SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number
COMFORCE Corporation: 1-6081
COMFORCE Operating, Inc.: 333-43341
COMFORCE Corporation and
COMFORCE Operating, Inc.
(Exact name of registrant as specified in its charter)
COMFORCE Corporation: 36-23262248
Delaware COMFORCE Operating, Inc.: 11-3407855
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York 11797
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 437-3300
Not Applicable Former name, former address and former fiscal year, if changed
since last report
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 9, 2000
----- --------------------------
COMFORCE Corporation:
Common stock, $.01 par value 16,430,726 shares
COMFORCE Operating, Inc.:
Common stock, $.01 par value 100 shares (all owned by COMFORCE Corporation)
COMFORCE Corporation and
COMFORCE Operating, Inc.
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION...................................................3
Item 1. Financial Statements....................................................3
Consolidated Balance Sheets at March 31, 2000
and December 31, 1999 (unaudited)...................................3
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 (unaudited)....................4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 (unaudited)...........................5
Notes to Unaudited Consolidated Financial Statements....................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk..............11
PART II OTHER INFORMATION......................................................12
Item 1. Legal Proceedings......................................................12
Item 2. Changes in Securities and Use of Proceeds (not applicable).............12
Item 3. Defaults Upon Senior Securities (not applicable).......................12
Item 4. Submission of Matters to a Vote of Security Holders (not applicable)...12
Item 5. Other Information (not applicable).....................................12
Item 6. Exhibits and Reports on Form 8-K ....................................12
SIGNATURES...........................................................................13
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except per share amounts)
(unaudited)
March 31, December 31,
2000 1999
--------- ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 4,083 $ 7,818
Accounts receivable, net 47,680 45,872
Funding and service fees receivable, net 36,352 35,962
Prepaid expenses and other current assets 3,267 2,786
Deferred income taxes 1,500 1,554
--------- ---------
Total current assets 92,882 93,992
Property and equipment, net 12,124 11,490
Intangible assets, net 140,110 139,010
Deferred financing costs 5,009 5,218
--------- ---------
Total assets $ 250,125 $ 249,710
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ 4,000 $ 4,000
Accounts payable 3,314 3,015
Accrued expenses 25,198 20,988
--------- ---------
Total current liabilities 32,512 28,003
Long-term debt 175,777 178,346
Other liabilities 176 198
--------- ---------
Total liabilities 208,465 206,547
--------- ---------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized; 16,430,586
shares and 16,395,549 shares issued and outstanding at March 31, 2000
and December 31, 1999, respectively 164 164
Additional paid-in capital 48,367 48,328
Accumulated deficit since January 1, 1996 (6,871) (5,329)
--------- ---------
Total stockholders' equity 41,660 43,163
--------- ---------
Total liabilities and stockholders' equity $ 250,125 $ 249,710
========= =========
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
3
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three Months ended March 31,
----------------------------
2000 1999
---- ----
Revenue:
Net sales of services $ 106,845 $ 107,075
Costs and expenses:
Cost of services 85,795 87,396
Selling, general and administrative 15,242 14,066
Depreciation and amortization 1,809 1,660
--------- ---------
Total costs and expenses 102,846 103,122
--------- ---------
Operating income 3,999 3,953
--------- ---------
Other income (expense):
Interest expense (5,594) (5,293)
Other income, net 53 2
--------- ---------
(5,541) (5,291)
--------- ---------
Loss before income taxes (1,542) (1,338)
Recovery of income tax -- (148)
--------- ---------
Net loss $ (1,542) $ (1,190)
========= =========
Basic and diluted loss per common share $ (0.09) $ (0.07)
========= =========
Basic and diluted weighted average shares 16,426 16,173
========= =========
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
4
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months ended March 31,
----------------------------
2000 1999
---- ----
Net cash flows provided by operating activities $ 2,427 $ (636)
-------- --------
Cash flows from investing activities:
Acquisition, net of cash acquired (781) --
Purchases of property and equipment (1,271) (1,415)
Payments of contingent consideration (1,501) (571)
-------- --------
Net cash flows used in investing activities (3,553) (1,986)
-------- --------
Cash flows from financing activities:
Borrowings under long-term line of credit agreement 28,831 6,406
Repayment under long-term line of credit agreement (31,400) (6,086)
Reduction of capital lease obligation (79) (36)
Proceeds from exercise of stock options 39 --
-------- --------
Net cash flows provided by (used in) financing
activities (2,609) 284
-------- --------
Decrease in cash and cash equivalents (3,735) (2,338)
Cash and cash equivalents, beginning of period 7,818 4,599
-------- --------
Cash and cash equivalents, end of period $ 4,083 $ 2,261
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest paid $ 831 $ 1,189
Income taxes paid 976 513
Noncash investing and financing activities:
Common stock issued in connection with acquisitions -- 264
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
5
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited interim consolidated financial statements of
COMFORCE Corporation, COMFORCE Operating, Inc. ("COI") and their subsidiaries
(collectively, the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in annual financial statements have been
condensed or omitted pursuant to those rules and regulations. In the opinion of
management, all adjustments, consisting of normal recurring adjustments
considered necessary for a fair presentation, have been included. Although
management believes that the disclosures made are adequate to ensure that the
information presented is not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999. The results for the three months ended March 31, 2000
are not necessarily indicative of the results of operations for the entire year.
