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 June 30, 1997
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 1-6081
COMFORCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2262248
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
2001 Marcus Avenue Lake Success, New York 11042
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (516) 328-7300
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 July 31, 1997
- ---------------------------------------- ----------------------------
Common stock, $.01 par value 13,719,039
COMFORCE CORPORATION
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION 1
Item 1. Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 1
Condensed Consolidated Statements of Operations
for the three months and six months ended
June 30, 1997 and June 30, 1996 3
Condensed Consolidated Statement of Changes in Stockholders'
Equity (Deficit) for the six months ended
June 30, 1997 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1997
and June 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
June 30, December 31,
1997 1996
------- -------
ASSETS
Current assets:
Cash and equivalents $ 3,562 $ 3,608
Restricted cash 1,000 --
Accounts receivable, net of allowance of doubtful accounts
of $423 in 1997 and $213 in 1996 26,388 12,042
Prepaid expenses 1,160 243
Deferred income tax 2,028 278
Deferred financing fees 1,762 --
Income tax receivable 889 --
Other 20 373
------- -------
Total current assets 36,809 16,544
------- -------
Property, plant and equipment 1,763 890
Less: accumulated depreciation and amortization 346 146
------- -------
1,417 744
------- -------
Other assets:
Excess of cost over net assets acquired, net of accumulated
amortization of $1,104 in 1997 and $526 in 1996 39,034 24,756
Other 181 1,322
------- -------
39,215 26,078
------- -------
Total Assets $77,441 $43,366
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands)
June 30, December 31,
1997 1996
-------- --------
LIABILITIES
Current liabilities:
Borrowings under revolving line of credit $ 15,588 $ 3,850
Accounts payable 1,335 1,398
Accrued expenses 7,507 1,961
Payroll tax liabilities 3,577 969
Income taxes -- 354
-------- --------
Total current liabilities 28,007 8,532
-------- --------
Deferred income tax 90 90
Long-term debt 20,000 --
Other liabilities 781 --
-------- --------
Total liabilities 48,879 8,622
-------- --------
Commitments and contingencies
STOCKHOLDERS' EQUITY
6% Series D convertible preferred stock, $.01 par value; 15,000 authorized,
7,002 issued and outstanding in 1996
Liquidation value of $1,000 per share ($7,002,000) -- 1
5% Series F convertible preferred stock, $.01 par value; 10,000 shares
authorized 500 shares issued and outstanding in
1997 and 3,250 shares issued and outstanding in 1996. Liquidation
value of $1,000 per share ($500,000) 1 1
Common stock, $.01 par value; 100,000,000 shares authorized, 13,717,039 issued
and outstanding in 1997 and 12,701,934 issued
and outstanding in 1996 136 127
Additional paid-in capital 30,665 34,253
Retained earnings (deficit) since January 1, 1996 (2,239) 362
-------- --------
Total stockholders' equity 28,563 34,744
-------- --------
Total liabilities and stockholders' equity $ 77,441 $ 43,366
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
Net Sales $ 55,669 $ 9,893 $ 91,477 $ 13,158
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold 48,666 8,424 79,751 11,002
Selling, general and administrative 4,278 731 7,339 1,173
Depreciation and amortization 461 151 802 228
-------- -------- -------- --------
53,405 9,306 87,892 12,403
-------- -------- -------- --------
Operating income (loss) 2,264 587 3,585 755
-------- -------- -------- --------
Interest expense:
Bridge financing costs (4,385) -- (5,822) --
Other interest, net of interest income (747) (50) (1,019) (51)
Other income -- 13 344 16
-------- -------- -------- --------
(5,132) (37) (6,497) (55)
-------- -------- -------- --------
Earnings (loss) before income taxes (2,868) 550 (2,912) 720
Credit (provision) for income taxes 1,095 (198) 1,037 (268)
-------- -------- -------- --------
Net income (loss) (1,773) 352 (1,875) 452
Dividends on preferred stock 592 -- 726 --
-------- -------- -------- --------
Income (loss) available to common stockholders (2,365) 352 (2,601) $ 452
======== ======== ======== ========
Earnings (loss) per share ($ 0.18) $ 0.03 ($ 0.20) $ 0.03
======== -------- -------- --------
Net earnings (loss) ($ 0.18) $ 0.03 ($ 0.20) $ 0.03
======== -------- ======== ========
Weighted average number of shares of common stock and
common stock equivalents outstanding 13,280 13,291 13,050 13,819
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(Unaudited in thousands, except per share data)
Retained
Series D Series F Earnings
Common Stock Preferred Stock Preferred Stock (Deficit) Total
--------------------- ------------------ ---------------- Additional Since Stockholders'
Paid-in January 1, Equity
Shares Dollars Shares Dollars Shares Dollars Capital 1996 (Deficit)
------ ------- ------ ------- ------ ------- ------- ---- ---------
Balance at December 31, 1996 12,701,934 $127 7,002 $1 3,250 $1 $34,253 $362 $34,744
