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, 1998
[ ] 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)
5741 RIO VISTA DRIVE, CLEARWATER, FLORIDA 33760
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(727) 533-3600
(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 [ ]
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 19, 1999 was $31,878,788. There were
5,544,137 shares of Common Stock outstanding as of MARCH 19, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 19,1999 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, 1997
TABLE OF CONTENTS
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ITEM PAGE
NUMBER NUMBER
- ------ --------
PART I
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1. Business................................................................................. 1-6
2. Properties............................................................................... 6
3. Legal Proceedings........................................................................ 9-6
4. Submission of Matters to a Vote of Security Holders...................................... 7
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 7
6. Selected Financial Data.................................................................. 7-8
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 8-15
8. Financial Statements and Supplementary Data............................................. 15
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 15
PART III
10. Directors and Executive Officers of the Registrant....................................... 16
11. Executive Compensation................................................................... 16
12. Security Ownership of Certain Beneficial Owners and Management.......................... 16
13. Certain Relationships and Related Transactions........................................... 16
PART IV
14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
SIGNATURES...............................................................................
INDEX OF FINANCIAL STATEMENTS............................................................
INDEX OF
EXHIBITS.................................................................................
</TABLE>
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS. SEE ITEM 7,
"MANAGEMENT'S DISCRETION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - SAFE HARBOR STATEMENT."
<PAGE>
ITEM 1. BUSINESS
CORPORATE OVERVIEW
Headquartered in Clearwater, Florida, TechForce Corporation ("TechForce" or the
"Company") operates two primary business units providing support for corporate
enterprise networks and personal computers. Our Enterprise Network Services
business unit provides multivendor network support services for local and wide
area networks (LAN/WAN) to corporate clients including manufacturers,
telecommunications carriers and network integrators. Our enterprise services,
branded under the name "TechCareSM," include offerings for network consulting,
network management and monitoring, integration, post sales support and
maintenance. We also sell and lease networking equipment which serves as a base
for additional long-term support agreements. Our Custom PC Services business
unit provides on-site and depot repair and logistics services for personal
computers and peripheral devices to PC manufacturers, retailers and
extended-warranty providers.
We were organized in 1991 as a Georgia general partnership. In March 1994, the
partnership transferred its assets and liabilities to a new corporation named
"TechForce". In December 1995, we completed a public offering of 3,100,000
shares of Common Stock and began trading on the Nasdaq National Market System
under the symbol "TFRC".
ENTERPRISE NETWORK SERVICES BUSINESS UNIT
MARKET OPPORTUNITIES
With the rapid growth of the Internet and e-commerce, corporate networks are
expanding beyond their original boundaries to enable companies to communicate
and transact business with customers and employees over the Internet, intranets
and extranets. The elaborate collection of technologies supplied by numerous
vendors creates tremendous support and logistic challenges for many companies.
There is a significant market opportunity for our Enterprise Network Services
business unit as companies seek quality providers of these increasingly complex,
network life cycle solutions. Increased demand for these solutions is expected
to result from the following:
o MULTI-VENDOR PRODUCT SUPPORT
Due to the broad variety of equipment used in today's networks,
companies are seeking to obtain support for various manufacturers'
equipment from a single supplier. Furthermore, many original equipment
manufacturers offering support for their product lines are seeking to
offer support for other manufacturers' components in the network. We
provide these multi-vendor support services.
o RAPIDLY EVOLVING TECHNOLOGY
Companies find it difficult and costly to recruit and retain the
necessary qualified technical personnel to provide their own support.
As a result, many companies choose to outsource enterprise network
services to third parties and focus their resources on their core
business issues. As a result of the increased outsourcing of network
support, end user customers are seeking to develop relationships with
single source suppliers who can provide the complete range of network
life cycle support.
o INTEGRATION OF OPEN SYSTEMS WITH LEGACY SYSTEMS
Many customers who have invested in applications built on IBM Systems
Network Architecture (SNA) technology want to integrate these
applications with Internet based open system platforms in order to
provide company-wide access to applications and information. Our
diverse knowledge in LAN/WAN internetworking and IBM SNA environments
offers end user customers expert integration and migration support.
STRATEGIC RELATIONSHIPS
Our service support partnerships with leading network equipment manufacturers
enable us to perform the complete cycle of Enterprise Network Services including
network consulting, network management, integration, and
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maintenance. We also provide other complementary services such as network
simulation, network security assessment, fault management, configuration
management, project management, staging, remote diagnostics and on-site
maintenance.
To reach a broader market of customers, we have augmented our direct sales
distribution channel with an indirect sales channel offering complete enterprise
network services to manufacturers, carriers and network integrators.
ENTERPRISE NETWORKING SOLUTIONS
Our in-depth expertise in both LAN/WAN internetworking and IBM SNA environments
enables us to deliver TechCare(SM) branded support and services needed by
customers at every stage in the life cycle of their network. No matter where
customers are in their decision-making process, we have a solution to meet their
requirements. Our service offerings include:
o NETWORK CONSULTING
NETWORK DESIGN. We work with corporate clients in designing and
implementing complex integrated networks comprised of multi-protocol
routers, access devices, modems, frame-relay access devices,
multiplexers, switches and hubs.
NETWORK SIMULATION. Our consultants simulate customers' existing
networks by using sophisticated simulation tools. These tools test the
effects of adding new sites and features to existing network
infrastructure before the customer actually purchases costly equipment
and deploys personnel. This pinpoints response time bottlenecks in the
client, server, and network environment, as well as predicts the
effects of application performance and response time for end-users on
the network. As a result, our customers save time, money and effort.
NETWORK SECURITY ASSESSMENT. Our security assessment services offer
end-to-end security solutions that help protect our customers' networks
from intruders - both internally and externally. Our certified
consultants are experienced in designing and implementing secure
networks, and can provide network security policy consulting, design,
implementation, and on-going technical support.
o NETWORK MANAGEMENT
FAULT MANAGEMENT. Our network management service offers proactive fault
detection and problem resolution. If our technical staff detect an
on-site hardware failure, we dispatch a field engineer, or work
directly with the customer or third party service provider, to ensure
that problems are quickly resolved.
CONFIGURATION MANAGEMENT. Using sophisticated tools and customized
network management platforms, this service captures network
configurations electronically on a daily basis. Our engineers
proactively verify the integrity of existing configurations, and should
a discrepancy occur, create resolution processes and archives the
corrected configurations.
PERFORMANCE MANAGEMENT. We offer performance management services
through continual proactive monitoring and analysis of customers'
networks. By constantly observing activity and reporting trends, we are
able to resolve potential problems before they occur. We also provide
customers with written recommendations for enhancing their current
network performance levels.
FRAME RELAY SERVICE LEVEL MANAGEMENT. Our Frame Relay Service Level
Management provides 7x24 service level management of customer frame
relay networks implemented with Paradyne FrameSaver(TM) SLV access
units. This service is specifically designed to proactively and
efficiently manage router-based frame relay networks.
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o INTEGRATION
PROJECT MANAGEMENT. Our project management services assist customers in
the deployment of large complex networks across multiple sites. Our
project managers serve as single points of contact with the customer
and other vendors in all aspects of the project to ensure a successful
implementation.
STAGING. To ensure timely and complete on-site installation, we provide
hardware staging services to complement the installation process. We
assemble multiple discrete hardware components, including chassis,
network cards, cables and software, and integrate and test the
component configuration prior to shipment to the customer's location
for installation.
INSTALLATION. We provide on-site installation for products we sell and
support, ranging from a single stand-alone unit to complex nationwide
networks involving multiple products. Our service technicians travel to
the customer's sites and work with technicians in our Customer Support
Center to assure proper set-up and operation.
EQUIPMENT SALES AND LEASING. We sell and lease a variety of new and
refurbished network equipment enabling us to provide total, integrated
customer solutions of both equipment and support. This also allows us
to establish strategic reseller relationships with product
manufacturers. In addition, our equipment leasing capability allows us
to establish relationships with customers that facilitate continued
support and equipment revenues over longer terms than with typical
equipment purchase transactions.
o SUPPORT
7X24 REMOTE DIAGNOSTICS AND TECHNICAL SUPPORT. We provide remote
telephone support for customers who require sophisticated and timely
network maintenance and support services. We offer this support on a
seven days a week, 24 hours a day (7 x 24), toll-free basis from our
Customer Support Centers in Clearwater, Florida and Atlanta, Georgia.
Our on-line problem resolution tools emphasize rapid service
restoration. Our ability to access customers' systems from a
centralized location and resolve many problems remotely reduces our
costs of service and saves the customer the delay of an on-site visit.
ON-SITE MAINTENANCE. We support a wide-variety of networking products
at customer locations nationwide. We offer two-hour and four-hour
on-site service response time on a 7 x 24 basis for customers requiring
rapid repair of critical networking hardware. Certain complex,
mission-critical products such as routers, multiplexers and channel
extenders require this level of service. We provide next-day service
when an outage does not severely impact the customer's operations.
DEPOT (ADVANCED REPLACEMENT). We provide depot repair by centralized
bench technicians as a more cost-effective and less disruptive way to
perform equipment repairs than on a customer's site. Our depot repair
capabilities, coupled with our centralized parts and logistics
management, allows us to offer customers cost effective next-day
replacement and repair services. We also utilize our repair
capabilities to refurbish used equipment before placing it in service.
ENTERPRISE NETWORKING OPERATIONS
Our Clearwater, Florida facility houses our corporate and administrative offices
as well as our engineering, call management, technical support, network
management, engineering development group and engineering labs. This facility
also acts as a fully redundant back-up center for our Atlanta and Reading, U.K.
customer support facilities. Our senior technicians, having extensive knowledge
and training in internetworking solutions, provide second-level troubleshooting
in support of our on-site technicians. Our engineering labs also contain leading
edge equipment for testing, training and simulation.
From our Atlanta, Georgia 7x24 Network Management Operations Center, we perform
Fault, Configuration, Performance, and Frame Relay Service Level Management
services. Our distributed architecture provides customers with scaleable cost
effective solutions with high service reliability.
