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 September 30, 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 November 6, 2000
- ---------------------------- -------------------------------
COMFORCE Corporation:
Common stock, $.01 par value 16,656,043 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 September 30, 2000 (unaudited)
and December 31, 1999..................................................... 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 2000 and 1999 (unaudited)...................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 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............................. 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk................... 14
PART II OTHER INFORMATION........................................................... 14
Item 1. Legal Proceedings........................................................... 14
Item 2. Changes in Securities and Use of Proceeds (not applicable).................. 15
Item 3. Defaults Upon Senior Securities (not applicable)............................ 15
Item 4. Submission of Matters to a Vote of Security Holders......................... 15
Item 5. Other Information (not applicable).......................................... 15
Item 6. Exhibits and Reports on Form 8-K............................................ 15
SIGNATURES............................................................................. 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
September 30, December 31,
2000 1999
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 6,918 $ 7,818
Accounts receivable, net 57,377 45,872
Funding and service fees receivable, net 48,832 35,962
Prepaid expenses and other current assets 4,126 2,786
Deferred income taxes, net 1,500 1,554
---------------- -----------------
Total current assets 118,753 93,992
Property and equipment, net 11,764 11,490
Intangible assets, net 138,759 139,010
Deferred financing costs, net 4,391 5,218
---------------- -----------------
Total assets $273,667 $249,710
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ -- $ 4,000
Accounts payable 2,811 3,015
Accrued expenses 32,605 20,988
---------------- -----------------
Total current liabilities 35,416 28,003
Long-term debt 193,275 178,346
Other liabilities 41 198
---------------- -----------------
Total liabilities 228,732 206,547
---------------- -----------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized; 16,431,040
shares and 16,395,549 shares issued and outstanding at September 30, 2000
and December 31, 1999, respectively 164 164
Additional paid-in capital 48,392 48,328
Accumulated deficit since January 1, 1996 (3,621) (5,329)
---------------- -----------------
Total stockholders' equity 44,935 43,163
---------------- -----------------
Total liabilities and stockholders' equity 273,667 $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 Nine Months Ended
------------------------ ------------------------
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- --------- ---------- ---------
Revenue:
Net sales of services $120,441 $109,394 $345,004 $327,588
---------- --------- ---------- ---------
Costs and expenses:
Cost of services 94,778 87,957 273,867 264,882
Selling, general and administrative 16,867 13,640 48,193 42,002
Depreciation and amortization 1,858 1,632 5,494 5,037
---------- --------- ---------- ---------
Total costs and expenses 113,503 103,229 327,554 311,921
---------- --------- ---------- ---------
Operating income 6,938 6,165 17,450 15,667
---------- --------- ---------- ---------
Other income (expense):
Interest expense (5,897) (5,537) (17,380) (16,294)
Restricted covenant release 1,000 - 1,000 -
Other income, net 205 2 239 14
---------- --------- ---------- ---------
(4,692) (5,535) (16,141) (16,280)
---------- --------- ---------- ---------
Income (loss) before income tax and extraordinary gain 2,246 630 1,309 (613)
Income tax provision 1,717 614 2,261 905
---------- --------- ---------- ---------
Income (loss) before extraordinary gain $ 529 $ 16 $ (952) $ (1,518)
---------- --------- ---------- ---------
Gain on early debt extinguishment, net of taxes 2,660 - 2,660 -
---------- --------- ---------- ---------
Net income (loss) $ 3,189 $ 16 $ 1,708 $ (1,518)
---------- --------- ---------- ---------
Basic income (loss) per common share:
Net income (loss) before extraordinary gain $ 0.03 $ 0.00 $ (0.06) $ (0.09)
Extraordinary gain 0.16 - 0.16 -
---------- --------- ---------- ---------
Net income (loss) $ 0.19 $ 0.00 $ 0.10 $ (0.09)
========== ========= ========== =========
Diluted income (loss) per common share:
Net income (loss) before extraordinary gain $ 0.03 $ 0.00 $ (0.06) $ (0.09)
Extraordinary gain 0.16 - 0.16 -
---------- --------- ---------- ---------
Net income (loss) $ 0.19 $ 0.00 $ 0.10 $ (0.09)
========== ========= ========== =========
Basic weighted average common shares outstanding 16,431 16,395 16,429 16,287
