. Revenues from services increased 40.6% from $9.2
million (63.7% of total revenues) for the three months ended September 30,
1997 to $12.9 million (68.2% of total revenues) for the three months ended
September 30, 1998. This increase was attributable to increased enterprise
network and workstation support revenues partially offset by the reduced
FedEx repair revenues. The Company discontinued its repair business for FedEx
during the three months ended September 30, 1997. Revenues from enterprise
network support services increased by 26.7% while revenues from workstation
support increased by 71.5% for the three months ended September 30, 1998 as
compared to revenues from these services for the three months ended September
30, 1997. Service revenues include revenues from the sale of workstation
repair parts procured by the Company on behalf of certain workstation support
customers.
HARDWARE REVENUES. Revenues from hardware sales increased 15.4% from
$5.2 million (36.3% of total revenue) for the three months ended September
30, 1997 to $6.0 million (31.8% of total revenues) for the three months ended
September 30, 1998. Hardware revenues included revenues from leasing
activities of $0.7 million and $0.5 million for the three months ended
September 30, 1997 and 1998, respectively. During the three months ended June
30, 1998, the Company reduced its strategic focus on hardware sales and
decreased infrastructure supporting its hardware sales efforts resulting in
one time charges related to inventory valuation and staff reductions.
Accordingly, historical levels of revenue from the sale and lease of hardware
may not be indicative of future hardware revenue.
<PAGE>
COST OF SERVICE. Cost of service increased 40.9% from $7.0 million
(76.3% of service revenues) for the three months ended September 30, 1997 to
$9.9 million (76.5% of service revenues) for the three months ended September
30, 1998. The cost of service increase was attributable to the growth in
business volumes from Custom PC Services and the increased cost structure to
support multiple extended warranty provider customers. Cost of service
includes the cost of workstation repair parts procured by the Company on
behalf of certain workstation support customers.
COST OF HARDWARE. Cost of hardware increased 35.7% from $3.3 million
(63.7% of hardware revenues) for the three months ended September 30, 1997 to
$4.5 million (74.9% of hardware revenue) for the three months ended September
30, 1998. Hardware cost as a percent of revenue in excess of historical
levels continues to reflect competitive pressure on hardware pricing.
GROSS MARGIN. Overall gross margin increased 11.8% from $4.1
million, (28.3% of total revenues), for the three months ended September 30,
1997 to $4.6 million, (24.0% of total revenues), for the three months ended
September 30, 1998. Gross margin on services increased 39.7% from $2.2
million for the three months ended September 30, 1997 to $3.0 million for the
three months ended September 30, 1998 while decreasing as a percent of
service revenues from 23.7% to 23.5% respectively. Gross margin on hardware
revenues decreased 20.2% from $1.9 million for the three months ended
September 30, 1997 to $1.5 million for the three months ended September 30,
1998. This decrease was caused primarily by declining margins from sales of
hardware during the three months ended September 30, 1998. Hardware margins
as a percentage of hardware revenues decreased from 36.3% for the three
months ended September 30, 1997 to 25.1% for the three months ended September
30, 1998.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
decreased 3.7% from $2.2 million for the three months ended September 30,
1997 to $2.1 million for the three months ended September 30, 1998. The
decrease resulted primarily from the reduction of the sales infrastructure
and reduced selling expense from lower margins on hardware revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 7.6% from $1.3 million for the three months ended
September 30, 1997 to $1.4 million for the three months ended September 30,
1998. Rent, information systems, supplies, and depreciation expenses
comprised a significant portion of the general and administrative expense
increase over the same period for 1997.
OPERATING INCOME. Operating income increased 91.1% from $.5 million,
(3.5% of total revenues), for the three months ended September 30, 1997 to
$.96 million, (5.1% of total revenues), for the three months ended September
30, 1998.
INTEREST EXPENSE, NET. Net interest income totaled $8,000 for the
three months ended September 30, 1997, resulting from investments partially
offset by interest on the Company's line of credit. Net interest expense
totaled $33,000 for the three months ended September 30, 1998, resulting from
increased reliance on the Company's line of credit.