Logistics and product staging services are provided from our facility in
Memphis, Tennessee.
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ENTERPRISE PRODUCTS OFFERED
We sell a variety of internetworking, channel networking and network access
products to provide a total range of integrated network solutions for open
systems and mainframe networks. Our proprietary channel extension technology,
Pixnet-XL, allows mainframe users to attach peripherals such as high-speed
printers, check sorters and tape drives 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.
ENTERPRISE STRATEGIC PARTNERSHIPS
Our strategic support and resale relationships with best-in-class manufacturers
allow us to provide superior support and products to our corporate customers.
Some of these manufacturers include Cisco Systems, Paradyne, Ascend, Nortel
Networks, Sync Research, Adtran, TxPort(Verilink), Premisys, Tellabs, Larscom,
LanOptics, AT&T, Netcon, and IBM. These relationships provide us access to the
manufacturers' technical and engineering resources allowing us to better support
our customers' products.
CISCO SYSTEMS INC. We resell and provide support for Cisco's entire
line of products throughout North America. We are Cisco Systems
Partner-Gold Certified for the United States. This places us in an
elite class of support providers for Cisco products. We feature Cisco
internetworking and Channel Interface Processor (CIP) products. In 1998
we implemented Cisco's SMART SparesTM program, which reduces future new
capital investment for network maintenance sparing while providing the
same levels of response time. SMARTSparesTM, a partner enabling
logistics program, offers spares on demand, with delivery of spares to
certified partners or end user sites within the defined service level
time requirements. Our equipment resale and service agreements with
Cisco are governed by Cisco's customary arrangements with its business
partners. Such arrangements are generally terminable by either party
upon 30 days' written notice. Although Cisco is under no obligation to
execute or renew any agreements with TechForce, we believe that our
relationships with Cisco are good and that we will continue to do
business with Cisco in the future under arrangements that are
substantially similar to or more favorable than those currently in
place.
PARADYNE CORPORATION (FORMERLY AT&T PARADYNE). Since July 1, 1994, we
have resold Paradyne Corporation access products, including DSUs,
modems, multiplexers, and frame relay access devices on an individual
basis or as part of an integrated network solution. We also support
these products as one of only four Paradyne Authorized Service
Providers. Our Paradyne agreement automatically renews for successive
one year periods each March 31. Either party may terminate the
agreement without cause upon 60 days' prior written notice.
CHOICE LOGISTICS. We contract with Choice Logistics, which focuses on
rapid local delivery and logistics support, to provide repair parts
warehousing and delivery services. This enables us to meet customers'
mission-critical response requirements on a cost-effective basis.
ENTERPRISE NETWORK SERVICES CUSTOMERS
Enterprise network services customers are located in the United States, Canada
and the United Kingdom, and span a variety of vertical markets including
financial services, healthcare, transportation, insurance, government, retail,
and manufacturing. We also offer specialized services to telecommunications
carriers, integrators and manufacturers of networking equipment with end users
located throughout the United States.
ENTERPRISE NETWORKING SALES AND MARKETING
As of December 31, 1998 our sales organization consisted of direct sales and
sales support personnel located in the United States, Canada and the United
Kingdom. Our sales force personnel have an average of over 15 years of
experience in the sale of networking products and support services. Our four
primary sales channels include:
o Direct "end-user" sales force focused on the sale of integrated support
and equipment solutions to large corporate accounts;
o Indirect sales to manufacturers and telecommunications carriers of
support service to complement their existing solutions;
o Indirect sales to network integrators, VARs, and resellers of our
service offerings to complement their channel networking and other
networking equipment sales to "end users"; and
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o International sales of channel networking and other networking support
and equipment solutions to corporate clients and distributor partners.
We also sell through agents with particular customer or geographic
specialties.
ENTERPRISE NETWORK SERVICES COMPETITION
While many companies provide support services to users and manufacturers of
electronic equipment, we believe no one company is dominant. Our competition is
based primarily on service quality, reliability, responsiveness and convenience
and, to a lesser extent, on price. We compete with three types of service
providers: (1) equipment vendors and manufacturers; (2) VARs and distributors
with repair capabilities; and (3) 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.
CUSTOM PC SERVICES BUSINESS UNIT
Our Custom PC Services business provides a wide range of on-site, depot and
logistics services related to PCs and peripheral devices for PC manufacturers,
retailers and other extended-warranty providers. Our on-site services include
repair, installation, diagnostics and technical support. We develop service
programs tailored to the needs of each customer based upon their requirements
for support to their end users. We also provide parts procurement and
distribution services designed to the needs of each service program.
MARKET OPPORTUNITIES
CONSUMER PC USERS
PC manufacturers have steadily decreased their warranty coverages as PC prices
have declined. Many retailers and extended warranty providers have implemented
aggressive warranty coverage sales programs aimed at buyers of new PCs. When
such programs are administered by retail locations with chains throughout the
United States, the actual in-home repair service is often sub-contracted to one
or more service providers. Our in-home PC repair business was created to support
the warranty requirements of Packard Bell who pursued an aggressive retail sales
distribution strategy. Over the past two years, we have successfully
transitioned from our original single-manufacturer focus to a business with a
growing customer base of name-brand retailers and other extended warranty
providers. We believe that sales of in-home support service programs to new
accounts and increased business from existing accounts are sources of growth for
our Custom PC Services.
BUSINESS USE OF HOME PCS
Increases in the number of in-home PC installations is further affected by the
growth of high speed internet and corporate network access and local PC
networking devices designed for the home. Our business model relies on
centralized systems, staff and tools complementing a variable cost network of
qualified repair technicians. This model is adaptable to support a variety of
products whose price points justify in-home service and which are widely
distributed in large quantities. We believe that the continued introduction of
products designed to increase the effectiveness and ease of use of in-home PCs
provides additional revenue opportunities for our Custom PC Services business.
CUSTOM PC SOLUTIONS
Custom PC Services provides a wide range of on-site and depot services for
personal computers and peripheral devices. We tailor our services to
meet the unique individual needs of our customers:
o ON-SITE REPAIR SERVICES. We provide on-site field service to repair PC
and periphals on a per call basis.
o PARTS PROCUREMENT. We procure parts on a fixed price or cost plus
basis.
o INSTALLATION SERVICES. We provide a range of installation services from
simple PC installations in a home office to complex multi-site
installations where Custom PC Services installs LANs, PCs and
specialized software.
o CALL MANAGEMENT. We manage inbound and outbound customer contacts for
our customers throughout the repair cycle.
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o DIAGNOSTIC AND TECHNICAL SUPPORT. The technical staff works closely
with our field technicians and customers to assist in troubleshooting
to minimize downtime and the need for multiple repair visits.
o DEPOT AND LOGISTICS SERVICES. We provide warehousing, inventory,
staging, and shipment of parts for customers in our logistics center.
CUSTOM PC OPERATIONS
The Custom PC business delivers high-quality, timely and reliable service by
centralizing service management and logistics functions and deploying remote
resources to meet the customers' repair needs.
Our Clearwater, Florida facility is home to the Call Management Center for the
Custom PC business. From this location, all support requests come into customer
specific focus groups that are dedicated to delivering a unique service to each
customer. If the call requires an on-site technician, we utilize a large network
of Authorized Service Providers (ASP) to deliver on-site service throughout the
United States - including Alaska, Hawaii and Puerto Rico.
Depot and logistics services are provided through our logistics center in
Memphis, Tennessee. This facility, located near a major distribution hub, allows
the company to provide late night shipping capabilities with competitive freight
costs. This facility also contains a secured area to warehouse customer
inventory.
CUSTOM PC SERVICES CUSTOMERS
The Custom PC Services business unit focuses its concentration on PC retailers,
manufacturers, and extended warranty providers to obtain maximum leverage from
investments in systems and infrastructure. With customers in each of these
areas, we deliver a higher value service to consumers and small businesses
throughout the United States
EMPLOYEES
As of December 31, 1998, we had 338 employees, of whom 308 were full-time
employees, 10 were full-time contract employees and 20 were temporary or
part-time employees. We also use a significant number of contract personnel in
our field service operations. None of our employees are represented by a labor
union. We have not experienced any work stoppages and consider our employee
relations to be good.
ITEM 2. PROPERTIES
We conduct operations in the United States principally out of facilities in
Clearwater, Florida; Memphis, Tennessee; Atlanta, Georgia; Chicago, Illinois;
and in Europe out of facilities in Reading, England. We occupy approximately
40,000 square feet in Clearwater, Florida, home to our administrative
headquarters and technical support services; approximately 52,000 square feet in
Memphis, Tennessee, which includes approximately 18,000 square feet of office
space and approximately 34,000 square feet of warehouse space that houses our
staging and logistics operations; and approximately 1,300 square feet of office
space in Chicago, Illinois which is used for sales operations. Our facilities in
the United Kingdom consist of approximately 7,000 square feet of office and
warehouse space that is used to support our European operations. We also
maintain a number of smaller remote sales offices in the United States. We
anticipate that our current facilities will adequately support our operations in
the near future. Our facilities are subject to leases with the following
expiration dates: Clearwater, Florida - January 31, 2003; Memphis, Tennessee -
August 1, 2000; Chicago, Illinois - June 30, 1999; Reading, England - September
29, 1999.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in routine litigation and proceedings in the
ordinary course of business. We believe that such litigation and proceedings
would not, if decided adversely, have a material adverse effect on our financial
condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market System under the symbol
"TFRC". The Company has never declared or paid any cash dividends on its common
stock. We anticipate that all of our earnings will be retained for the operation
and expansion of the business and do not anticipate paying any cash dividends in
the foreseeable future. Our credit facility contains certain restrictive
covenants which, among other things, require us to maintain certain financial
ratios and restricts our ability to pay dividends. The chart below sets forth
the high and low stock prices for the last two fiscal years:
1997 HIGH LOW
- ---- ---- ---
First Quarter 8.75 5.94
Second Quarter 7.88 5.25
Third Quarter 11.25 7.25
Fourth Quarter 9.00 6.00
1998
- ----
First Quarter 9.88 6.13
Second Quarter 9.63 6.06
Third Quarter 7.50 5.38
Fourth Quarter 7.56 5.75
At March 19, 1999, there were approximately 55 shareholders of record.