========== ========= ========== =========
Diluted weighted average common shares outstanding 16,453 16,406 16,429 16,287
========== ========= ========== =========
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
4
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended September 30,
2000 1999
------- -------
Net cash flows (used in) provided by operating activities $(9,041) $ 5,700
-------- --------
Cash flows from investing activities:
Acquisition, net of cash acquired (780) -
Purchases of property and equipment (2,372) (3,655)
Payments of contingent consideration (2,374) (2,689)
Payments of deferred financing costs (50) -
-------- --------
Net cash flows used in investing activities (5,576) (6,344)
-------- --------
Cash flows from financing activities:
Net borrowings under long-term line of credit
agreement 18,921 1,130
Repurchase of senior notes (5,080) -
Reduction of capital lease obligation (163) (174)
Proceeds from exercise of stock options 39 -
-------- --------
Net cash flows provided by financing
Activities 13,717 956
-------- --------
(Decrease) increase in cash and cash equivalents (900) 312
Cash and cash equivalents, beginning of period 7,818 4,599
-------- --------
Cash and cash equivalents, end of period $ 6,918 $ 4,911
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest paid $ 9,892 $10,591
Income taxes paid 1,439 607
Non-cash investing and financing activities:
Common stock issued in connection with acquisitions - 867
Issuance of senior secured PIK Debentures in lieu of
interest payments 2,008 1,736
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 and nine months ended
September 30, 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. Pro forma results have not been provided as their effect is not
material to the financial statements of the Company.
3. DEBT
Long-term debt at September 30, 2000 and December 31, 1999 consisted of the
following (in thousands):
September 30, December 31,
2000 1999
------------- -----------
12% Senior Notes, due 2007 $100,000 $110,000
15% Senior Secured PIK Debentures, due 2009 28,774 26,766
Revolving line of credit, due November 26, 2002, monthly at LIBOR plus
up to 2.5%. At September 30, 2000, the average rate was 9.1%. 64,501 45,580
----------- ----------
193,275 182,346
Less, current portion - 4,000
----------- ----------
Total long-term debt $193,275 $178,346
=========== ==========
The debt service costs associated with the 15% Senior Secured PIK
Debentures due 2009 ("PIK Debentures") may be satisfied through the issuance of
new notes. For the nine months ended September 30, 2000, the Company issued
$2,008,000 of additional PIK Debentures in lieu of interest.
6
During the third quarter, the Company repurchased $10.0 million face value
of COI's 12% Senior Notes due 2007 (the "COI Notes") for a purchase price of
$5.1 million. The extraordinary gain that was realized by these repurchases was
$2.7 million, which includes the reduction of $200,000 of deferred financing
costs associated with the repurchases net of tax expense of $2.0 million.
4. EQUITY
During the first nine months of 2000, options were exercised to purchase
35,000 shares of common stock at an exercise price of $1.13 per share.
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. The following represents a reconciliation of the
numerators and denominators for basic and diluted income (loss) per share for
the three-month and nine-month periods ended September 30, 2000 and 1999 (in
thousands):
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------------------
Numerator:
Income (loss) before extraordinary
gain $ 529 $ 16 $ (952) $(1,518)
Gain on early debt extinguishment,
net of taxes 2,660 - 2,660 -
--------------------------------------------------------------------
Net income (loss) $ 3,189 $ 16 $ 1,708 $(1,518)
===================================================================
Denominator:
Weighted-average shares 16,431 16,395 16,429 16,287
Effect of dilutive securities:
Warrants and Employee stock options 22 11 - -
-------------------------------------------------------------------
Denominator for diluted income (loss)
per share - adjusted weighted average
shares and assumed conversions 16,453 16,406 16,429 16,287
===================================================================
Outstanding options and warrants to purchase shares of common stock,
representing approximately 4,500,000 shares of common stock on September 30,
2000, were not included in the computations of diluted loss per share for the
nine months ended September 30, 2000 because their effect would be anti-
dilutive.
6. STOCK OPTIONS:
At the Company's annual meeting of stockholders held on June 13, 2000, the
Company's stockholders approved an amendment to the Company's Long-Term Stock
Investment Plan increasing the number of shares of common stock that may be
issued under the plan from 4,000,000 to 5,000,000.