INCOME TAXES. The Company's effective income tax rate was 39.5% for
the three months ended September 30, 1998, compared to a 35.2% effective
income tax rate for the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues. Total revenues increased 7.2% from $47.2 million for
the nine months ended September 30, 1997 to $50.6 million for the nine months
ended September 30, 1998 due to increased enterprise network support and
workstation support revenues. This increase was partially offset by decreased
revenues from hardware sales, leasing activity and FedEx repair.
Service revenues. Revenues from services increased 26.0% from $28.0
million (59.3% of total revenues) for the nine months ended September 30,
1997 to $35.3 million (69.7% of total revenues) for the nine months ended
September 30, 1998. This increase was attributable to increased enterprise
network and workstation support revenues and was partially offset by the
reduced FedEx repair revenue. The Company discontinued its repair business
for FedEx
<PAGE>
during the nine months ended September 30, 1997. Revenues from enterprise
network support services increased by 17.5% while revenues from workstation
support increased by 55.9% for the nine months ended September 30, 1998 as
compared to revenues from these services for the nine months ended September
30, 1997. Service revenues include revenues from the sale of workstation
repair parts procured by the Company on behalf of certain workstation support
customers.
HARDWARE REVENUES. Revenues from hardware sales decreased 20.3% from
$19.2 million (40.7% of total revenue) for the nine months ended September
30, 1997 to $15.3 million (30.3% of total revenues) for the nine months ended
September 30, 1998. Hardware revenues included revenues from leasing
activities of $5.1 million and $1.3 million for the nine months ended
September 30, 1997 and 1998, respectively. During the nine months ended
September 30, 1998, the Company reduced its strategic focus on hardware sales
and decreased infrastructure supporting its hardware sales efforts.
Accordingly historical levels of revenue from the sale and lease of hardware
may not be indicative of future hardware revenue.
COST OF SERVICE. Cost of service increased 41.5% from $20.3 million
(72.3% of service revenues) for the nine months ended September 30, 1997 to
$28.7 million (81.2% of service revenues) for the nine months ended September
30, 1998. This overall cost of service increase was attributable, in part to
a one time charge of $0.9 million related to a replacement parts valuation
adjustment in the nine months ended September 30, 1998, and increased costs
related to enterprise service delivery. The cost of service increase was also
attributable to the growth in business volumes from Custom PC Services and
the increased cost structure to support multiple extended warranty provider
customers. Cost of service includes the cost of workstation repair parts
procured by the Company on behalf of certain workstation support customers.
COST OF HARDWARE. Cost of hardware increased 8.2% from $12.7 million
(66.3% of hardware revenues) for the nine months ended September 30, 1997 to
$13.8 million (90.0% of hardware revenue) for the nine months ended September
30, 1998. This increase was primarily due to the one time charge of $1.5 million
related to finished goods inventory valuation adjustment in the nine months
ended September 30, 1998, and increased competitive pressure on hardware
pricing.
GROSS MARGIN. Overall gross margin decreased 42.6% from $14.2
million, (30.1% of total revenues), for the nine months ended September 30,
1997 to $8.2 million, (16.1% of total revenues) for the nine months ended
September 30, 1998 due to the one time charges discussed under "Cost of
Service" and "Cost of Hardware", declining hardware margins, and
increased costs supporting multiple extended warranty customers. Gross margin
on services decreased 14.3% from $7.8 million for the nine months ended
September 30, 1997 to $6.6 million after the one-time charge for the nine
months ended September 30, 1998 while decreasing as a percent of service
revenues from 27.7% to 18.8% respectively. Gross margin on hardware revenues
decreased from $6.5 million for the nine months ended September 30, 1997 to $
1.5 million after the one time charge for the nine months ended September 30,
1998. This decrease was caused primarily by the one time charge and by
decreased hardware revenues combined with declining margins from sales of
hardware during the nine months ended September 30, 1998. Hardware margins as
a percentage of hardware revenues decreased from 33.7% for the nine months
ended September 30, 1997 to 10.0% for the nine months ended September 30,
1998 as a result of these factors.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
decreased 1.7% from 7.0 million for the nine months ended September 30, 1997
to 6.8 million for the nine months ended September 30, 1998. The decrease
resulted primarily from the reduction of the sales infrastructure and reduced
selling expense from lower margins on hardware revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 18.5% from $3.7 million for the nine months ended September
30, 1997 to $4.4 million for the nine months ended September 30, 1998. Rent,
information systems, and depreciation expenses comprised a significant portion
of the general and administrative expense increase over the same period for
1997.