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.
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YEAR ENDED DECEMBER 31,
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1998 1997 1996 1995 1994
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(in thousands, except share data and percentages)
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STATEMENT OF OPERATIONS DATA:
Revenues:
Services ........................................ $ 49,454 $ 37,168 $ 35,191 $ 35,466 $ 20,882
Hardware ........................................ 24,550 27,747 28,082 13,766 9,856
----------- ----------- ----------- ----------- -----------
Total Revenues ........................................ 74,004 64,915 63,273 49,232 30,738
----------- ----------- ----------- ----------- -----------
Direct costs:
Services (Note 2) ................................ 39,309 27,172 24,968 25,538 17,144
Hardware ......................................... 18,913 18,545 19,504 9,173 4,242
----------- ----------- ----------- ----------- -----------
Total direct costs .................................... 58,222 45,717 44,472 34,711 21,386
----------- ----------- ----------- ----------- -----------
Gross margin:
Service .......................................... 10,145 9,996 10,223 9,928 3,738
Hardware ......................................... 5,637 9,202 8,578 4,593 5,614
----------- ----------- ----------- ----------- -----------
Total gross margin .................................... 15,782 19,198 18,801 14,521 9,352
----------- ----------- ----------- ----------- -----------
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Operating costs:
Selling and marketing ............................ 10,082 9,954 10,330 7,754 4,278
Research and development (Note 2)
General and administrative ....................... 6,681 5,079 4,490 3,379 2,843
Nonrecurring charges ............................. 338 -- 243 600 --
----------- ----------- ----------- ----------- -----------
Total operating costs ................................. 17,101 15,033 15,063 11,733 7,121
----------- ----------- ----------- ----------- -----------
Operating (loss) income ............................... (1,319) 4,165 3,738 2,788 2,231
Interest expense, net ............................ 207 41 103 1,106 834
(Loss) income before (benefit) provision for income
taxes and minority interest ........................ (1,526) 4,124 3,635 1,682 1,397
----------- ----------- ----------- ----------- -----------
Income tax (benefit) provision (Note1) .......... (548) 1,460 1,312 671 (259)
Minority interest ................................ -- -- -- -- 66
----------- ----------- ----------- ----------- -----------
Net (loss) income ..................................... $ (978) $ 2,664 $ 2,323 $ 1,011 $ 1,590
=========== =========== =========== =========== ===========
Basic (loss) earnings per common share ................ $ (0.12) $ 0.33 $ 0.29 $ 0.16 $ 0.13
----------- ----------- ----------- ----------- -----------
Diluted (loss) earnings per common share .............. $ (0.12) $ 0.32 $ 0.28 $ 0.18 $ 0.13
----------- ----------- ----------- ----------- -----------
Weighted average number of common shares
outstanding ....................................... 8,190,437 8,067,646 7,931,554 6,266,267 --
----------- ----------- ----------- ----------- -----------
Weighted average number of common
and common equivalent shares .......................... 8,190,437 8,405,234 8,335.058 5,790,033 --
----------- ----------- ----------- ----------- -----------
Other data:
Service ............................................... 20.5% 26.8% 29.1% 28.0% 17.5%
Hardware .............................................. 23.0% 33.2% 30.5% 33.4% 57.0%
Gross margin .......................................... 21.3% 29.6% 29.7% 29.5% 30.1%
Balance Sheet Data:
Working Capital ....................................... $ 15,528 $ 14,019 $ 14,486 $ 19,420 $ 3,666
Total assets .......................................... $ 49,086 $ 50,673 $ 46,483 $ 38,307 $ 25,017
Long-term obligations(Note 3) ......................... $ 2,545 $ 7,867 $ 6,180 $ 2,735 $ 9,231
Redeemable convertible
Preferred stock ....................................... -- -- -- -- 4,259
Partner's capital /
Shareholders' (deficit) equity ........................ $ 31,063 $ 31,494 $ 28,494 $ 26,017 $ (802)
</TABLE>
1) 1994 net income reflects the C Corporation tax rate of 40% (versus no
provision for the general partnership). The tax provision includes a
non-recurring deferred income tax benefit of $788,000.
2) Research and development cost have been re-classed to Direct Costs:
Services for all periods presented.
3) From 1995 to 1998 long term obligations included non-recourse notes payable
related to discounted sales-type leases.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Established in 1991, the Company operates two primary business units providing
support for corporate enterprise networks and personal computers. The Company's
Enterprise Network Services business unit provides multivendor network support
services for local and wide area networks (LAN/WAN) to corporate customers,
manufacturers, carriers, and network integrators. The Enterprise network
services, branded under the name "TechCareSM," include offerings for network
consulting, management and monitoring, integration, and maintenance. The Company
also sells and leases networking equipment which serves as a procurement service
and a base for additional long-term support agreements. The Company's Custom PC
Services business unit provides on-site, depot and logistics services for
personal computers and peripheral devices to PC manufacturers, retailers and
other extended-warranty providers. For on-site repair and parts replacement
services, the Company dispatches its own customer support representatives, as
well as TechForce certified contracted technicians located in the United States,
Canada and the United Kingdom.
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The Company generates revenues from services provided under maintenance
contracts with terms ranging from one to five years and through the sale and
lease of various network hardware. Revenues from service and maintenance
contracts are recognized ratably over the contract period or on a per call
basis. Revenues from hardware 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 are recorded currently as revenues and the
related costs of the equipment less the present value of any appropriate
unguaranteed residual value 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 1996, 1997 and 1998 were approximately $13.0 million, $7.4
million and $5.4 million, respectively. Interest income on sales-type leases
totaled $0.6 million, $0.7 million, and $ 0.7 million for 1996, 1997, and 1998,
respectively.
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, and general and administrative expenses. Cost of service includes all
costs associated with service delivery as well as depreciation of spares
inventories held for customer repair requirements. Cost of hardware consists of
amounts paid by the Company for the hardware products it sells and related
costs. Development costs were reclassed in 1998 and all prior periods to cost of
service.
The Company operates in two geographic areas -- North America and Europe.
Revenues from North American operations were $61.6 million, $60.6 million, and
$70.3 million for 1996, 1997, and 1998, respectively while revenues from
European operations were $1.7 million, $4.3 million and $3.7 million for the
respective periods. Management has no immediate plans regarding further
expansion into foreign markets. Management anticipates that revenues from
proprietary channel extension products and services will gradually decrease over
the next several years at a rate of approximately 10% to 20% 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 results of operations and financial condition. Revenues from Packard
Bell represented less than 3.0% of total revenues for the year ended December
31, 1998 as compared to 16.6% for the full year 1997 and 19.8% for the full year
1996 reflecting decreased call volumes as a result of changes made by Packard
Bell in its end user product warranty.
During the second quarter of 1998, the Company restructured its business
operations away from hardware sales by reducing the infrastructure and resources
allocated to it. As a result of these second quarter actions, 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. These charges
for the second quarter also included valuation adjustments of $0.8 million
related to replacement parts due to the Company's planned move to Cisco's SMART
SparesTM program, 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 for 1998 and contributed to the
unfavorable cost and margin variances.
Other issued but not yet required FASB standards are not currently applicable or
material to the Company's operations.
9
<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:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
Revenues:
Services 55.6% 57.3% 66.8%
Hardware 44.4 42.7 33.2
----- ----- -----
Total revenues 100.0 100.0 100.0
Direct costs:
Services 39.5 41.8 53.1
Hardware 30.8 28.6 25.6
----- ----- -----
Total direct costs 70.3 70.4 78.7
----- ----- -----
Gross margin 29.7 29.6 21.3
----- ----- -----
Operating costs:
Selling and marketing 16.3 15.3 13.6
General and administrative 7.1 7.8 9.0
Nonrecurring charges 0.4 0.0 0.5
----- ----- -----
Total operating costs 23.8 23.1 23.1
----- ----- -----
Operating income (loss) 5.9 6.4 (1.8)
Interest expense, net 0.2 0.0 0.3
----- ----- -----
Income (loss) before provision (benefit)
for income taxes 5.7 6.4 (2.1)
Income tax provision (benefit) 2.1 2.2 (0.8)
----- ----- -----
Net income (loss) 3.7% 4.1% (1.3)%
===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
TOTAL REVENUES. Total revenues increased 14.0% from $64.9 million for 1997 to
$74.0 million for 1998.
SERVICE REVENUES. Revenues from services increased 33.1% from $37.2 million
(57.3% of total revenues) for 1997 to $49.4 million (66.8% of total revenues)
for 1998. This increase was attributable to increased revenues from the
enterprise channel (an increase in internetworking services of 63.6% partially
offset by a decrease in revenues from channel networking services of 15.7%), and
a 70.4% increase in Custom PC Service revenues. Revenues from FedEx decreased in
1998 primarily as a result of the Company's discontinuing its FedEx repair
business in 1997. Revenue growth from new retail extended warranty PC support
customers more than offset a decrease in revenues from Packard Bell, previously
the Company's only PC support customer.
HARDWARE REVENUES. Revenues from hardware products decreased 11.5% from $27.7
million (42.7% of total revenues) for 1997 to $24.5 million (33.2% of total
revenues) for 1998 due primarily to a decrease in revenues from internetworking
product sales.
COST OF SERVICE. Cost of service increased 44.7% from $27.2 million (73.1% of
service revenues) for 1997 to $39.3 million (79.5% of service revenues) for
1998. This increase was primarily caused by increased custom PC support cost,
and increased enterprise service support costs related to 63.6% growth in
internetworking services revenues and a one time charge of $0.9 million related
to a replacement parts valuation adjustment.