7
During the first nine months of 2000, the Company granted options to
purchase in aggregate of 662,000 shares of the Company's common stock at an
exercise price of $2.00 per share, and 40,000 at an exercise price of $1.75 per
share, which was equal to or greater than the fair market value on the date of
grant. Substantially all of the options were granted to 27 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.
8
The table below presents information on the revenues and operating
contribution for each segment for the three and nine months ended September 30,
2000 and 1999, and items that reconcile segment operating contribution to the
Company's reported pre-tax income (loss) (in thousands).
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------ -------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales of services:
Financial Services $ 36,852 $ 30,300 $104,627 $ 82,381
Staff Augmentation 83,589 79,094 240,377 245,207
---------- ---------- ---------- ---------
$120,441 $109,394 $345,004 $327,588
Operating contribution:
Financial Services $ 3,365 $ 3,794 $ 10,570 $ 10,146
Staff Augmentation 9,463 7,599 24,907 22,191
---------- ---------- ---------- ---------
12,828 11,393 35,477 32,337
---------- ---------- ---------- ---------
Consolidated expenses:
Other income/expense, net 4,692 5,535 16,141 16,280
Depreciation and amortization 1,858 1,632 5,494 5,037
Corporate general and administrative 4,032 3,596 12,533 11,633
---------- ---------- ---------- ---------
10,582 10,763 34,168 32,950
---------- ---------- ---------- ---------
Income (loss) before income taxes and
extraordinary gain $ 2,246 $ 630 $ 1,309 $ (613)
========== ========== ========== =========
At September 30, 2000 At December 31, 1999
--------------------- --------------------
Total Assets:
Financial Services $ 65,851 $ 42,812
Staff Augmentation 40,358 39,022
Corporate 167,458 167,876
------------------------------- ---------------------------------
$273,667 $249,710
=============================== =================================
8. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
established standards for the reporting and display of comprehensive income and
its components with the same prominence as other items in annual consolidated
financial statements. The Company has no elements of comprehensive income other
than net income (loss); therefore, comprehensive income (loss) equals reported
net income (loss).
9
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 September 30, 2000 Compared to Three Months Ended September
30, 1999
Net sales of services for the three months ended September 30, 2000 were
$120.4 million, an increase of 10.1% from net sales of services for the three
months ended September 30, 1999 of $109.4 million. The increase in 2000 net
sales of services is principally attributable to higher sales to the Company's
Financial Services customers, substantially in PrO Unlimited, and to Telecom
customers, and the contribution of sales by Gerri G. since its acquisition in
February 2000, partially offset by a decrease in sales to Staff Augmentation
customers in the technical sector.
Cost of services for the three months ended September 30, 2000 was 78.7% of
net sales of services as compared to cost of services of 80.4% for the three
months ended September 30, 1999. The cost of services decrease as a percentage
of net sales for the third quarter of 2000 is a result of the continued
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 were 14.0% for the three months ended September 30, 2000, compared
to 12.5% for the three months ended September 30, 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 September 30, 2000 was $6.9
million as compared to operating income of $6.2 million for the three months
ended September 30, 1999. This 12.5% increase in operating
10
income for the third quarter of 2000 resulted from an increase in gross margin,
partially offset by higher selling, general and administrative expenses
discussed above and an increase in depreciation and amortization.
The Company's interest expense for the third quarter 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. During the third quarter,
the Company repurchased $10.0 million face value of COI's Notes for a purchase
price of $5.1 million. The extraordinary gain that was realized by these
repurchases was $2.7 million, which includes the reduction of $200,000 of
deferred financing costs associated with the repurchases net of tax expense of
$2.0 million. See "Financial Condition, Liquidity and Capital Resources" in
this Item 2.
The restricted covenant release of $1.0 million during the third quarter of
2000 represents a payment made by certain former officers of the Company to
release them from certain restrictive agreements and non-competition covenants.
Also, during the current period, the Company sold certain long lived assets
which resulted in a gain of $185,000 which is included in other income.