NONRECURRING CHARGES. For the nine months ended September 30, 1998,
the Company recognized non-recurring cost of $0.3 million related to staff
reductions, primarily in response to the Company's strategy shift related to
the sale of hardware. The Company incurred no such expenses for the nine
months ended September 30, 1997.
<PAGE>
OPERATING (LOSS) INCOME. Operating income decreased 197.0% from $3.5
million, (7.5% of total revenues), for the nine months ended September 30,
1997 to a loss of $(3.4) million, ((6.8)% of total revenues), for the nine
months ended September 30, 1998 as a result of the factors listed above.
INTEREST EXPENSE, NET. Net interest expense totaled $49,000 for the
nine months ended September 30, 1997, resulting from interest on the
Company's line of credit partially offset by investment income. Net interest
expense totaled $104,000, for the nine months ended September 30, 1998,
resulting from increased reliance on the Company's line of credit.
INCOME TAXES. The Company's effective income tax rate was 37.2% for
the nine months ended September 30, 1998, as compared to a 36.2% effective
income tax rate for the nine months ended September 30, 1997.
Liquidity and Capital Resources
The Company's operating activities provided cash of $8.3 million
and used cash of $1.5 million for the nine months ended September 30, 1997
and 1998, respectively. Cash provided by operating activities for the 1997
period was primarily the result of net income before depreciation and
amortization, increases in accounts payable and deferred revenue, and
reductions in accounts receivable and inventory. Cash used in operating
activities for the 1998 period was primarily the result of net income before
depreciation and amortization, and second quarter valuation charges, and an
increase in deferred revenue offset by increases in accounts receivable and
prepaid expenses, and decreases in accounts payable, and accrued expenses.
The Company's investing activities used cash of $11.1 million and
provided cash of $1.1 million for the nine months ended September 30, 1997 and
1998, respectively. Cash used by the Company's investing activities for the 1997
period related to the purchase of investments and property and equipment, as
well as increases in investment of sales-type leases. Cash provided by the
Company's investing activities for the 1998 period resulted from the sale of
investments, the reduction of investment in sales-type leases partially offset
by the purchase of property and equipment.
Financing activities provided cash of $1.5 million and $.1 million
for the nine months ended September 30, 1997 and 1998 respectively.
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. 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 and leases receivables. Borrowings
under the line of credit bear interest at the Bank's quoted variable base rate,
which has ranged from 7.09% to 7.47% during the nine months ended September 30,
1998, and was 7.09% as of September 30, 1998. As of September 30, 1998, the
Company had an outstanding balance under the line of credit of $.8 million out
of approximately $11.3 million which was available for borrowing thereunder
based upon the Company's qualifying accounts receivables. The Company intends to
use its borrowing capacity under the line of credit primarily for working
capital requirements. The credit facility is available through September 1999.
The Company decreased its investment in sales-type leases by $0.5
million and decreased discounted leases to third parties of $0.2 million for
the three months ended September 30, 1998. As of September 30, 1998, the
Company's investment in capital leases included $4.6 million in undiscounted
leases, a portion of which the Company plans to discount in the future. 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 cash from operations and borrowings available
under its revolving credit facility together with current cash balances 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 relocated its joint corporate headquarters and
operations facility to a new location in the first quarter of 1998. In
<PAGE>
conjunction with this move, the Company committed to a 60 month premise lease
in Clearwater, Florida. The Company does not currently have any other
material commitments.
Year 2000
Many companies use existing computer programs which identify a
particular year using only two digits. These programs were not developed to
consider the impact of the upcoming change in the century. Many computer
software applications could therefore fail or create erroneous results at or
beyond the year 2000 if not corrected or replaced by software applications
designed to properly recognize and process dates during and beyond year 2000
("Year 2000 compliant software"). During 1997, the Company upgraded its
financial and business communications systems with Year 2000 compliant
software. Furthermore, the Company is in the process of replacing and
upgrading certain other systems to meet its evolving business requirements.
The replacement or upgraded systems will be evaluated or developed to ensure
Year 2000 compliance. However, each of these upgrades and replacements is
being made due to reasons other than Year 2000 compliance concerns and no
upgrade or replacement has been accelerated because of such concerns. The
expected costs for this systems work are included within the Company's
capital and operating budgets. The Company is also testing remaining internal
systems and critical external interfaces in order to identify areas where the
Year 2000 issue might materially impact the Company's business and retains an
outside consultant with Year 2000 compliance experience to assist in this
evaluation.