10
<PAGE>
COST OF HARDWARE. Cost of hardware increased 2.0% from $18.5 million (66.8% of
hardware revenues) for 1997 to $18.9 million (77.0% of hardware revenues) for
1998. Cost of hardware as a percent of revenue in excess of historical levels
continues to reflect competitive pressure on hardware pricing. The overall cost
of hardware was also unfavorably affected by a one time charge of $1.5 million
related to the second quarter inventory valuation adjustment. Hardware cost as a
percentage of revenues would have been 70.9% for 1998 without this adjustment.
GROSS MARGIN. Overall gross margin decreased 17.8% from $19.2 million (29.6% of
total revenues) for 1997 to $15.8 million ( 21.3% of total revenues) for 1998.
Gross margin on services increased 1.5% from $10.0 million in 1997 to $10.1
million in 1998. This change in service margins was affected by increased
support costs related to growth in internetworking services revenues, the one
time charge of $0.8 million valuation adjustments related to spares and no
corresponding cost savings related to decreases in channel networking revenues.
The overall cost of service increase was also unfavorably affected by service
costs related to increased PC support revenues. Service gross margins
comparisons were further affected by the discontinuation of the FedEx repair
business during 1997. The Company had previously experienced above-average
margins from the repair of the units which FedEx replaced. Gross margin on
hardware revenues decreased 38.7% from $9.2 million in 1997 to $5.6 million in
1998. This change resulted from declining margins from the sales of channel and
internetworking hardware, and the one time charge of $1.5 million for valuation
adjustments related to the second quarter finished goods inventory valuation
adjustment. Service margins as a percentage of service revenues decreased from
26.9% in 1997 to 20.5% in 1998 primarily due to factors affecting service cost
increases discussed above. Hardware margins as a percentage of hardware revenues
decreased from 33.2% for 1997 to 23.0% for 1998 primarily due to factors
affecting cost of hardware discussed above.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 0.2%
from $10.0 million (15.3% of total revenues) for 1997 to $10.1 million (13.6% of
total revenues) for 1998 primarily as a result of the cost of service and sales
support resources generally offset by the reduction of the sales infrastructure
in response to the strategy shift in the second quarter and reduced selling
expenses from the lower margins on hardware.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
historically included operational and business systems development and support
and have been reclassified as cost of service to more accurately reflect the
nature of the expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 31.6% from $5.1 million (7.8% of total revenues) for 1997 to $6.7
million (9.0% of total revenues) for 1998. This increase was primarily due to
increases in business systems development and support expenses, rent expense,
legal and professional expenses, bad debt expense and other general support
expenses.
OPERATING INCOME (LOSS). Operating income decreased 120.0% from net income of
$4.1 million (6.4% of total revenues) for 1997 to a net loss of $(1.0) million
((2.1)% of total revenues) for 1998 as a result of the factors described above.
INTEREST EXPENSE. Net interest expense increased from $41,000 for 1997 to
$207,000 for 1998. The increase was primarily due to borrowing against the
Company's line of credit and interest expense on notes payable.
INCOME TAXES. Income tax expense decreased from $1.5 million in 1997 to a tax
benefit of $.5 million in 1998. The Company's effective income tax rate was
35.4% for 1997 and 35.9% for 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
TOTAL REVENUES. Total revenues increased 2.6% from $63.3 million for 1996 to
$64.9 million for 1997.
SERVICE REVENUES. Revenues from services increased 5.6% from $35.2 million
(55.6% of total revenues) for 1996 to $37.2 million (57.3% of total revenues)
for 1997. This increase was attributable to increases in revenues from
internetworking services of 160.3% and increases in PC support revenues of 16.1%
partially offset by decreases in revenues from channel networking support of
15.7% and decreases in revenues from FedEx of 54.9%. Revenues from FedEx
decreased during 1997 due to lower repair volumes resulting from the
introduction of upgraded technology by FedEx which experienced a lower failure
rate than the replaced technology. Revenue growth from new retail
11
<PAGE>
extended warranty PC support customers more than offset a 13.8% decrease in
revenues from Packard Bell, previously the Company's only PC support customer.
HARDWARE REVENUES. Revenues from hardware products decreased 1.2% from $28.1
million (44.4% of total revenues) for 1996 to $27.7 million (42.7% of total
revenues) for 1997 due to a decrease in revenues from channel extension product
sales.
COST OF SERVICE. Cost of service increased 8.8% from $25.0 million (70.9% of
service revenues) for 1996 to $27.2 million (73.1% of service revenues) for
1997. This increase was primarily caused by increases in enterprise service
support costs related to 160.3% growth in internetworking services revenues. The
overall cost of service increase was also unfavorably affected by service costs
related to the addition of new PC support customers. Included in cost of service
are research and development expenses which decreased 28.6% from $1.7 million
for 1996 to $1.2 million for 1997. This decrease was primarily due to internal
business systems support expenses reported together with general and
administrative expenses for 1997.
COST OF HARDWARE. Cost of hardware decreased 4.9% from $19.5 million (69.4% of
hardware revenues) for 1996 to $18.5 million (66.8% of hardware revenues) for
1997. This decrease was primarily the result of the lower than Company average
costs associated with sales of used equipment, which yielded higher than average
hardware margins.
GROSS MARGIN. Overall gross margin increased 2.1% from $18.8 million (29.7% of
total revenues) for 1996 to $19.2 million (29.6% of total revenues) for 1997.
Gross margin on services decreased 2.2% from $10.2 million in 1996 to $10.0
million in 1997. The Company did not realize corresponding cost savings related
to decreases in channel networking revenues. The overall cost of service
increase was unfavorably affected by increases in enterprise service support
costs related to growth in internetworking services revenues and service costs
related to the addition of new PC support customers. Service gross margins were
further affected by the reduction in and ultimate discontinuation of FedEx
repair business volumes during the third quarter of 1997. The Company had
previously experienced above-average margins from the repair of the units which
FedEx replaced. Gross margin on hardware revenues increased 7.3% from $8.6
million in 1996 to $9.2 million in 1997. This change resulted from lower than
average costs associated with the sales of used equipment which yielded higher
margins on both channel extension product and the resale of other manufacturers'
equipment. Service margins as a percentage of service revenues decreased from
29.1% in 1996 to 26.9% in 1997 primarily due to factors affecting service cost
increases discussed above. Hardware margins as a percentage of hardware revenues
increased from 30.5% for 1996 to 33.2% for 1997 due to lower costs of resale
hardware.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased 3.6%
from $10.3 million (16.3% of total revenues) for 1996 to $10.0 million (15.3% of
total revenues) for 1997 resulting, in part, from changes made by the Company to
its sales compensation plan for 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
historically included operational and business systems development and support
and have been reclassified as cost of service to more accurately reflect the
nature of the expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 13.1% from $4.5 million, (7.1% of total revenues) for 1996 to $5.1
million (7.8% of total revenues) for 1997. This increase included business
systems support expenses reported together with general and administrative
expenses for 1997.
OPERATING INCOME. Operating income increased 11.4% from $3.7 million (5.9% of
total revenues) for 1996 to $4.1 million (6.4% of total revenues) for 1997 as a
result of the factors listed above.
INTEREST EXPENSE, NET. Net interest expense decreased from $103,000 (0.2%
of total revenues) for 1996 to $41,000 (0.1% of total revenues) for 1997. The
final monthly payment on the Company's note payable to Paradyne is due May 24,
1998.
INCOME TAXES. Income tax expense increased 15.4% from $1.3 million (2.1% of
total revenues) in 1996 to $1.5 million (2.3% of total revenues) in 1997. The
Company's effective income tax rate was 36.1% for 1996 and 35.4% for 1997.
12
<PAGE>
QUARTERLY RESULTS
The following table presents certain unaudited quarterly financial information
for each of the eight preceding quarters through December 31, 1998. 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.
SUMMARY OF QUARTERLY RESULTS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
SHARE DATA) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 17,661 $ 15,144 $ 14,419 $ 17,691 $ 16,617 $ 15,051 $ 18,952 $ 23,384
Gross Margin 4,979 5,169 4,074 4,975 3,620 (6) 4,554 7,614
Operating Income (loss) 1,550 1,481 504 630 (156) (4,238) 963 2,112
Net Income (loss) 960 933 332 439 (115) (2,669) 563 1,243
Net Income (loss) per common $ 0.12 $ 0.11 $ 0.04 $ 0.05 $ (0.01) $ (0.33) $ 0.07 $ 0.15
and common equivalent share
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $6.3 million, $7.7 million
and $1.6 million in 1996, 1997 and 1998, respectively. Cash provided by the
Company's operating activities in 1996 primarily resulted from earnings before
depreciation and increases in deferred income taxes, current liabilities and
deferred revenue offset by increases in accounts receivable and inventory. The
Company generated cash from operating activities in 1997 primarily as a result
of earnings before depreciation and increases in deferred income taxes offset by
increases in inventory and decreases in deferred revenue. The Company generated
cash from operating activities in 1998 primarily as a result of earnings before
depreciation and increases in current liabilities and a decrease in inventory,
offset by increases in accounts receivable and deferred revenues.
The Company's investing activities used cash of $6.7 million and $13.4 million
in 1996 and 1997, respectively, and provided $0.9 million in 1998. 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 offset by proceeds from the liquidation of investments. Cash
used in the Company's investing activities for 1997 related to the purchase of
property, plant and equipment and investment in capitalized leases related to
hardware leased to customers. Cash provided by the Company's investing
activities in 1998 related to the liquidation of investments and proceeds from
sales-type leases partially offset by purchases of property, plant, and
equipment, and additional investment in capitalized leases related to hardware
leased to customers. (See Note 1 of Notes to Consolidated Financial Statements.)
Financing activities provided cash of $3.8 million and $2.5 million in 1996 and
1997 respectively, and used cash of $0.1 million in 1998. Cash generated from
the Company's financing activity in 1996 and 1997 resulted from the Company's
lease discounting activity which included the issuance of certain non-recourse
notes payable to banks. Cash used in the Company's financing activities in 1998
resulted from the repayment of certain non-recourse notes payable to banks
related to the Company's lease discounting activity.