2. ACQUISITION
On February 7, 2000, the Company purchased, through its Uniforce Staffing
Services, Inc. subsidiary, all of the issued and outstanding stock of Gerri G.,
Inc. for total consideration of $800,000 in cash. In addition, the Company
agreed to contingent payments under which it would pay a minimum of $200,000 and
a maximum of $600,000 in cash over a two-year period, provided certain
contingencies are satisfied. Gerri G. is in the business of providing staffing,
permanent placement and training services. This transaction is not material to
the Company.
3. DEBT
Long-term debt at March 31, 2000 and December 31, 1999 consisted of the
following (in thousands):
March 31, December 31,
2000 1999
--------- ------------
12% Senior Notes, due 2007 $110,000 $110,000
15% Senior Secured PIK Debentures, due 2009 26,766 26,766
Revolving line of credit, due November 26, 2002, monthly at LIBOR plus up to
2.0%. At March 31, 2000, the rate was 8.4% 43,011 45,580
-------- --------
179,777 182,346
Less, current portion 4,000 4,000
-------- --------
Total long-term debt $175,777 $178,346
======== ========
4. EQUITY
During the first three months of 2000, options to exercise 35,000 shares of
common stock at a price of $1.13 per share were exercised.
6
5. EARNINGS PER SHARE
Basic income (loss) per common share is computed by dividing net income
(loss) available for common stockholders by the weighted average number of
shares of common stock outstanding during each period. Diluted income (loss) per
share is computed assuming the conversion of stock options and warrants with a
market value greater than the exercise price to the extent such conversion
assumption is dilutive.
Outstanding options and warrants to purchase shares of common stock,
representing approximately 4,600,000 shares of common stock on March 31, 2000,
were not included in the computations of diluted loss per share because their
effect would be anti-dilutive.
6. STOCK OPTIONS:
Effective as of April 4, 2000, the Company granted options to purchase in
the aggregate 562,000 shares of the Company's common stock at an exercise price
of $2.00 per share. Substantially all of the options were granted to 23 officers
and employees of the Company. These options, which were granted under the
Company's Long-Term Stock Investment Plan, will vest in equal increments on each
of the next two anniversaries of the date of grant.
7. INDUSTRY SEGMENT INFORMATION:
The Company has determined that its reportable segments can be
distinguished principally by the types of services offered to the Company's
clients.
Revenues and profits in the Staff Augmentation segment are generated by
providing temporary employees to client companies generally on a
time-and-materials basis. Staff Augmentation services are offered through
several sectors. Telecom provides telecommunications workers, primarily to
telecommunications companies; Information Technologies provides programmers,
systems consultants, software engineers and other IT workers to a broad range of
companies which outsource portions of their IT requirements; and Staffing
Services provides primarily technical workers, including engineers, scientists
and laboratory workers, to a variety of corporations and laboratories.
Revenues and profits in the Financial Services segment are generated
through outsourcing and consulting services for client companies. Financial
Services is composed of two distinct activities. The PrO Unlimited division
provides confidential consulting and conversion services related to clients'
employment of independent contractors, and typically involves providing
non-recruited payrolling services to those clients. The Financial Services
segment also includes outsourcing services to independent consulting and
staffing companies, in which the Company provides payroll funding services and
back office support to those clients.
The accounting policies of the segments are the same as those described in
Note 2 to the consolidated financial statements of the Company included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999. The
Company evaluates the performance of its segments and allocates resources to
them based on operating contribution, which represents segment revenues less
direct costs of operations, excluding the allocation of corporate general and
administrative expenses. Assets of the operating segments reflect primarily net
accounts receivable associated with segment activities; all other assets are
included as corporate assets. The Company does not track expenditures for
long-lived assets on a segment basis.
The table below presents information on the revenues and operating
contribution for each segment for the three months ended March 31, 2000 and
1999, and items which reconcile segment operating contribution to the Company's
reported pre-tax loss (in thousands).