The Company utilizes replacement parts inventories with varying levels
of software content in the maintenance of enterprise networks. These replacement
parts are distributed throughout warehouse locations owned and operated by the
Company's logistics vendor. Management believes that less than 10% of its
replacement parts pool represents potential Year 2000 compliance issues.
Software upgrades for these replacement parts are generally available from the
manufacturers at little to no cost to the Company. The unavailability of Year
2000 compliant replacement parts or the failure of such parts once introduced
into the customers' networks due to Year 2000 non-compliance would reduce the
quality of service provided by the Company to its customers and increase the
Company's costs.
The Company is conducting an audit of its replacement parts inventories
to identify its Year 2000 related upgrade requirements. Management believes that
the project will be complete by mid 1999. Although it is not possible to
accurately predict the extent of the upgrade requirement, management estimates
that the expenses related to the audit and upgrade activity will not exceed
$250,000.
Management believes that any Year 2000 compliance issue related to its
internal system can be properly managed by its internal staff with no additional
incremental costs; however, management estimates that the Company will incur
less than $100,000 in fees payable to its Year 2000 outside consultant.
Management believes that if the Company's PC service customers experience Year
2000 compliance problems in their customer help desk systems, the Company could
experience a downturn in customer service requests. Management intends to seek
Year 2000 compliance certification from these customers prior to the end of
1998.
During 1998, management expects to identify any remaining concerns
related to Year 2000 readiness and initiate required actions to ensure Year
2000 readiness. Except as otherwise discussed herein, the Company believes
that it will be Year 2000 ready with no material impact on the Company's
business and that the costs of any corrective action will not materially
affect the Company's operating results or financial condition.
The Company believes that its most reasonably likely worst case Year
2000 scenario would be the failure of the public telecommunications network,
including the Internet, to provide service to the Company and its customers.
The Company's business substantially depends upon its ability and the ability
of its customers to exchange both voice and digital information. The
sustained inability of a substantial portion of the Company's customer base to
have telecommunications service or the sustained inability of one or more of
the Company's business service units to have telecommunications service could
materially impact the Company. While management does not expect that scenario
to occur, that scenario, if it occurs could, even despite the successful
execution of the Company's business continuity and contingency plans, result
in the reduction or suspension of a material portion of the Company's
operations and accordingly have a material adverse effect on the Company's
business and financial condition.
Safe Harbor Statement
The Management's Discussion and Analysis and other portions of this
Report include "forward-looking" statements, within the meaning of the federal
securities laws, that are subject to future events, risks and uncertainties that
could cause actual results to differ materially from those expressed or implied.
Important factors that either individually or in the aggregate could cause
actual results to differ materially from those expressed include, without
limitation, (1) that the Company will not retain or grow its customer base, (2)
that the Company will fail to be competitive with existing and new competitors,
(3) that the Company will not be able to sustain its current growth, (4) that
the Company will not adequately respond to technological developments impacting
its industry and markets, (5) that needed financing will not be available to the
Company if and as needed, (6) that a significant change in the
<PAGE>
growth rate of the overall U.S. economy will occur such that consumer and
corporate spending are materially impacted, (7) that the Company or its vendors
and suppliers may fail to timely achieve Year 2000 readiness such that there is
a material adverse impact on the business, operations or financial results of
the Company, (8) that a drastic negative change in market conditions occurs, or
(9) that some other unforeseen difficulties occur. This list is intended to
identify only certain of the principal factors that could cause actual results
to differ materially from those described in the forward-looking statements
included herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Not Applicable.
<PAGE>
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
27.2 Financial Data Schedule (RESTATED)
(b) No reports on Form 8-K were filed during the period.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHFORCE CORPORATION
Date: November 13, 1998 /s/ Jerrel W. Kee
----------------------------------------------
Jerrel W. Kee
Chief Financial Officer
(principal financial and accounting officer)
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO.
- -----------
27.1 Financial Data Schedule
27.2 Financial Data Schedule (RESTATED)
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<PAGE>
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<PERIOD-END> SEP-30-1998
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