13
<PAGE>
Per Statement of Financial Accounting Standards No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
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.
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 receivable and eligible leases.
Borrowings under the line of credit bear interest at the Bank's quoted variable
base rate, which has ranged from 6.50% to 9.00% and was 7.07% as of December 31,
1998. As of December 31, 1998, the Company had no outstanding balance under the
line of credit and approximately $12.6 million was available for borrowing
thereunder based upon the Company's qualifying accounts receivable balance. The
Company intends to use its borrowing capacity under the line of credit primarily
for working capital requirements. The credit facility expires in September,
1999. Although there can be no assurances that the Bank will do so, the Company
believes that the Bank will agree to renew the facility.
As of December 31, 1998, the Company's investment in capital leases included $
1.7 million of leases which had been discounted via non-recourse notes payable
to banks. Additionally, investment in capital leases included $5.3 million of
undiscounted leases, a portion of which management anticipates discounting in
1999, and accordingly expects to reduce its working capital committed to this
activity. 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
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").
In 1998 the Company initiated a project to evaluate its internal systems and
critical external interfaces in order to identify areas where the Year 2000
issue might materially impact the Company's business and has hired an outside
consultant with Year 2000 compliance experience to assist in this evaluation.
All critical systems and interfaces are being evaluated for Year 2000 compliance
and programs have been initiated to bring about remedial action where necessary.
During 1999, the Company plans to replace certain of its systems to meet its
evolving business requirements. The replacement systems are being evaluated or
developed to ensure Year 2000 compliance. Such replacements are being made due
to reasons other than Year 2000 compliance concerns and no replacement has been
accelerated because of such concerns. The expected costs for systems work are
included within the Company's capital and operating budgets for 1999.
Management believes that any other Year 2000 compliance issue related to its
internal systems can be properly managed by its internal staff with minimal
incremental costs, including 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
1999. Management has identified concerns related to Year 2000 readiness and has
initiated actions to ensure Year 2000 readiness.
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. The Company has initiated a program to identify and
upgrade non-compliant
14
<PAGE>
Year 2000 replacement parts and expects to complete this activity prior to 2000.
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. 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 other Year 2000 compliance issue related to its
internal systems can be properly managed by its internal staff with minimal
incremental costs, including fees payable to its Year 2000 outside consultant.
The Company believes that it will be Year 2000 ready with no material impact on
its business and estimates that its total costs related to all Year 2000
compliance efforts will be approximately $250,000 to $300,000. Any corrective
action will not materially affect the Company's operating results or financial
condition.
SAFE HARBOR STATEMENT
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. 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 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 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.
15
<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 19, 1999. Information relating to the executive
officers of the Company will be set forth under the caption "Executive Officers"
in the 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 Proxy Statements, and 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 - 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 - Audit and 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 captions "Voting - Principal
Shareholders" and "Proposal 1 - Election of Directors - Information Regarding
Nominees for Director" 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 captions "Proposal 1 -
Election of Directors - Director Compensation" and "Certain Relationships and
Certain Transactions" in the Company's Proxy Statement referred to in Item 10
above. Such information is incorporated herein by reference.
16
<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 Anderson LLP
Report of Independent Public Accountants - Pridie Brewster
Consolidated Balance Sheets at December 31, 1997 and 1998
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1998
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ John A. Koehler
------------------------------------
John A. Koehler, President & CEO
Date: March 28, 1998
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 , on behalf of the Registrant and in the capacities and
on the dates indicated.
Date: March 28 , 1999 /s/ John A. Koehler
-------------- ------------------------------------------
John A. Koehler, President, Chief
Executive Officer and Director
Date: March 28 , 1999 /s/ Jerrel W. Kee
-------------- ------------------------------------------
Jerrel, W. Kee, Senior Vice President --
Finance and Chief Financial Officer
Date: March 28 , 1999 /s/ Paul J. Ferri
--------------
------------------------------------------
Paul J. Ferri, Director
Date: March 28 , 1999 /s/ Richard D. Tadler
-------------- ------------------------------------------
Richard D. Tadler, Director
Date: March 28 , 1999 /s/ Bertil D. Nordin
-------------- ------------------------------------------
Bertil D. Nordin, Director
Date: March 28 , 1999 /s/ William E. Bassett
-------------- ------------------------------------------
William E. Bassett, Director
18
<PAGE>
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <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.
10.2 -- 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 -- 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).
10.4 -- 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).
10.5 -- 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).
10.6 -- 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).
10.7 -- 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).
19
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- -------
10.8 -- 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).
10.9 -- 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).
10.11 -- 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).
10.12 -- 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).
10.13 -- 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).
10.14 -- 401(k) Plan of the Company (Exhibit 10.28 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.15 -- Stock Option Plan of the Company, as amended (Exhibit 10.29 to
the Company's Registration Statement on Form S-1, No. 33-98716).
10.16 -- 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).
10.19 -- 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).
10.20 -- 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).
10.21 -- 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).
20
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- -------
10.22 -- 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).
10.23 -- 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).
10.24 -- 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).
10.25 -- 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).
10.26 -- 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).
10.27 -- 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).
10.31 -- 1995 Stock Incentive Plan (Exhibit 10.52 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.32 -- Directors' Stock Option Plan (Exhibit 10.53 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.33 -- Employee Stock Purchase Plan (Exhibit 10.54 to the Company's
Registration Statement on Form S-1, No. 33-98716).
10.34 -- 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),
10.35 -- 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).
10.36 -- 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).
21
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- -------
10.37 -- 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).
10.38 -- 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).
10.39 -- Services Level Agreement for Installation and Support Services
between the Company and National Medical Care, Inc. dated March
1, 1996 (Exhibit 10.0 to the Company's Report on Form 10-Q for
the period ended March 31, 1996).
10.40 -- 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.
10.41(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).
10.41(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.
10.41(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.
10.42 -- Transfer of Federal Express Services Agreement dates as of
September 26, 1997, by and between TechForce Corporation and ATS
Telephone and Data Systems, Inc. (Exhibit 10.1 to the Company's
Report on Form 10-Q for the period ended September 30, 1997.
10.43-- Premises Lease dated March 12, 1997, with addendum dated
September 30, 1997, by and between TechForce Cororation and
Pinellas Bay Vista Partners, Ltd. - (Exhibit 10.2 to the
Company's Report on Form 10-Q for the period ended September 30,
1997.
10.44 -- Equipment Service agreement dated August 5, 1997, between
TechForce Corporation and Sears, Roebuck, and Company - (Exhibit
10.44 to the Company's Report on Form 10-K for the year ended
December 30, 1997. 10.45-- Master sub-contract agreement, dated
March 31, 1998, between TechForce Corporation and XXXX
Corporation. (Exhibit 10.1 to the Company's Report on Form 10-Q
for the period ended March 31, 1998.
10.45 -- Sub-contractor agreement, dated October 10, 1997, between
TechForce Corporation and General Electric Corporation. (Exhibit
10.2 to the Company's Report on Form 10-Q for the period ended
March 31, 1998.
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.
</TABLE>
22
<PAGE>
TECHFORCE CORPORATION
INDEX OF FINANCIAL STATEMENTS
DECEMBER 31, 1997
PAGE NO.
--------
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 - F-4
Consolidated Statements of Income F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F9 - F-20
Valuation and Qualifying Accounts (Schedule II) F-21
23
<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) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits. We did
not audit the financial statements of TechForce UK Limited for the years ended
December 31, 1998 and 1997, which statements reflect total assets and total
revenues of 4.0 percent and 5.0 percent in 1998 and 5.4 percent and 6.6 percent
in 1997, respectively, of the consolidated totals. Those statements were audited
by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for that entity, is based solely
on the reports 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 reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of TechForce Corporation and subsidiaries as
of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, 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.