Exercise of stock options 122,000 1 -- -- -- -- 139 -- 140
Exercise of stock warrants 40,000 -- -- -- -- -- 121 -- 121
Redemption of Series F -- -- --
preferred stock -- -- -- -- (2,750) -- (3,162) -- (3,162)
Conversion of Series D
preferred stock 583,500 6 (7,002) (1) -- -- (5) -- --
Issuance of common stock
as inducement to effect
Series D conversion 87,750 1 -- -- -- -- 492 (493) --
SEC Registration fees -- -- -- -- -- -- (388) -- (388)
Issuance of warrants in -- --
connection with debt -- --
placement -- -- -- -- -- -- 1,004 -- 1,004
Issuance of common stock -- -- -- --
in connection with payment -- -- -- --
right 385,591 4 -- -- -- -- (4) -- --
Issuance of common stock as -- -- -- -- -- -- -- -- --
consideration for interest -- -- -- -- -- --
owed on debt 118,145 1 -- -- -- -- 632 -- 633
Redemption of common stock (321,867) (4) -- -- -- -- (2,417) -- (2,421)
Redemption of partial shares (14) -- -- -- -- -- -- -- --
of common stock
Net earnings -- -- -- -- -- -- -- (1,875) (1,875)
Dividends -- -- -- -- -- -- -- -- --
Series D preferred stock -- -- -- -- -- -- -- (195) (195)
Series F preferred stock -- -- -- -- -- -- -- (38) (38)
---------- ------ -------- ------- --------- ------- ------- ------- -------
Balance as of June 30, 1997 13,717,039 $136 0 $0 500 $1 $30,665 ($2,239) $28,563
========== ====== ======== ======= ========= ======= ======= ======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited in thousands)
Six Months Ended
June 30,
--------------------
1997 1996
-------- --------
Net cash flows used by operating activities $ (792) $ (3,318)
-------- --------
Cash flows from investing activities:
Acquisition payments, net of cash acquired (14,355) (7,450)
Officer loans 30 (331)
Restricted cash (1,000) --
Additions to property, plant and equipment (392) (323)
-------- --------
Net cash flows (used by) from investing activities (15,717) (8,104)
-------- --------
Cash flows from financing activities:
Proceeds from revolving lines of credit 49,535 1,500
Repayment on revolving lines of credit (43,081) --
Proceeds from short-term debt 20,628 --
Payment of short-term debt (27,930) (500)
Proceeds from long-term debt 20,000 --
Repurchase of common stock (2,300) --
Issuance of Preferred Stock Series E -- 4,636
Issuance of Preferred Stock Series D -- 6,416
Proceeds from exercise of stock options 140 --
Proceeds from exercise of warrants 121 999
Payment of registration costs (388) --
Dividends paid (262) --
-------- --------
Net cash flows from financing activities 16,463 13,051
-------- --------
Increase (decrease) in cash and cash equivalents (46) 1,629
Cash and equivalents, beginning of period 3,608 649
-------- --------
Cash and equivalents, end of period $ 3,562 $ 2,278
======== ========
Supplemental cash flow information: Cash paid during the period for:
Interest $ 416 $ 51
Income taxes paid 164 --
Supplemental schedule of noncash investing and financing activities:
Quasi-reorganization -- (93,848)
Common stock issued to settle liabilities 633 --
Issuance of short-term debt to redeem Series F preferred stock 3,162 --
Accrued dividends 75 --
Amounts assumed by ARTRA -- 1,537
Warrants issued in connection with the sale of convertible debentures 734 --
Warrants issued in connection with short-term loan 100 --
Warrants issued in connection with credit facility 170 --
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of COMFORCE
Corporation ("COMFORCE" or the "Company"), formerly The Lori Corporation
("Lori"), are presented on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company currently operates in one industry segment as a
provider of telecommunications and computer technical staffing and consulting
services worldwide.
Effective January 1, 1996, the Company effected a quasi-reorganization through
the application of $93,847,000 of its $95,993,000 Additional Paid in Capital
account to eliminate its Accumulated Deficit. The Company's Board decided to
effect a quasi-reorganization given that the Company achieved profitability
following its entry into the technical staffing business and discontinuation of
its unprofitable jewelry business.
As discussed in Note 3, on February 28, 1997, the Company purchased all of the
stock of RHO Company Incorporated ("RHO"). RHO is in the business of providing
contract employees to other businesses.
These condensed consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all the
disclosures required in the Company's Annual Report on Form 10-K. Accordingly,
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, as filed with the Securities and Exchange Commission, should be read in
conjunction with the accompanying consolidated financial statements. The
condensed consolidated balance sheet as of December 31, 1996 was derived from
the audited consolidated financial statements in the Company's Annual Report on
Form 10-K.
Reported interim results of operations are based in part on estimates which may
be subject to year-end adjustments. In addition, these quarterly results of
operations are not necessarily indicative of those expected for the year.
2. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"),
which establishes standards for computing and presenting earnings per share
(EPS). SFAS No. 128 will be effective for financial statements issued for
periods ending after December 15, 1997. Earlier application is not permitted.
Management has not yet evaluated the effects of this change on the Company's
financial statements.
3. CERTAIN ACQUISITIONS
On February 28, 1997, the Company purchased all of the stock of RHO for $14.8
million payable in cash, plus a contingent payout to be paid over three years on
future earnings of RHO payable in stock in an aggregate amount not to exceed
$3.3 million. The maximum number of shares issuable under the contingent payout
is 386,249 shares. The acquisition of RHO was accounted for under the purchase
method and, accordingly, RHO's operations are included in the Company's
statement of operations from the date of acquisition. The cash portion of the
purchase price paid at closing was principally funded through the Company's
offering of Subordinated Convertible Debentures. See Note 4. RHO provides
specialists primarily in the technical services and IT sectors. In connection
with the closing of the RHO acquisition and in recognition of the efforts of
James L. Paterek, Chairman of the Company, Christopher P. Franco, Chief
Executive Officer of the Company, and Michael Ferrentino, President of the
Company, including providing their personal guarantees on certain loans to the
Company through the pledging of their shares of Company stock, the Company paid
each of these officers $75,000.
6
4. DEBT
At June 30, 1997, current and long-term debt (in thousands) consists of:
June 30, December 31,
1997 1996
---- ----
Current debt
Revolving line of credit, due in July 1998, with interest
payable monthly at the bank's prime rate plus .75%. At
June 30, 1997, the bank's prime rate was 8.5%. $15,588 $3,850
Long-term Debt
Term loan with interest payable at the bank's prime rate
plus 1.75%. At June 30, 1997, the bank's prime rate was 8.5%. $20,000
From February 27 to March 21, 1997 (each date of sale a "Closing Date"), the
Company sold $25.2 million of its Subordinated Convertible Debentures
("Debentures") to certain institutional investors for cash or in exchange for
shares of the Company's Series F Preferred Stock. In the case of the shares
exchanged, the Company effected the repurchase of 2,750 of the 3,250 outstanding
shares of its Series F Preferred Stock by issuing Debentures in the original
principal amount of 115% of the liquidation value of the Series F Preferred
Stock to the holders thereof (the "Series F Holders"), which premium had been
included as an accretive dividend in December 1996. The Debentures bore interest
at the rate of 8% per annum, and were to bear interest at the rate of 10% per
annum commencing 180 days after each Closing Date. Interest on the Debentures
was payable quarterly in cash or in common stock of the Company, at the
Company's option. Warrants to purchase 302,400 shares of the Company's common
stock at prices ranging from $6.85 to $7.65 per share were issued in connection
with this financing, which were valued at $734,000. In connection with this
financing, the Company incurred costs of approximately $5.8 million which were
expensed during the first half of 1997.
On June 25, 1997, the Company completed a $40 million credit facility (the
"Credit Facility") with Fleet National Bank, as lender and agent ("Fleet"), and
U.S. Bank, Washington, as lender (U.S. Bank) (collectively, "Lenders"). The
Credit Facility consists of a revolving credit facility of up to $20 million and
a $20 million term loan.
The Company utilized all of the proceeds of the term loan and a portion of the
availability under the revolving credit facility to redeem the Company's $25.2
million in outstanding principal amount of Debentures issued principally to fund
the Company's acquisition of RHO Company Incorporated ("RHO") in February 1997.
Additional funds available under the revolving credit facility were used to
retire the existing $7.5 million revolving credit facility of RHO with U.S.
Bank. The Company intends to use available funds under the revolving credit
facility for working capital and general corporate purposes, including for
acquisitions, subject to the satisfaction of the conditions therefore set forth
in the Credit Facility. Borrowings under the revolving credit facility are
subject to various financial covenants and other conditions. At June 30, 1997,
the Company was in compliance with all covenants and conditions of the Credit
Facility.
The revolving credit facility and the term loan bear interest at a rate equal to
0.75% and 1.75%, respectively, in excess of Fleet's prime rate as announced from
time to time. The Company's obligations under the Credit Facility are secured by
substantially all of its assets. In addition, James L. Paterek, the Chairman of
the Company, Christopher P. Franco, the Chief Executive Officer of the Company,
and Michael Ferrentino, the President of the Company, each pledged 500,000
shares of the Company's common stock held by them and all of the options to
purchase common stock held by them as additional collateral for the Company's
obligations under the Credit Facility. The scheduled maturity date of the
revolving credit facility is July 10, 1998. Subject to Fleet's right to issue a
call notice requiring repayment of the term loan at any time on or after July
10, 1998, the term loan is payable in quarterly installments as follows:
$750,000 on July 1, 1998 and at the end of each calendar quarter thereafter
through and including December 31, 1999; $1,475,000 at the end of each calendar
quarter beginning March 31, 2000 and ending March 31, 2002, and a final balloon
payment equal to the sum of unpaid principal plus accrued interest on June 30,
2002.