7
Three Months Ended March 31,
------------------------------
2000 1999
--------- ---------
Net sales of services:
Financial Services $ 32,741 $ 24,185
Staff Augmentation 74,104 82,890
--------- ---------
$ 106,845 $ 107,075
--------- ---------
Operating contribution:
Financial Services $ 3,369 $ 2,784
Staff Augmentation 6,713 6,984
--------- ---------
10,082 9,768
--------- ---------
Consolidated expenses:
Interest 5,594 5,293
Depreciation and amortization 1,809 1,660
Corporate general and 4,221 4,153
administrative --------- ---------
11,624 11,106
--------- ---------
Loss before income taxes $ (1,542) $ (1,338)
========= =========
At March 31, At December 31,
2000 1999
------------ ---------------
Total Assets:
Financial Services $ 49,838 $ 42,812
Staff Augmentation 34,193 39,022
Corporate 166,094 167,876
--------- ---------
$ 250,125 $ 249,710
========= =========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth below supplements the information found in the
unaudited consolidated financial statements and related notes of COMFORCE
Corporation, COMFORCE Operating, Inc. ("COI") and their subsidiaries
(collectively, the "Company").
Overview
Staffing personnel placed by the Company are employees of the Company. The
Company is responsible for employee related expenses for its employees,
including workers' compensation, unemployment compensation insurance, Medicare
and Social Security taxes and general payroll expenses. The Company offers
health, dental, disability and life insurance to its billable employees.
Staffing and consulting companies, including the Company, typically pay their
billable employees for their services before receiving payment from their
customers, often resulting in significant outstanding receivables. To the extent
the Company increases revenues through acquisitions and/or internal growth,
these receivables will grow and there will be greater requirements for borrowing
availability under its credit facilities to fund current operations.
The Company operates in two business segments -- Staff Augmentation and
Financial Services. The Staff Augmentation segment provides Information
Technologies (IT), Telecom and Staffing services. The Financial Services segment
provides outsourcing and consulting services. For a detailed discussion of the
Company's business, see Item 1 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
In February 2000, the Company completed the acquisition of Gerri G. Inc., a
Staten Island based provider of staffing, permanent placement and training
services. In 1999, Gerri G. generated sales of approximately $4.8 million.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Net sales of services for the three months ended March 31, 2000 were $106.8
million, a decline of 0.2% from net sales of services for the three months ended
March 31, 1999 of $107.1 million. The decrease in 2000 net sales of services is
principally attributable to a decrease in sales to Staffing and Information
Technologies customers, offset largely by higher sales to the Company's
Financial Services customers, substantially in PrO Unlimited, and the
contribution of sales by Gerri G. since the date of acquisition as discussed
above.
Cost of services for the three months ended March 31, 2000 was 80.3% of net
sales of services compared to cost of services of 81.6% for the three months
ended March 31, 1999. The cost of services decrease as a percentage of net sales
for the first quarter of 2000 is a result of the strategies undertaken by
management to increase margins throughout the Company, as well as increases in
permanent placement fees.
Selling, general and administrative expenses as a percentage of net sales
of services was 14.3% for the three months ended March 31, 2000, compared to
13.1% for the three months ended March 31, 1999. This increase resulted
principally from higher payroll and recruiting costs with respect to
non-billable staff and investments to expand PrO Unlimited's infrastructure.
Operating income for the three months ended March 31, 2000 was $4.0
million, unchanged from the three months ended March 31, 1999. This resulted
from an increase in gross margin, offset by higher selling, general and
administrative expenses discussed above and an increase in depreciation and
amortization.
9
The Company's interest expense for the first quarter of each of 2000 and
1999 is attributable to the interest on the Company's credit facility with
Heller Financial, Inc. (the "Credit Facility"), COI's 12% Senior Notes due 2007
(the "COI Notes") and the Company's 15% Senior Secured PIK Debentures due 2009
(the "PIK Debentures"), which obligations were incurred in 1997, principally in
connection with the funding of business acquisitions.
The Company provides for income taxes based upon the estimated effective
tax rate for the full year, considering the non-deductibility of certain items.
No tax recovery has been provided for the quarter ended March 31, 2000 since its
realization in future periods is not yet determinable.
Financial Condition, Liquidity and Capital Resources
The Company pays its billable employees weekly for their services, and
remits certain statutory payroll and related taxes as well as other fringe
benefits. Invoices are generated to reflect these costs plus the Company's
markup. These bills are typically paid within 45 days. Increases in the
Company's net sales of services, resulting from expansion of existing offices or
establishment of new offices, will require additional cash resources.
Management of the Company believes that cash flow from operations and funds
anticipated to be available under the Credit Facility will be sufficient to
service the Company's indebtedness and to meet anticipated working capital
requirements for the foreseeable future.
As of March 31, 2000, the Company had outstanding $26.8 million in
principal amount of PIK Debentures bearing interest at a rate of 15%, $110.0
million in principal amount of COI Notes bearing interest at a rate of 12% and
$43.0 million outstanding under the Credit Facility bearing interest at an
average rate of 8.4% per annum. The debt service costs associated with the
borrowings under the COI Notes and the Credit Facility have significantly
reduced the Company's liquidity. The debt service costs associated with the PIK
Debentures may be satisfied through the issuance of new notes. To date, the
Company has chosen to issue new notes to pay these costs.