Tampa, Florida,
February 18, 1999
/s/ ARTHUR ANDERSEN
- --------------------
24
<PAGE>
TECHFORCE UK LIMITED
REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF
TECHFORCE UK LIMITED
We have audited the financial statements of TechForce UK Limited which have been
prepared under the historical cost convention and accounting policies.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
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 1998 and of its loss for the year
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: 26 March 1999
25
<PAGE>
TECHFORCE UK LIMITED
REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF
TECHFORCE UK LIMITED
We have audited the financial statements of TechForce UK Limited which have been
prepared under the historical cost convention and accounting policies.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
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 1997 and of its profit for the year
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: 26 March 1998
26
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,159,188 $ 736,222
Investments 104,177 3,174,734
Receivables, net of allowance of approximately $912,000 and $343,000 for
doubtful accounts in 1998 and 1997, respectively 20,414,779 12,828,921
Inventories 1,795,698 3,461,435
Prepaid expenses and other current assets 1,222,387 1,030,845
Net investment in sales-type leases, current portion 2,502,287 4,099,559
Deferred taxes 1,807,000 --
------------ ------------
Total current assets 31,005,516 25,331,716
------------ ------------
PROPERTY AND EQUIPMENT:
Leasehold improvements 1,164,717 764,231
Furniture, fixtures and equipment 9,915,706 7,499,089
Equipment held for rental 703,041 592,189
Replacement parts 17,107,373 17,076,590
------------ ------------
28,890,837 25,932,099
Less- Accumulated depreciation (15,411,593) (10,968,498)
------------ ------------
Property and equipment, net 13,479,244 14,963,601
------------ ------------
NET INVESTMENT IN SALES-TYPE LEASES,
less current portion 4,467,846 10,105,223
------------ ------------
OTHER ASSETS 133,202 272,947
------------ ------------
Total assets $ 49,085,808 $ 50,673,487
============ ============
</TABLE>
27
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1998 AND 1997
(continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 5,458,447 $ 3,905,249
Accrued expenses 5,150,031 1,936,473
Accrued contract labor 1,139,026 551,110
Current maturities of obligations under capital leases, long-term debt and
non-recourse notes payable 980,261 2,770,166
Deferred revenue, current portion 2,750,080 2,068,847
Deferred taxes -- 81,000
----------- -----------
Total current liabilities 15,477,845 11,312,845
OBLIGATIONS UNDER CAPITAL LEASES,
net of current maturities 370,746 167,588
NON-RECOURSE NOTES PAYABLE, net of current maturities 659,233 6,031,619
DEFERRED REVENUE, net of current portion 16,789 85,845
DEFERRED TAXES 1,498,000 1,582,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 9,400,234 shares authorized, 8,261,894 and
8,116,530 shares issued and outstanding at December 31, 1998 and 1997,
respectively 82,619 81,166
Additional paid-in capital 28,577,403 28,031,331
Retained earnings 2,403,173 3,381,093
----------- -----------
Total stockholders' equity 31,063,195 31,493,590
----------- -----------
Total liabilities and stockholders' equity $49,085,808 $50,673,487
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
28
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Services $ 49,453,587 $ 37,167,936 $ 35,191,848
Hardware 24,550,098 27,746,861 28,081,581
------------ ------------ ------------
Total revenues 74,003,685 64,914,797 63,273,429
------------ ------------ ------------
DIRECT COSTS:
Services 39,308,866 27,171,881 24,967,943
Hardware 18,912,912 18,545,038 19,504,406
------------ ------------ ------------
Total direct costs 58,221,778 45,716,919 44,472,349
------------ ------------ ------------
Gross profit 15,781,907 19,197,878 18,801,080
------------ ------------ ------------
OPERATING COSTS:
Selling and marketing 10,081,511 9,954,636 10,329,889
General and administrative 6,681,497 5,078,459 4,489,926
Non-recurring charges 338,363 -- 243,493
------------ ------------ ------------
Total operating costs 17,101,371 15,033,095 15,063,308
------------ ------------ ------------
Operating (loss) income (1,319,464) 4,164,783 3,737,772
INTEREST EXPENSE, net (206,456) (40,626) (102,672)
------------ ------------ ------------
(LOSS) INCOME BEFORE BENEFIT (PROVISION) FOR INCOME TAXES
(1,525,920) 4,124,157 3,635,100
BENEFIT (PROVISION) FOR INCOME TAXES 548,000 (1,460,000) (1,312,000)
------------ ------------ ------------
NET (LOSS) INCOME $ (977,920) $ 2,664,157 $ 2,323,100
============ ============ ============
BASIC (LOSS) EARNINGS PER COMMON SHARE $ (0.12) $ 0.33 $ 0.29
============ ============ ============
DILUTED (LOSS) EARNINGS PER COMMON SHARE $ (0.12) $ 0.32 $ 0.28
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
8,190,437 8,067,646 7,931,554
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES 8,190,437 8,405,234 8,335,058
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
29
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
--------------------------- PAID-IN (DEFICIT)
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 7,905,500 $ 79,055 $ 27,634,333 $ (1,606,164) $ 26,107,224
Issuance of common stock through
exercises of common stock options 64,777 647 63,308 -- 63,955
Net income -- -- -- 2,323,100 2,323,100
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 7,970,277 79,702 27,697,641 716,936 28,494,279
Issuance of common stock through
exercises of common stock options 93,073 932 71,367 -- 72,299
Issuance of common stock under the ESPP 53,180 532 262,323 -- 262,855
Net income -- -- -- 2,664,157 2,664,157
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 8,116,530 81,166 28,031,331 3,381,093 31,493,590
Issuance of common stock through
exercises of common stock options 119,064 1,190 220,021 -- 221,211
Issuance of common stock under the ESPP 26,300 263 173,111 -- 173,374
Tax benefit of stock options exercised
by employees -- -- 152,940 -- 152,940
Net loss -- -- -- (977,920) (977,920)
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1998 8,261,894 $ 82,619 $ 28,577,403 $ 2,403,173 $ 31,063,195
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (977,920) $ 2,664,157 $ 2,323,100
Adjustments to reconcile net (loss) income to net cash provided
by operating activities-
Depreciation 4,443,095 4,232,316 3,179,313
Amortization 87,798 45,944 33,770
Deferred income tax (benefit) provision (1,972,000) 1,086,000 1,484,000
Changes in assets and liabilities-
Accounts receivable (7,585,858) (141,694) (550,175)
Inventories 1,665,737 984,377 (1,125,197)
Prepaid expenses and other current assets (191,542) (429,667) (350,208)
Other assets 51,947 (114,849) --
Accounts payable 1,553,198 1,322,608 995,844
Accrued expenses 3,366,498 (1,322,905) 514,640
Accrued contract labor 587,916 (48,687) (1,023,756)
Deferred revenue 612,177 (614,352) 822,406
------------ ------------ ------------
Net cash provided by
operating activities 1,641,064 7,663,248 6,303,737
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,461,639) (7,885,832) (6,041,682)
Sale (purchase) of investments 3,070,557 (875,976) 10,125,072
Increase in sales-type leases (5,343,209) (8,052,492) (13,565,728)
Payments received for sales-type leases 3,047,603 2,377,214 1,612,051
Proceeds from sale of sales-type leases 2,616,091 1,212,498 1,117,285
Purchase of other assets -- (130,872) --
------------ ------------ ------------
Net cash provided by (used in) investing
activities 929,403 (13,355,460) (6,753,002)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised 221,211 72,299 63,955
Proceeds from issuance of common stock under
the ESPP 173,374 262,855 --
Repayments of capital lease obligations (248,761) (51,546) (53,962)
Repayments under revolving credit facilities (30,281,000) (20,012,000) (11,629,955)
Borrowings under revolving credit facilities 30,281,000 20,012,000 11,629,955
Repayments of long-term note payable (740,018) (1,678,883) (1,550,217)
Borrowings of non-recourse notes payable,
secured by sales-type leases 894,864 3,999,982 5,367,208
Repayments of non-recourse notes payable (448,153) (119,369) --
------------ ------------ ------------
Net cash (used in) provided by
financing activities (147,483) 2,485,338 3,826,984
------------ ------------ ------------
</TABLE>
31
<PAGE>
TECHFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(continued)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,422,966 (3,206,874) 3,377,719
CASH AND CASH EQUIVALENTS, beginning of year 736,222 3,943,096 565,377
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 3,159,188 $ 736,222 $ 3,943,096
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for-
Interest $ 124,649 $ 178,656 $ 407,124
Income taxes, net $ (364,897) $ 455,000 $ 391,000
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Amortization of non-recourse notes payable and
net investment in sales-type leases $ 1,862,963 $ 1,241,406 $ --
Lease obligation capitalized $ 497,099 $ -- $ --
Tax benefit of stock options exercised by employees $ 152,940 $ -- $ --
Extinguishment of non-recouse notes payable through sales
of sales-type leases $ 5,051,201 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
32
<PAGE>
PRELIMINARY AND TENTATIVE
TECHFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
TechForce Corporation (a Georgia corporation) and subsidiaries (the Company) 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 intercompany accounts and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a purchased original
maturity of three months or less to be cash equivalents.
INVESTMENTS
At December 31, 1998, investments consist of an interest-bearing money market
account. At December 31, 1997, investments consisted of preferred shares in a
mutual fund which invested 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, 1998 and 1997, consisted primarily of finished
goods.
33
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization have
been computed using the straight-line method over the estimated useful lives of
assets as follows:
DESCRIPTION YEARS
----------- ------
Leasehold improvements 1-10
Furniture, fixtures and equipment 3-10
Equipment held for rental 3
Replacement parts 5-6
As the lessor, the Company leases certain equipment under non-cancelable
operating lease contracts. Future minimum rentals on these leases are
approximately $121,000 and $88,000 for the years ending December 31, 1999 and
2000, respectively.
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, less the present value of the unguaranteed residual
values, are recorded as cost of sales. The associated interest, using the
effective interest method, is credited over the term of the lease agreement.
Total revenues from sales-type leases for the years ended December 31, 1998,
1997 and 1996, were approximately $5,394,000, $8,052,000 and $13,566,000,
respectively, and are included in hardware revenues in the accompanying
consolidated statements of operations. Cost of sales from sales-type leases for
the years ended December 31, 1998, 1997 and 1996, were approximately $1,397,000,
$3,412,000 and $8,186,000, respectively, and are included in hardware direct
costs in the accompanying consolidated statements of operations.
Future minimum lease payments to be received by the Company, as lessor, pursuant
to its sales-type leases at December 31, 1998, are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ----------
1999 $2,977,606
2000 2,329,817
2001 1,581,183
2002 551,405
2003 449,848
----------
$7,889,859
==========
34
<PAGE>
The net investment in sales-type leases at December 31, 1998 and 1997, consisted
of the following:
1998 1997
---------- -----------
Future minimum lease payments $7,889,859 $16,652,647
Less- Unearned income (919,726) (2,447,865)
---------- -----------
Net investment in sales-type leases $6,970,133 $14,204,782
========== ===========
The balance of net investment in sales-type leases as of December 31, 1998,
includes sales-type leases of $1,692,661, which secure non-recourse notes
payable of $1,538,962 (see Note 4).
For the period from July 1, 1997, to December 31, 1997, the Company
prospectively revised the unguaranteed residual value in the equipment
underlying the sales-type leases. This change increased net income, basic
earnings per common share and diluted earnings per common share for the year
ended December 31, 1997, by approximately $246,000, $0.03 and $0.03,
respectively.
REVENUE RECOGNITION
Revenues from hardware sales are recognized at the 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.
RESEARCH AND DEVE.LOPMENT
Research and development costs are charged to direct costs - services as
incurred and amounted to $812,278, $1,225,557 and $1,717,864 in 1998, 1997 and
1996, respectively.
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 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.
35
<PAGE>
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>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Basic weighted average number of
common shares 8,190,437 8,067,646 7,931,554
Dilutive effect of options outstanding -- 337,588 403,504
Diluted weighted average number of common and common
equivalent shares outstanding 8,190,437 8,405,234 8,335,058
</TABLE>
The following options were outstanding at December 31, 1998, but were not
included in the computation of diluted earnings per share because the Company
incurred a net loss for the year ended December 31, 1998:
1998
--------------
Number of options outstanding 1,081,755
Range of exercise prices $0.38 - $10.59
Range of expiration dates 2005 - 2008
The following options were outstanding at December 31, 1997 and 1996, but were
not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares:
1997 1996
------------- -------------
Number of options outstanding 279,582 212,533
Range of exercise prices $8.38 - $9.63 $9.00 - $9.63
Range of expiration dates 2005 - 2007 2005 - 2007
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of net investment in 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.