The income tax provision for the three months ended September 30, 2000 was
$1.7 million on income before taxes and extraordinary gain of $2.2 million,
compared to an income tax provision of $614,000 on income before taxes of
$630,000 for the three months ended September 30, 1999. The Company provides
for income taxes, based upon the estimated effective tax rate (on a year to date
basis). The difference between the federal statutory income tax rate and the
Company's effective tax rate relates primarily to the nondeductibility of
amortization expense associated with certain intangible assets, the
nondeductibility of a portion of the interest expense associated with the PIK
Debentures and state income taxes.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Net sales of services for the nine months ended September 30, 2000 were
$345.0 million, an increase of 5.3% from net sales of services for the nine
months ended September 30, 1999 of $327.6 million. The increase in 2000 net
sales of services is principally attributable to higher sales to the Company's
Financial Services customers, substantially in PrO Unlimited, and to Telecom
customers, and the contribution of sales by Gerri G. since its acquisition in
February 2000, partially offset by a decrease in sales to Staff Augmentation
customers in the technical and information technologies sectors.
Cost of services for the nine months ended September 30, 2000 was 79.4% of
net sales of services as compared to cost of services of 80.9% for the nine
months ended September 30, 1999. The cost of services decrease as a percentage
of net sales for the first nine months of 2000 is a result of the continued
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 were 14.0% for the nine months ended September 30, 2000, compared to
12.8% for the nine months ended September 30, 1999. This increase resulted
principally from higher payroll and recruiting costs with respect to non-
billable staff, the establishment of new offices and investments to expand PrO
Unlimited's infrastructure.
Operating income for the nine months ended September 30, 2000 was $17.5
million as compared to operating income of $15.7 million for the nine months
ended September 30, 1999. This 11.4% increase in operating income for the first
nine months of 2000 resulted from an increase in gross margin, offset by higher
selling, general and administrative expenses discussed above and an increase in
depreciation and amortization.
11
The Company's interest expense for the first nine months of 2000 and 1999
is attributable to the interest on the Credit Facility, the COI Notes and the
PIK Debentures, which obligations were incurred in 1997, principally in
connection with the funding of business acquisitions. During the third quarter,
the Company repurchased $10.0 million face value of COI's Notes for a purchase
price of $5.1 million. The extraordinary gain that was realized by these
repurchases was $2.7 million, which includes the reduction of $200,000 of
deferred financing costs associated with the repurchases net of tax expense of
$2.0 million. See "Financial Condition, Liquidity and Capital Resources" in
this Item 2.
The restricted covenant release of $1.0 million for the nine months ended
September 30, 2000 represents a payment made by certain former officers of the
Company to release them from certain restrictive agreements and non-competition
covenants. Also, during the current period, the Company sold certain long lived
assets which resulted in a gain of $185,000 of other income.
The income tax provision for the nine months ended September 30, 2000 was
$2.3 million on income before taxes and extraordinary gain of $1.3 million,
compared to an income tax provision for the nine months ended September 30, 1999
was $905,000 on a loss before taxes of $613,000. The Company provides for
income taxes, based upon the estimated effective tax rate (on a year to date
basis). The difference between the federal statutory income tax rate and the
Company's effective tax rate relates primarily to the nondeductibility of
amortization expense associated with certain intangible assets, the
nondeductibility of a portion of the interest expense associated with the PIK
Debentures and state income taxes.
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.
During the nine months ended September 30, 2000, the Company's primary
sources of funds to meet working capital needs were from borrowings under the
Credit Facility. Cash and cash equivalents decreased $900,000 during the nine
months ended September 30, 2000. Cash flows provided by financing activities of
$13.7 million were exceeded by cash flows used in operating activities of $9.0
million and cash flows used in investing activities of $5.6 million. The
increase in cash flows used in operations over the same period in the prior year
is primarily attributable to the need to fund growth in accounts receivable.
As of September 30, 2000, the Company had outstanding $64.5 million in
principal amount under its Credit Facility bearing interest at an average rate
of 9.1% per annum. In addition, as of September 30, 2000, the Company had
outstanding $28.8 million in principal amount of PIK Debentures bearing interest
at a rate of 15%, and $100.0 million in principal amount of COI Notes bearing
interest at a rate of 12%. 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 PIK Debentures to pay these costs. In the third
quarter of 2000, the Company repurchased $10.0 million principal amount of COI
Notes for a purchase price of $5.1 million, principally from funds made
available for this purpose through an amendment of the Credit Facility entered
into in the third quarter of 2000.