As of March 31, 2000, approximately $140.1 million, or 56.0%, of the
Company's total assets were intangible assets. These intangible assets
substantially represent amounts attributable to goodwill recorded in connection
with the Company's acquisitions and will be amortized over a five to 40 year
period, resulting in an annual charge of approximately $4.5 million.
The Company is obligated under various acquisition agreements to make
earn-out payments to the sellers of acquired companies, subject to the acquired
companies' having met certain contractual requirements. During the three months
ended March 31, 2000, contingent payments in connection with these acquisitions
were approximately $1.5 million in cash. The maximum amount of the remaining
potential earn-out payments is approximately $2.1 million in cash payable
through December 31, 2002. The Company cannot currently estimate whether it will
be obligated to pay the maximum amount; however, the Company anticipates that
the cash generated by the operations of the acquired companies will provide all
or a substantial part of the capital required to fund the cash portion of the
earn-out payments.
During the three months ended March 31, 2000, the Company's primary sources
of funds to meet working capital needs were from operating activities and
borrowings under the Credit Facility. Cash and cash equivalents decreased $3.7
million during the three months ended March 31, 2000. Cash flows provided by
operating activities of $2.4 million were exceeded by cash flows used in
financing activities of $2.6 and cash flows used in investing activities of $3.6
million.
10
Seasonality
The Company's quarterly operating results are affected primarily by the
number of billing days in the quarter and the seasonality of its customers'
businesses. Demand for Technical Staffing services has historically been lower
during the year-end holidays through January of the following year, showing
gradual improvement over the remainder of the year. Although less pronounced
than in technical services, the demand for Telecom and IT services is typically
lower during the first quarter until customers' operating budgets are finalized.
The Company believes that the effects of seasonality will be less severe in the
future if sales to IT, Telecom and Financial Services customers continue to
increase as a percentage of the Company's consolidated net sales of services.
Other Matters
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). The FASB issued SFAS No. 137 in
June 1999 to delay the effective date of SFAS 133 to the first quarter of the
fiscal year beginning after June 15, 2000 (January 1, 2001 for the Company). The
Company does not expect the adoption of SFAS 133, as amended by SFAS 137, to
have a significant effect on the Company's results of operations or its
financial position.
Forward Looking Statements
Various statements made in this Report concerning the manner in which the
Company intends to conduct its future operations, and potential trends that may
impact future results of operations, are forward looking statements. The Company
may be unable to realize its plans and objectives due to various important
factors, including, but not limited to, heightened competition for customers as
well as for contingent personnel which could potentially require the Company to
reduce its current fee scales without being able to reduce the personnel costs
of its billable employees; due to the Company's significant leverage, its
greater vulnerability to economic downturns and its diminished ability to obtain
additional financing for working capital, capital expenditures, debt service
requirements or for other purposes; and if the Company is unable to sustain the
cash flow necessary to support the significant amortization charges related to
goodwill for its acquired businesses, it could be required to write-off the
impaired assets, which could have a material adverse impact on its financial
condition and results of operations. Additional important factors that could
cause the Company to be unable to realize its plans and objectives are described
under "Risk Factors" in the Registration Statement on Form S-3 of the Company
filed with the Securities and Exchange Commission on July 2, 1999 (Registration
No. 333-82201). The disclosure under "Risk Factors" in the Registration
Statement may be accessed through the Web site maintained by the Securities and
Exchange Commission at "www.sec.gov." In addition, the Company will provide,
without charge, a copy of such "Risk Factors" disclosure to each stockholder of
the Company who requests such information. Requests for copies should be
directed to the attention of Linda Annicelli, Vice President of Administration
at COMFORCE Corporation, 415 Crossways Park Drive, P.O. Box 9006, Woodbury, New
York 11797, telephone 516-437-3300.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 has been disclosed in Item 7A of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999. There
has been no material change in the disclosure regarding market risk.
11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Since the date of the filing of the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, there have been no material new legal
proceedings involving the Company or any material developments to the
proceedings described in such 10-K.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule of COMFORCE Corporation and COMFORCE
Operating, Inc.
(b) Reports on Form 8-K.
None.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
COMFORCE Corporation
By: /s/ Robert H.B. Baldwin, Jr.
-----------------------------
Robert H.B. Baldwin, Jr.,
Senior Vice President and Chief Financial Officer
Date: May 11, 2000
COMFORCE Operating, Inc.
By: /s/ Robert H.B. Baldwin, Jr.
------------------------------
Robert H.B. Baldwin, Jr.,
Senior Vice President and Chief Financial Officer
Date: May 11, 2000