The Company incurred fees and expenses of approximately $1.7 million in
connection with obtaining the Credit Facility, which will be amortized over the
term of the Credit Facility, including amounts awarded to Messrs. Paterek,
Franco and Ferrentino for pledging their shares to further collateralize the
Company's obligations under the Credit Facility (see Note
7
9). In addition, the Company agreed to issue to Fleet warrants to purchase (i)
100,000 shares of common stock at an exercise price of $7.30 per share ($1.50
per share in excess of the average closing price of the common stock for the
five business days ended June 24, 1997), exercisable until June 25, 2000 and
(ii) upon the occurrence of certain specified conditions, 100,000 shares of
common stock at an exercise price of $0.75 per share in excess of the average
closing price of the common stock for the five business days ending prior to the
date of the occurrence of the specified conditions, exercisable commencing on
such date and for a period of three years thereafter (see Note 5).
5. EQUITY
During the first six months of 1997, options were issued to purchase 122,000
shares of common stock at a price of $1.125 per share.
During the first six months of 1997, the Company issued warrants with a value of
$734,000 to purchase 302,400 shares of common stock at prices ranging from $6.85
to $7.65 in connection with issuance of the Debentures and warrants with a value
of $170,000 to purchase 100,000 shares of common stock at a price of $7.30 per
share in connection with a long-term credit facility.
During the first six months of 1997, the Company issued 100,000 warrants with a
value of $100,000 in connection with a short-term loan made to the Company.
During the first six months of 1997, warrants to purchase 40,000 shares of
common stock were exercised at prices ranging from $2.062 to $3.375 per share.
During the first six months of 1997, the Company effected the repurchase of
2,750 of the 3,250 outstanding shares of its Series F Preferred Stock with a
value of $3,162,000 through the issuance of its Debentures. (See Note 4.)
During the first six months of 1997, 7,002 shares of Series D Preferred Stock
were converted into 671,250 shares of common stock under the conversion terms.
Such common shares included 87,750 shares with a market value of $493,000 given
to induce certain conversions. These additional shares have been accounted for
as a preferred stock dividend in the second quarter of 1997.
In June 1997, 118,145 shares of common stock were issued in consideration for
interest of $633,000 owed on the Debenture financing.
In December 1996, the Company sold 460,000 shares of its common stock, together
with a related payment right requiring the Company to make a payment to the
investors in either cash or common stock, at the Company's option, equal to the
amount by which $10.00 per share exceeded the average closing bid price for the
five trading days prior to April 1, 1997. In addition, in December 1996, the
Company sold 350,000 shares of its common stock, together with a related payment
right requiring the Company to make a payment to the investors in either cash or
common stock, at the Company's option, equal to the amount by which $12.05 per
share exceeded the average closing bid price for the five trading days prior to
April 1, 1997. On April 1, 1997, the Company satisfied these payment rights by
issuing 385,591 shares of its common stock.
In February 1997, in connection with its sale of its Debentures to the investors
who purchased 460,000 shares of the Company's common stock in December 1996,
described above, the Company granted to such investors put options under which
the Company agreed to repurchase 115,000 of the shares on each of April 28,
1997, May 28, 1997, June 27, 1997 and July 27, 1997 made in satisfaction of the
payment right described above. In the case of cash payments under the payment
right, this adjustment is effected through a reduction of the put option price
by the amount of the cash payment. In the case of payments in stock under the
payment right, this adjustment is effected through an increase in the aggregate
number of shares subject to the put option, without adjustment of the aggregate
put option price. On April 28 and May 28, 1997, the investors elected to
exercise the put option. As a result of the
8
Company's satisfaction of the payment right through its issuance of shares of
common stock, the number of shares the Company was required to repurchase has
been increased by 80,782 shares. Consequently, the Company repurchased 310,782
shares of its common stock for $2,300,000.
6. EARNINGS PER SHARE
Earnings per common share is computed by dividing net earnings available for
common stockholders by the weighted average number of shares of common stock and
common stock equivalents (stock options and warrants), outstanding during each
period. Common stock equivalents relate to outstanding stock options and
warrants. For this computation, shares of the Series F Preferred Stock are
anti-dilutive and as such are not considered common stock equivalents and are
excluded from this calculation. The dividends of $592,000 and $688,000 accrued
or paid on the Series D Preferred Stock for the three months and six months
ended June 30, 1997, respectively, and the dividends of $6,000 and $38,000
accrued or paid on the Series F Preferred Stock have been deducted for computing
earnings available to common stockholders. For the period June 30, 1997, common
stock equivalents have not been included in this calculation as their effect in
antidilutive. For the six month periods ended June 30, 1997 and June 30, 1996,
fully diluted earnings per share have not been presented as the result is
anti-dilutive or does not differ from primary earnings per share.