36
<PAGE>
RECLASSIFICATIONS
Certain amounts included in the 1997 and 1996 consolidated financial statements
have been reclassified to conform with the 1998 presentation.
2. ACQUISITION OF BUSINESS UNIT:
On April 30, 1997, the Company purchased certain equipment and other rights
related to the SCANmanager remote LAN monitoring operations of Ungermann-Bass
Networks, Inc. for $375,000 in cash. No liabilities were assumed in this
transaction. The Company has accounted for this transaction under the purchase
accounting method. The operating results of the SCANmanager operation are
included in the accompanying consolidated statements of operations since the
date of acquisition.
3. LINE OF CREDIT:
The Company has a line of credit facility at December 31, 1998 and 1997, with
the following features:
Description
--------------------------------------------------
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 (7.07%
and 7.22% at December 31, 1998 and 1997,
respectively)
Payment of interest: Monthly
Security of borrowings: Accounts receivable and all other assets not
otherwise encumbered
Available borrowings: Calculated monthly
Expiration date: September 1999
The line of credit facility includes certain restrictive covenants related to
mergers and acquisitions, investments, incurrence of additional indebtedness and
maintenance of certain financial ratios, as defined. The Company was in
compliance with these covenants as of December 31, 1998.
37
<PAGE>
4. LONG-TERM DEBT AND NON-RECOURSE NOTES PAYABLE:
At December 31, 1998 and 1997, the Company's long-term debt and non-recourse
notes payable consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Note payable to AT&T Paradyne, interest at 8%, payable in equal monthly
installments of $150,977, including interest, through May 1998,
secured by certain inventory, property and equipment and personal
guarantees of certain stockholders totaling $1,500,000 $ -- $ 740,018
Non-recourse notes payable to financial institutions, interest
ranging from 7.75% to 10.6%, payable in monthly
installments ranging from $15,135 to $41,275, including interest,
through August 2000, secured by net investment in sales-type leases
and the related equipment thereunder 1,538,962 8,006,415
----------- -----------
1,538,962 8,746,433
Less- Current maturities of long-term debt -- (740,018)
Less- Current maturities of non-recourse
notes payable (879,729) (1,974,796)
----------- -----------
$ 659,233 $ 6,031,619
=========== ===========
</TABLE>
38
<PAGE>
During 1998 and 1997, the Company assigned and granted security interests in 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 $14,866, $132,839 and $261,506 for the
years ended December 31, 1998, 1997 and 1996, respectively. Interest expense for
non-recourse notes payable was $527,539 and $519,243 for the years ended
December 31, 1998 and 1997, respectively. Interest expense for non-recourse
notes payable for the year ended December 31, 1996, was insignificant to the
1996 consolidated financial statements.
Maturities of non-recourse notes payable as of December 31, 1998, are as
follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ----------
1999 $ 879,729
2000 659,233
----------
$1,538,962
==========
5. BENEFIT PLANS:
During 1994, the Company's Board of Directors (the Board) approved an incentive
stock option plan (the Plan) for certain key employees and the Board. On
November 21, 1995, the Board approved the adoption of the 1995 Stock Incentive
Plan (the Incentive Plan), the Stock Option Plan for the Board (the Option Plan)
and a noncompensatory employee stock purchase plan (ESPP).
1994 PLAN
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 date of grant.
As of December 31, 1998, 460,730 options had been granted (net of forfeitures),
280,247 had been exercised and 180,483 were outstanding.
39
<PAGE>
1995 INCENTIVE 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 date of grant. 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 date of the grant 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 owns greater than 10 percent of the Company. As of December 31,
1998, 896,822 options had been granted (net of forfeitures), 28,550 had been
exercised and 868,272 were outstanding.
1995 OPTION PLAN
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 date
of grant. 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 date of the grant. As of
December 31, 1998, 33,000 options had been granted (net of forfeitures), none
had been exercised and 33,000 were outstanding.
EMPLOYEE STOCK PURCHASE PLAN
The ESPP 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 ESPP. As of December 31, 1998, 1997 and 1996, 26,300, 53,180
and no shares, respectively, were purchased under the ESPP.
40
<PAGE>
SFAS NO. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION"
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
(FASB) issued SFAS 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 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 for grants in 1998, 1997 and 1996: risk-free
interest rate of 5.38 percent for 1998 and 6.2 percent for 1997 and 1996,
expected life of four years for 1998 and 1997 and five years for 1996, no
expected dividends for 1998, 1997 and 1996, and expected volatility of 60
percent, 65 percent and 50 percent for 1998, 1997 and 1996, respectively. Using
these assumptions, the fair value of the stock options granted in 1998, 1997 and
1996 was $1,785,509, $1,889,667 and $1,357,826, respectively, which would be
amortized as compensation expense over the vesting period of the options.
Compensation expense for the ESPP in 1998, 1997 and 1996, was insignificant to
the Company's financial statements.
Had compensation expense been determined consistent with SFAS 123, utilizing the
assumptions detailed above, the Company's net (loss) income and (loss) earnings
per share would have been changed to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net (loss) income:
As reported $ (977,920) $ 2,664,157 $ 2,323,100
Pro forma (1,676,917) 2,180,523 2,164,434
(Loss) earnings per share:
Basic (loss) earnings per share-
As reported $ (0.12) $ 0.33 $ 0.29
Pro forma (0.20) 0.26 0.26
Diluted (loss) earnings per share
As reported $ (0.12) $ 0.32 $ 0.28
Pro forma (0.20) 0.25 0.25
</TABLE>
41
<PAGE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
AGGREGATE STOCK OPTION ACTIVITY
The following table summarizes stock option activity for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 1,100,036 $ 5.80 742,207 $ 4.16 607,309 $ 1.29
Granted 486,750 7.07 552,333 7.29 389,007 7.94
Exercised (120,064) 1.84 (93,073) 0.79 (64,777) 0.79
Forfeited (384,967) 7.08 (101,431) 6.70 (189,332) 4.35
---------- ---------- ---------- ---------- ---------- ----------
Outstanding,
end of year 1,081,755 $ 6.37 1,100,036 $ 5.80 742,207 $ 4.16
========== ========== ========== ========== ========== ==========
Options vested at
year-end 351,090 $ 5.10 246,196 $ 3.81 170,662 $ 1.00
========== ========== ========== ==========
Weighted-average fair value
of options granted
during the year
$ 5.61 -- $ 4.35 -- $ 4.05 --
</TABLE>
42
<PAGE>
The following table summarizes information about stock options at December 31,
1998:
<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>
$0.38 - $0.38 93,685 5.8 $0.38 77,183 $0.38
$0.75 - $0.75 62,219 6.1 0.75 45,680 0.75
$2.25 - $2.25 7,012 6.6 2.25 3,625 2.25
$5.00 - $7.19 498,339 8.4 6.65 149,383 6.73
$7.75 - $10.59 420,500 8.6 8.39 75,219 9.50
--------- --- ----- ------- -----
1,081,755 8.1 $6.37 351,090 $5.10
========= === ===== ======= =====
</TABLE>
6. EMPLOYEE 401(K) SAVINGS PLAN
The Company has a 401(k) savings plan that covers substantially all of its
eligible employees. Employees may contribute up to 15 percent of their annual
compensation, subject to certain limits. The Company matches employee
contributions at 25 percent of up to 4 percent of the employees' contributions.
Employees are eligible to participate after attaining the age of 21. The Company
contributions vest ratably over a five-year period. The Company contributions to
the plan totaled $84,031, $114,821 and $82,599 during 1998, 1997 and 1996,
respectively.
7. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISKS;
The net investment in sales-type leases includes approximately $1,352,000 and
$6,545,000 at December 31, 1998 and 1997, respectively, attributable to
Fresenius Medical Care North America (FMC). The non-recourse notes payable
includes approximately $0 and $6,050,000 at December 31, 1998 and 1997,
attributable to FMC.
43
<PAGE>
During the years ended December 31, 1998, 1997 and 1996, the following customers
individually accounted for more than 10 percent of the Company's revenues:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
AMOUNT % AMOUNT % AMOUNT %
----------- ---- ----------- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
General Electric $ 8,412,000 11% $ 435,000 1% $ -- 0%
Packard Bell Electronics, Inc.
(Packard Bell) 1,946,000 3% 10,753,000 17% 12,473,000 20%
Federal Express Company
(Fed Ex) 955,000 1% 3,117,000 5% 6,906,000 11%
FMC 3,025,000 4% 1,202,000 2% 8,601,000 14%
</TABLE>
The loss of General Electric could have a significant impact on the results of
operations of the Company in the near term. Revenues from General Electric and
Packard Bell are included in service revenues in the accompanying consolidated
statements of operations. During 1998 and 1996, revenues from FMC included
significant sales-type lease transactions, and are included in hardware revenues
in the accompanying consolidated statements of operations.
8. 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 2003. Rent expense for the years ended December 31, 1998, 1997 and 1996,
totaled approximately $1,606,000, $1,357,000 and $1,040,000, respectively.
Future minimum operating lease payments as of December 31, 1998, were as
follows:
YEAR ENDING
DECEMBER 31, AMOUNT
----------- -----------
1999 $ 955,049
2000 804,709
2001 702,390
2002 696,998
2003 110,372
-----------
$ 3,269,518
===========
44
<PAGE>
OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain equipment under capital leases.