Limitations on additional availability under the Credit Facility (due to
both the terms of the Credit Facility as in effect as well as restrictions
therefor under the Indentures under which the COI Notes and PIK Debentures were
issued (the "Indentures")) have negatively impacted the Company's ability to
fully pursue various business opportunities and to respond flexibly to changing
market conditions during recent periods. In addition, recent growth in the
Company's PrO Unlimited and Telecom businesses that require additional cash
resources to fund customers' payrolls and for other purposes, coupled with the
Company's recent use of funds to repurchase COI
12
Notes on favorable terms, have resulted in higher levels of borrowing under the
Credit Facility and, thus, further reduced the Company's borrowing availability
thereunder. Borrowings at November 1, 2000 were $61.5 million and are expected
to increase to near the $75 million limit under the Credit Facility when the
Company is required to make its next semi-annual interest payment on the COI
Notes of $6.0 million on December 1, 2000. Management is currently seeking to
increase its borrowing availability so that it has sufficient borrowing capacity
to meet growth objectives for the foreseeable future. However, no assurance can
be given that the Company will be successful in negotiating loan terms
acceptable to it.
During the fourth quarter of 2000, the Company solicited and received
approval from the holders of the COI Notes to authorize amendments of the
Indentures designed to address certain of the Company's debt strategies,
including permitting the Company to increase the indebtedness under the Credit
Facility and through securitization vehicles to the greater of (i) $75 million
at any time outstanding, less the aggregate amount thereof repaid with the net
proceeds of asset dispositions, or (ii) 90% of eligible accounts receivable
outstanding at any time.
The Company has also taken steps and is contemplating additional strategies
to reduce its higher interest rate debt. These strategies may include, but are
not limited to, repurchasing additional COI Notes through public market
purchases or privately negotiated transactions, exchanging COI Notes or PIK
Debentures for equity or convertible securities, and selling assets. In this
connection, the Company is seeking authority to use loan proceeds to repurchase
COI Notes and PIK Debentures to the extent that it has the opportunity to do so
through public market purchases or privately negotiated transactions on
advantageous terms. In the event the Company elects to pursue and is successful
with one or more of these strategies, the Company may incur additional tax
liabilities.
As of September 30, 2000, approximately $139.0 million, or 50.7%, 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. Intangible assets will be amortized over a 5
to 40 year period, resulting in an annual non-cash 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 nine months
ended September 30, 2000, contingent payments in connection with these
acquisitions were approximately $2.4 million in cash. The maximum amount of the
remaining potential earn-out payments is approximately $900,000 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.
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.
13
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 and
SFAS 138, 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In January 1997, Austin A. Iodice, who served as the Company's Chief
Executive Officer, President and Vice Chairman while the Company 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.
14
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.
Plaintiffs allege that they are entitled to an unspecified amount of
damages based upon the difference between the exercise price and highest market
price of the Company's Common Stock following the date of the purported exercise
of all options (which date has not been stipulated), plus costs and expenses.
They also claim entitlement to treble these damages under Connecticut law. The
plaintiffs have filed offers of judgment with the court for $6.0 million in the
aggregate, but such offers would not limit the amount of any judgment that could
be rendered in the case. The Company denies that it is liable to the
plaintiffs.
The parties attended a non-binding mediation conference in February 2000
but were unable to resolve their dispute. Settlement discussions since that
time have been unsuccessful. The Company is preparing for trial, which has been
scheduled to commence not earlier than the last week of November 2000, and
intends to defend itself vigorously at trial.
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 or financial condition of the
Company. The Company maintains general liability insurance, property insurance,
automobile insurance, employee benefit liability insurance, fidelity insurance
and directors' and officers' liability insurance. The Company is generally self-
insured with respect to workers' compensation, but maintains umbrella workers'
compensation coverage to limit its maximum exposure to such claims.
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.
27.1 Financial Data Schedule of COMFORCE Corporation and COMFORCE
Operating, Inc.
(b) Reports on Form 8-K.
None.
15
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/ Harry Maccarrone
--------------------------------------------
Harry Maccarrone, Executive Vice President
and Chief Financial Officer
Date: November 13, 2000
COMFORCE Operating, Inc.
By: /s/ Harry Maccarrone
--------------------------------------------
Harry Maccarrone, Executive Vice President
and Chief Financial Officer
Date: November 13, 2000
16