Primary earnings per share is calculated as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
Earnings (loss) available for common
stockholders $ (2,365) $ 352 $ (2,601) $ 452
-------- -------- -------- --------
Weighted average number of shares outstanding
for the period 13,280 9,548 13,050 9,446
Dilutive effect of common stock equivalents -- 3,745 -- 4,373
-------- -------- -------- --------
13,280 13,293 13,050 13,819
======== ======== ======== ========
Primary earnings (loss) per share $ (0.18) $ 0.03 $ (0.20) $ 0.03
======== ======== ======== ========
7. INCOME TAXES
In the three month and six month periods ended June 30, 1997, the difference
between the Federal statutory income tax rate and the Company's effective tax
rate relates primarily to state income taxes and the nondeductibility of certain
intangible assets. The Company has recorded a benefit from income taxes in the
periods ended June 30, 1997 as it believes that it will have taxable income in
the second half of 1997 since the bridge financing costs will not recur in this
period.
8. LITIGATION
In January 1997, Austin A. Iodice, who served as the Company's Chief Executive
Officer, President and Vice Chairman while the Company, through its
subsidiaries, was engaged in the jewelry business, and Anthony Giglio, who
performed the functions of the Company's Chief Operating Officer while the
Company was engaged in the jewelry business, filed separate suits against the
Company in the Connecticut Superior Court alleging that the Company had breached
the terms of management agreements entered into with them by failing to honor
options to purchase common stock awarded to them in connection with the
management of the jewelry business under the terms of such management agreements
and the Company's Long-Term Stock Investment Plan. The suits allege that the
plaintiffs are entitled to an unspecified amount of damages. The Company
believes that the option to purchase 370,419 shares granted to Mr. Iodice
(through Nitsua, Ltd., a corporation wholly-owned by him) and the option to
purchase 185,210 shares granted to Mr. Giglio, each having an exercise price of
$1.125 per share, expired in 1996, three months after Messrs. Giglio and Iodice
ceased to be employed by the Company. Messrs. Giglio and Iodice maintain that
they were agents and not employees of the Company and that the options continue
to be exercisable. In March 1997, the Company filed motions to dismiss each of
these suits. The Company intends to vigorously defend these suits.
9
In a case filed in U.S. District Court, Central District of California, against
RHO and Technical Staff Associates, Inc. ("TSA"), which was acquired by RHO in
1992, TSA's former insurance carrier has alleged that TSA and RHO are obligated
to repay to it approximately $1.6 million that it was required to pay in
connection with an injury and death that occurred in November 1992 to a
temporary employee of TSA. The action has been referred to RHO's insurance
carrier, which is defending it with a reservation of rights. RHO has been
granted summary judgment with respect to all claims made in the action, which
judgment is the subject of an appeal by the plaintiff. Management believes that
the case is without substantial merit and intends to vigorously defend it.
Prior to its entry into the jewelry business in 1985, the Company operated in
excess of 20 manufacturing facilities for the production of, inter alia,
photocopy machines, photographic chemicals and paper coating. These operations
were sold or discontinued in the late 1970s and early 1980s. Certain of these
facilities may have used and/or generated hazardous materials and may have
disposed of the hazardous substances, particularly before the enactment of laws
governing the safe disposal of hazardous substances, at an indeterminable number
of sites. Although the controlling stockholders and current management had no
involvement in such prior manufacturing operations, the Company could be held to
be responsible for clean-up costs if any hazardous substances were deposited at
these manufacturing sites, or at off-site waste disposal locations, under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), or under other Federal or state environmental laws now or hereafter
enacted. However, except for the Gary, Indiana site described below, the Company
has not been notified by the Federal Environmental Protection Agency (the "EPA")
that it is a potentially responsible party for, nor is the Company aware of
having disposed of hazardous substances at, any site.
In December 1994, the Company was notified by the EPA that it is a potentially
responsible party under CERCLA for the disposal of hazardous substances at a
site in Gary, Indiana. The alleged disposal occurred in the mid-1970s at a time
when the Company conducted operations as APECO Corporation. In this connection,
in December 1994, the Company was named as one of approximately 80 defendants in
a case brought in the United States District Court for the Northern District of
Indiana by a group of 14 potentially responsible parties who agreed in a consent
order entered into with the EPA to clean-up this site. The plaintiffs have
estimated the cost of cleaning up this site to be $45 million, and have offered
to settle the case with the Company for $991,445. This amount represents the
plaintiffs' estimate of the Company's pro rata share of the clean-up costs. At
the direction of ARTRA, which, as described below, is contractually obligated to
the Company for any environmental liabilities, the Company declined to accept
this settlement proposal, which was subsequently withdrawn.