Future minimum lease payments under capital leases at December 31, 1998,
together with the present value of the minimum lease payments, are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
----------- --------
1999 $137,460
2000 137,460
2001 137,460
2002 137,460
2003 11,455
--------
Total minimum lease payments 561,295
Less- Amount representing interest (90,017)
--------
Present value of minimum lease payments 471,278
Less- Current maturities (100,532)
--------
Obligations under capital leases, net of current maturities $370,746
========
Interest expense for obligations under capital leases was $42,631, $21,848 and
$24,326 for the years ended December 31, 1998, 1997 and 1996 respectively.
Assets recorded under capital leases are included in property and equipment at
December 31, 1998 and 1997, as follows:
1998 1997
-------- --------
Furniture, fixtures and equipment $554,032 $328,448
Less- Accumulated depreciation (125,186) (131,380)
-------- --------
$428,846 $197,068
======== ========
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.
45
<PAGE>
9. INCOME TAXES:
The Company accounts for income taxes under provisions of SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method of
accounting for deferred income taxes.
The provision (benefit) for income taxes for the years ended December 31, 1998,
1997 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 1,169,000 $ 235,000 $ (162,000)
State 299,000 44,000 (30,000)
Foreign (44,000) 95,000 20,000
----------- ----------- -----------
Current provision (benefit) for income taxes 1,424,000 374,000 (172,000)
----------- ----------- -----------
Deferred:
Federal (1,661,000) 915,000 1,250,000
State (311,000) 171,000 234,000
----------- ----------- -----------
Deferred income tax (benefit) provision (1,972,000) 1,086,000 1,484,000
----------- ----------- -----------
(Benefit) provision for income taxes $ (548,000) $ 1,460,000 $ 1,312,000
=========== =========== ===========
</TABLE>
The principal differences between the federal statutory tax rate and the
effective tax rate are as follows for the years ended December 31, 1998, 1997
and 1996:
1998 1997 1996
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 4.0 4.0 4.0
Non-taxable income from investments -- (1.0) (1.9)
Other (2.1) (1.6) --
---- ---- ----
35.9% 35.4% 36.1%
==== ==== ====
46
<PAGE>
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, 1998 and 1997, are summarized as follows:
1998 1997
----------- -----------
Deferred income tax assets:
Goodwill $ 778,000 $ 854,000
Deferred income recognition 43,000 60,000
Allowance for doubtful accounts 345,000 130,000
Net operating loss 117,000 837,000
Alternative minimum tax -- 264,000
Inventory valuation 645,000 --
Property and equipment impairment 249,000 --
Other 257,000 83,000
----------- -----------
2,317,000 2,228,000
----------- -----------
Deferred income tax liabilities:
Depreciation and amortization (1,174,000) (2,805,000)
Sales-type leases (693,000) (1,031,000)
Other (141,000) (55,000)
----------- -----------
(2,008,000) (3,891,000)
----------- -----------
$ 309,000 $(1,663,000)
=========== ===========
At December 31, 1998 and 1997, there was no valuation allowance for deferred
taxes.
47
<PAGE>
10. NON-RECURRING CHARGES:
During the second quarter of 1998, in response to the declining performance from
its hardware sales business, the Company restructured its business operations by
reducing the infrastructure and resources allocated to its hardware sales
business. As a result, the Company incurred a one-time charge of approximately
$338,000 related to staff reductions and approximately $1,600,000 related to
inventory valuation adjustments to reduce the carrying cost of certain finished
goods inventory to net realizable value. The Company also determined that the
carrying amount of certain long-lived assets, replacement parts, may not be
recoverable due to the Company's change to a fee-based spares sourcing program,
Cisco's SMART Spares(TM). The Company assessed the fair value of the assets at
the net realizable value for used replacement spares. The Company recognized an
impairment loss in accordance with SFAS 121 on the replacement spares of
approximately $845,000, representing the difference between the fair value of
the assets and the carrying amount of the assets, for the year ended December
31, 1998. The amount is included in direct cost - services in the accompanying
consolidated statements of operations for the year ended December 31, 1998
During fiscal year 1996, the Company adopted a plan to restructure certain of
its operations in Memphis, Tennessee. Restructuring costs of approximately
$244,000, primarily related to employee termination benefits, were incurred and
are reflected in the accompanying consolidated statements of operations. All
costs related to the restructuring were paid as of December 31, 1996.
11. BUSINESS SEGMENTS:
The Company operates in three primary business segments, one related to the
sales of networking hardware and two related to the sale of services. The
hardware segment provides networking and channel extension hardware primarily in
the United States and Canada and the UK. The service operation segment is
comprised of two segments, one operating in the network services industry and
the other in the personal computer warranty repair industry.
Due to the nature of the Company's business, the segments share operating costs,
assets and related liabilities. Where the ability to allocate specific amounts
exists, they have been reflected in their respective segments.
In 1998, the Company incurred a one-time charge of approximately $1,600,000
related to inventory valuation adjustments and approximately $845,000 related to
the write down of certain long-lived assets (see Note 10). Had these charges not
been incurred, gross margins would have been $7,235,125 for the hardware segment
and $5,894,508 for the TechCare(TM) Services segment.
There were no significant intercompany sales between the three segments for the
years ended December 31, 1998, 1997 and 1996.
The following information summarizes the Company's segment information for years
1998, 1997 and 1996.
48
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------
TECHCARE(TM) CUSTOM PC
HARDWARE SERVICES SERVICES CONSOLIDATED
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $24,550,098 $23,790,639 $25,662,948 $74,003,685
Gross margin 5,637,186 5,047,871 5,096,850 15,781,907
Operating costs 17,101,371
Operating loss (1,319,464)
Interest expense (206,456)
Loss before benefit for
income taxes (1,525,920)
Benefit for income taxes 548,000
Net loss (977,920)
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------
TECHCARE(TM) CUSTOM PC
HARDWARE SERVICES SERVICES CONSOLIDATED
----------- ----------- ----------- ------------
Revenues $27,746,861 $19,549,326 $17,618,610 $64,914,797
Gross margin 9,201,823 5,293,188 4,702,867 19,197,878
Operating costs 15,033,095
Operating income 4,164,783
Interest expense (40,626)
Income before provision for
income taxes 4,124,157
Provision for income taxes (1,460,000)
Net Income 2,664,157
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
TECHCARE(TM) CUSTOM PC
HARDWARE SERVICES SERVICES CONSOLIDATED
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $28,081,580 $15,813,341 $19,378,508 $63,273,429
Gross margin 8,577,174 5,133,170 5,090,736 18,801,080
Operating costs 15,063,308
Operating income 3,737,722
Interest expense (102,672)
Income before provision
for income taxes 3,635,101
Provision for income
taxes (1,312,000)
Net income 2,323,000
</TABLE>
IDENTIFIABLE ASSETS
- -------------------
The company's identifiable assets for 1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
HARDWARE SEGMENT
- ----------------
Inventory $ 1,796,000 $ 3,461,000 $ 4,446,000
Net Investment in Leases 6,970,000 14,205,000 10,983,000
Notes Payable (1,539,000) (8,006,000) (5,367,000)
TECHCARE(TM) SERVICES SEGMENT
- -----------------------------
Replacement Parts, net 6,965,000 9,760,000 7,194,000
Deferred Revenue (2,767,000) (2,155,000) (2,769,000)
CUSTOM PC SERVICES SEGMENT
- --------------------------
Accounts Receivable, net 7,896,000 2,795,186 5,765,000
GEOGRAPHIC INFORMATION
- ----------------------
The Company allocates revenues based on the selling location. Accordingly
revenue from external customers was derived as follows:
1998 1997 1996
United States $70,336,849 $60,607,409 $61,597,001
United Kingdom (or foreign) 3,666,836 4,307,388 1,676,418
----------- ----------- -----------
$74,003,685 $64,914,797 $63,273,429
The Company's long-lived assets, excluding deferred tax assets, were as follows:
United States $17,978,080 $25,098,368 $19,738,639
United Kingdom (or foreign) $ 152,212 $ 243,403 189,979
----------- ----------- -----------
18,080,292 25,341,771 19,928,618
50
<PAGE>
Schedule II
Valuation and Qualifying Accounts for the
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
BALANCE ADDITIONS BALANCE
BEGINNING CHARGED END
OF PERIOD TO EXPENSE DEDUCTIONS OF PERIOD
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended December 31, 1998 $342,898 $668,960 $ (99,605) $912,253
Allowance for Doubtful Accounts
Year Ended December 31, 1997 845,000 (381,572) (120,530) 342,898
Allowance for Doubtful Accounts
Year Ended December 31, 1996 200,000 694,217 (49,217) 845,000
</TABLE>
51
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
23.1 -- Consent of Arthur Andersen LLP - filed herewith.
23.2 -- Consent of Pridie Brewster - filed herewith
27 -- Financial Data Schedule.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report dated February 18, 1999, included in this Form 10-K
into TechForce Corporation's previously filed Registration Statements (File Nos.
333-1936, 333-1938, 333-1942).
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida
March 31, 1999
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified accoutants, we hereby consent to the incorporation of
our report dated March 26, 1999 on the Financial Statements for the years ended
31st December 1997 and 1998, included in this Form 10-K into the Company's
previously filed Registration Statements on Form S-8 (File No. 333-1942, File
333-1939, File No. 333-1940 and File No. 333-1936).
Pridie Brewster
London
26th March 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-31-1998
<CASH> 3,160
<SECURITIES> 104
<RECEIVABLES> 20,415
<ALLOWANCES> 912
<INVENTORY> 1,796
<CURRENT-ASSETS> 31,006
<PP&E> 28,891
<DEPRECIATION> 15,412
<TOTAL-ASSETS> 49,086
<CURRENT-LIABILITIES> 15,488
<BONDS> 0
0
0
<COMMON> 83
<OTHER-SE> 30,981
<TOTAL-LIABILITY-AND-EQUITY> 49,086
<SALES> 24,550
<TOTAL-REVENUES> 74,004
<CGS> 18,913
<TOTAL-COSTS> 58,222
<OTHER-EXPENSES> 17,101
<LOSS-PROVISION> 287
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> (1,526)
<INCOME-TAX> (548)
<INCOME-CONTINUING> (977)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (977)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