The evidence produced by the plaintiffs to date is the testamentary evidence of
four former employees of a waste disposal company that deposited wastes at the
Gary, Indiana site identifying the Company as a customer of such disposal
company, and entries in such disposal company's bookkeeping ledgers showing
invoices to the Company. The Company, however, has neither discovered any
records which indicate, nor located any current or former employees who have
advised, that the Company deposited hazardous substances at the site. The
Company is preparing and intends to file a motion to dismiss the case on the
grounds that (i) there is no evidence that hazardous materials were collected
from the Company by this waste disposal company and (ii) even assuming for
argument's sake that the materials collected by this waste disposal company from
the Company were hazardous, there is no evidence that such materials were
deposited at the Gary, Indiana site. Management and its counsel cannot state
whether a negative outcome is probable regarding the Company's potential
liability at this site.
Under the terms of the Assumption Agreement and a subsequent agreement entered
into between ARTRA and the Company, ARTRA has agreed to pay and discharge
substantially all of the Company's pre-existing liabilities and obligations,
including environmental liabilities at any sites at which the Company allegedly
operated facilities or disposed of hazardous substances, whether or not the
Company is currently identified as a potentially responsible party therefor.
Consequently, the Company is entitled to full indemnification from ARTRA for any
environmental liabilities associated with the Gary, Indiana site. In addition,
ARTRA has deposited 125,000 shares of the Company's common stock in escrow as
collateral to satisfy any judgment adverse to the Company or to pay any agreed
upon settlement amount with respect to the Gary, Indiana site, and to satisfy
certain other obligations assumed by ARTRA. Proceeds from the sale of the shares
held in escrow might not be sufficient to satisfy any such judgment or pay any
such settlement amount. While ARTRA is obligated to indemnify the Company for
any environmental liabilities, no assurance can be given that ARTRA will be
financially capable of satisfying its obligations with respect to any liability
in connection with the Gary,
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Indiana site or any other environmental liabilities. ARTRA has advised that it
intends to vigorously defend this case.
The Company is a party to routine contract and employment-related litigation
matters in the ordinary course of its business. No such pending matters,
individually or in the aggregate, if adversely determined, are believed by
management to be material to the business, results of operations or financial
condition of the Company. The Company maintains general liability insurance,
property insurance, automobile insurance, employee benefit liability insurance,
owner's and contractor's protective insurance and exporter's foreign operations
insurance with coverage of $1 million on a per claim basis and $2 million
aggregate (with $3 million umbrella coverage). The Company insures against
workers' compensation in amounts required under applicable state law and in the
amount of $500,000 in the case of foreign workers. The Company also maintains
fidelity insurance in the amount of $25,000 per claim and directors' and
officers' liability insurance in the amount of $5 million. The Company is
presently soliciting quotations to obtain errors and omissions coverage.
9. RELATED PARTY TRANSACTION
The Company paid L.H. Friskoff & Company, a certified public accounting firm at
which Richard Barber, a Director of the Company, is a partner, approximately
$77,000 in fees during 1997 for tax-related advisory services.
As a condition to the funding of the Credit Facility (see Note 4), the Lenders
required James L. Paterek, the Company's Chairman, Christopher P. Franco, the
Company's Chief Executive Officer, and Michael Ferrentino, the Company's
President, to each pledge as additional collateral to secure the Company's
obligations under the Credit Facility 500,000 shares of the Company's common
stock owned by them and all of the options to purchase common stock held by them
(281,250 shares in the case of Messrs. Paterek and Ferrentino and 112,500 shares
in the case of Mr. Franco), which shares have a current market value in excess
of $12 million as of August 6, 1997. The board of directors of the Company
engaged an independent valuation firm to value these pledges by the principals.
In recognition of both the substantial benefit afforded to the Company by the
pledges and the cost to the principals of making the pledges, the board of
directors authorized the issuance of an aggregate consideration of approximately
$650,000 to these principals, which amount was utilized to repay outstanding
loans of such officers due to the Company and related payroll withholding taxes.
The board of directors has deemed such consideration reasonable based on the
valuation of the pledges as determined by the appraisal performed by the
independent valuation firm. The aggregate amount of this consideration,
approximately $650,000, is included as a part of the fees and expenses incurred
in connection with the Credit Facility (as described in Note 4).
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.
Overview
The October 1995 acquisition of COMFORCE Telecom marked the Company's entry into
the technical staffing business, followed by the acquisition of six additional
technical staffing businesses through February 1997. The Company's results of
operations and financial condition reflect its rapid growth through
acquisitions. Amortization of intangibles, principally goodwill, has also
increased as a result of acquisitions.
The Company serves customers in three principal sectors -- telecommunications,
information technology and technical services. In the telecommunications sector,
the Company provides staffing for wireline and wireless communications systems
development, satellite and earth station deployment, network management and
plant modernization. In the information technology sector, the Company provides
staffing for specific projects requiring highly specialized skills such as
applications programming and development, client/server development, systems
software architecture and design,
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systems engineering and systems integration. In the technical services sector,
the Company provides staffing for national laboratory research in such areas as
environmental safety, alternative energy source development and laser
technology, and provides highly-skilled labor meeting diverse commercial needs
in the avionics and aerospace, architectural, automotive, energy and power,
pharmaceutical, marine and petrochemical fields.
Gross margins on staffing services can vary significantly depending on factors
such as the specific services being performed, the overall contract size and the
amount of recruiting required. Margins on the Company's sales in the technical
services sector are typically significantly lower than those in the
telecommunications and information technology ("IT") sectors, although the trend
in the IT staffing sector has been toward lower gross margins generally as this
sector matures and consolidates. Additionally, in certain markets the Company
has experienced significant pricing pressure from some of its competitors.
Consequently, changes in the Company's sales mix can be expected to impact the
overall gross margins generated by the Company.
Staffing personnel placed by the Company are Company employees. 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.
Results of Operations
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenues of $55.7 million for the three months ended June 30, 1997 were $45.8
million, or 463% higher than revenues for the three months ended June 30, 1996.
The increase in 1997 revenues is attributable principally to the Company's
completion of five acquisitions since the end of the first quarter of 1996 and
growth in the various markets served by the Company.
Cost of revenues of the three months ended June 30, 1997 was 87.4% of revenues
compared to cost of revenues of 85.2% for the three months ended June 30, 1996.
The 1997 cost of revenues increase of 2.2% is a result of the Company's
expansion into more mature technical staffing markets.
Selling, general and administrative expenses as a percentage of revenue remained
consistent at 7.7% for the three months ended June 30, 1997, compared to 7.4%
for the three months ended June 30, 1996.
Operating income for the three months ended June 30, 1997 was $2.3 million,
compared to operating income of $587,000 for the three months ended June 30,
1996. This increase was principally attributable to the Company's completion of
five acquisitions since the end of the first quarter of 1996.
The Company's interest expense for the three months ended June 30, 1997 is
attributable principally to amortization of bridge financing costs and the
interest payable on the $25.2 million principal amount of Subordinated
Convertible Debentures (the "Debentures") issued by the Company in February and
March 1997, the proceeds of which were used to partially fund the RHO
acquisition and for working capital purposes. The Debentures were refinanced in
June 1997.
The income tax provision reflects a credit for the three months ended June 30,
1997 for $1.1 million on a loss before income taxes of $2.9 million, compared to
taxes of $198,000 on pretax income of $550,000 for the three months ended June
30, 1996. The difference between the Federal statutory income tax rate and the
Company's effective tax rate relates primarily to state income taxes and the
nondeductibility of certain intangible assets.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues of $91.5 million for the six months ended June 30, 1997 were $78.3
million, or nearly 600% higher than revenues for the six months ended June 30,
1996. The increase in 1997 revenues is attributable principally to the Company's
completion of five acquisitions since the end of the first quarter of 1996 and
growth in the various markets served by the Company.
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Cost of revenues of the six months ended June 30, 1997 was 87.2% of revenues
compared to cost of revenues of 83.6% for the six months ended June 30, 1996.
The 1997 cost of revenues increase of 3.6% is a result of the Company's
expansion into more mature technical staffing markets.
Selling, general and administrative expenses as a percentage of revenue was 8.0%
for the six months ended June 30, 1997, compared to 8.9% for the six months
ended June 30, 1996. The decrease is principally attributable to the
acquisitions completed during 1996 and 1997 which contributed increased gross
profit with lower incremental selling, general and administrative costs.
Operating income for the six months ended June 30, 1997 was $3.6 million,
compared to operating income of $755,000 for the six months ended June 30, 1996.
This increase was principally attributable to the Company's completion of five
acquisitions since the end of the first quarter of 1996.
The Company's interest expense for the six months ended June 30, 1997 is
attributable principally to the amortization of bridge finance costs payable on
the $25.2 million principal amount of Debentures issued by the Company in
February and March 1997, the proceeds of which were used to partially fund the
RHO acquisition and for working capital purposes. The Debentures were refinanced
in June 1997.
The income tax reflects a credit for the six months ended June 30, 1997 for $1.0
million on a loss before income taxes of $2.9 million, compared to taxes of
$268,000 on pretax income of $720,000 for the six months ended June 30, 1996.
Such credit assumes that the Company will have taxable income in the second half
of 1997 as the bridge financing costs will not recur in such period. The
difference between the Federal statutory income tax rate and the Company's
effective tax rate relates primarily to state income taxes and the
nondeductibility of certain intangible assets.
Financial Condition, Liquidity and Capital Resources
During the first half of 1997, the Company's primary sources of funds to meet
working capital needs were from operations, funds made available through the
Company's $25.2 million offering of Debentures in February and March 1997 and
borrowings under a short-term credit facility with U.S. Bank of Washington,
National Association ("U.S. Bank") entered into in February 1997 which provided
for up to $7.5 million in availability. A portion of the net proceeds from the
offering of the Debentures were also used to fund the Company's acquisition of
RHO Company Incorporated ("RHO") in February 1997.
On June 25, 1997, the Company completed a $40 million credit facility (the
"Credit Facility") with Fleet National Bank, as lender and agent ("Fleet"), and
U.S. Bank, as lender (collectively, "Lenders"). The Credit Facility consists of
a revolving credit facility of up to $20 million and a $20 million term loan.
The Company utilized all of the proceeds of the term loan and a portion of the
availability under the revolving credit facility to redeem the Debentures.
Additional funds available under the revolving credit facility were used to
retire the existing $7.5 million revolving credit facility with U.S. Bank. The
Company intends to use available funds under the revolving credit facility for
working capital and general corporate purposes, including for acquisitions,
subject to the satisfaction of the conditions therefore set forth in the Credit
Facility. Borrowings under the revolving credit facility are subject to various
financial covenants and other conditions.
The revolving credit facility and the term loan bear interest at a rate equal to
0.75% and 1.75%, respectively, in excess of Fleet's prime rate as announced from
time to time. The Company's obligations under the Credit Facility are secured by
substantially all of its assets. Subject to Fleet's right to issue a call notice
requiring repayment of the term loan at any time on or after July 10, 1998, the
term loan is payable in quarterly installments as follows: $750,000 on July 1,
1998 and at the end of each calendar quarter thereafter through and including
December 31, 1999, $1,475,000 at the end of each calendar quarter beginning
March 31, 2000 and ending March 31, 2002, and a final balloon payment equal to
the sum of unpaid principal plus accrued interest on June 30, 2002.
The Company typically pays its billable employees weekly for their services
before receiving payment from its customers. As new offices are established or
acquired, or as existing offices expand and revenues are increased, there will
be greater requirements for cash resources to fund current operations.
Management believes that the Credit Facility
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will be sufficient to meet the Company's present working capital requirements.
However, if the Company acquires additional staffing businesses, additional
borrowing availability is expected to be required.
The Company is obligated under various acquisition agreements to make earn-out
payments to the sellers of acquired companies, subject to the acquired
companies' meeting certain contractual requirements. For calendar year 1997,
sellers are entitled to earn-out payments of $521,000, all of which have been
paid. The maximum amount of the remaining potential earn-out payments is $5
million in cash and $4.5 million in stock payable in the three-year period from
1998 to 2000. 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.
Cash and cash equivalents decreased $46,000 during the six months ended June 30,
1997. Cash flows of $792,000 used in operating activities and cash flows of
$15,717,000 used by investing activities were in excess of cash flows provided
by financing activities of $16,463,000. Cash flows used by operating activities
were principally attributable to the need to fund growth in accounts receivable
and their carrying costs. Cash flows used in investing activities are
principally related to the purchase of RHO. Cash flows from financing activities
were principally attributable to net proceeds available to the Company in
connection with its sale of Debentures (which were redeemed on June 25, 1997)
and net borrowings under the credit facility with U.S. Bank (which was repaid on
June 25, 1997). The Debentures were redeemed and the net borrowings under the
credit facility with U.S. Bank were repaid with proceeds from the Credit
Facility (as described in Note 4).
As of June 30, 1997, approximately $39.0 million, or 50% 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 in excess of $1 million. Various factors could impact the
Company's ability to generate the earnings necessary to support this
amortization schedule, including fluctuations in the economy, the degree and
nature of competition, demand for the Company's services, and the Company's
ability to integrate the operations of acquired businesses, to recruit and place
staffing professionals, to expand into new markets and to maintain gross margins
in the face of pricing pressures. The failure of the Company to generate
earnings necessary to support the amortization charge may result in an
impairment of the asset. The resulting write-off could have a material adverse
effect on the Company's business, financial condition and results of operations.
14
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 services in the technical services sector 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 services of the telecommunications
and IT sectors 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 as revenues contributed by the
information technology and telecommunications sectors continue to increase as a
percentage of the Company's consolidated revenues.
Other Matters
In February 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"),
which establishes standards for computing and presenting earnings per share.
SFAS No. 128 will be effective for financial statements issued for periods
ending after December 15, 1997. Earlier application is not permitted. Management
has not yet evaluated the effects of this change on the Company's financial
statements.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule (included in EDGAR document only for use by the
Securities and Exchange Commission).
(b) Reports on Form 8-K.
On April 14, the Company filed Amendment No. 1 to a Current Report on Form
8-K/A to include the financial statements and pro forma financial
statements required in connection with the completed RHO acquisition.
On July 10, 1996, the Company filed a Current Report on Form 8-K and
Amendment No. 1 thereto on Form 8-K/A to report entering into the Credit
Facility and to report the conversion of the Company's Series D Preferred
Stock into Common Stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
COMFORCE CORPORATION
--------------------------
Registrant
Dated: August 7, 1997 /s/ PAUL J. GRILLO
--------------------------
Vice President/Finance
Chief Financial Officer
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