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 April 1, 2001
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 of (IRS Employer Identification No.)
incorporation or organization)
415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York 11797
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 437-3300
--------------
Not Applicable
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 2001
- -------------------------------- ---------------------------
Common stock, $.01 par value 16,659,099 shares
COMFORCE Corporation
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION................................................. 3
Item 1. Financial Statements.................................................. 3
Consolidated Balance Sheets at April 1, 2001 (unaudited)
and December 31, 2000............................................. 3
Consolidated Statements of Operations for the three
months ended April 1, 2001 and March 31, 2000 (unaudited)......... 4
Consolidated Statements of Cash Flows for the three
months ended April 1, 2001 and March 31, 2000 (unaudited)......... 5
Notes to Unaudited Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk............. 13
PART II OTHER INFORMATION..................................................... 13
Item 1. Legal Proceedings..................................................... 13
Item 2. Changes in Securities and Use of Proceeds............................. 13
Item 3. Defaults Upon Senior Securities (not applicable)...................... 13
Item 4. Submission of Matters to a Vote of Security Holders (not applicable).. 13
Item 5. Other Information (not applicable).................................... 13
Item 6. Exhibits and Reports on Form 8-K...................................... 14
SIGNATURES....................................................................... 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
April 1, December 31,
2001 2000
---------- ----------
ASSETS: (unaudited)
Current assets:
Cash and cash equivalents $ 4,965 $ 4,940
Accounts receivable, net 66,443 69,675
Funding and service fees receivable, net 46,788 49,392
Prepaid expenses and other current assets 2,951 3,467
Deferred income taxes 1,076 1,076
---------- ----------
Total current assets 122,223 128,550
Deferred income taxes, net 404 404
Property and equipment, net 12,412 12,050
Intangible assets, net 137,246 137,655
Deferred financing costs, net 4,037 4,755
---------- ----------
Total assets $276,322 $283,414
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 2,525 $ 5,373
Accrued expenses 42,921 34,235
---------- ----------
Total current liabilities 45,446 39,608
Long-term debt 179,964 197,421
Other liabilities 87 11
---------- ----------
Total liabilities $225,497 $237,040
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized; 16,659,062 shares
and 16,659,027 shares issued and outstanding at April 1, 2001 and December
31, 2000, respectively 167 167
Additional paid-in capital 49,581 49,149
Accumulated earnings (deficit) since January 1, 1996 1,077 (2,942)
---------- ----------
Total stockholders' equity 50,825 46,374
---------- ----------
Total liabilities and stockholders' equity $276,322 $283,414
========== ==========
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
April 1, 2001 March 31, 2000
------------- --------------
Revenue:
Net sales of services $123,352 $106,845
Costs and expenses:
Cost of services 96,880 85,795
Selling, general and administrative 17,759 15,242
Depreciation and amortization 1,918 1,809
------------- ---------------
Total costs and expenses 116,557 102,846
------------- ---------------
Operating income 6,795 3,999
------------- ---------------
Other income (expense):
Interest expense (5,693) (5,594)
Other income, net 2 53
------------- ---------------
(5,691) (5,541)
------------- ---------------
Income (loss) before income tax and extraordinary gain 1,104 (1,542)
Provision for income taxes 942 ---
------------- ---------------
Income (loss) before extraordinary gain 162 (1,542)
Gain on early debt extinguishment, net of taxes of $2,679 3,857 ---
------------- ---------------
Net Income (loss) $ 4,019 $ (1,542)
------------- ---------------
Basic income (loss) per common share:
Income (loss) before extraordinary gain $ 0.01 $ (0.09)
Extraordinary gain 0.23 ---
------------- ---------------
Net Income (loss) $ 0.24 $ (0.09)
============= ===============
Diluted income (loss) per common share:
Income (loss) before extraordinary gain $ 0.01 $ (0.09)
Extraordinary gain 0.23 ---
------------- ---------------
Net Income (loss) $ 0.24 $ (0.09)
============= ===============
Weighted average common shares outstanding, basic 16,659 16,426
============= ===============
Weighted average common shares outstanding, diluted 16,870 16,426
============= ===============
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
4
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months ended
April 1, March 31,
2001 2000
Cash flows from operating activities:
Net income (loss) $ 4,019 $ (1,542)
Adjustments to reconcile net income
to net cash provided
by operating activities:
Depreciation and amortization 1,918 1,809
Amortization of deferred financing fees 200 209
Allowance for doubtful accounts --- 8
Gain on repurchase of senior notes (2,237) ---
Gain on repurchase of PIK notes (1,620) ---
Changes in assets and liabilities, net of effects
of acquisitions of businesses:
Accounts receivable and funding service fees receivable 5,836 (2,177)
Prepaid expenses and other current assets 516 (475)
Accounts payable and accrued expenses 3,906 4,595
--------- ----------
Net cash provided by operating activities 12,538 2,427
--------- ----------
Cash flows from investing activities:
Purchases of property and equipment (1,201) (1,271)
Payments of contingent consideration (421) (1,501)
(Increase) in deferred costs and other assets (250) ---
Acquisition of Gerri G, net of cash acquired --- (781)
--------- ----------
Net cash (used) by investing activities (1,872) (3,553)
--------- ----------
Cash flows from financing activities:
Reduction of capital lease obligations (32) (79)
Net borrowings (repayments) under line of credit agreements 749 (2,569)
Repayment of Senior Notes and PIK Debentures (11,336) ---
Debt financing costs (22) ---
Proceeds from issuance of equity securities --- 39
--------- ----------
Net cash provided by financing activities (10,641) (2,609)
--------- ----------
Net increase (decrease) in cash and cash equivalents 25 (3,735)
Cash and cash equivalents at beginning of period 4,940 7,818
--------- ----------
Cash and cash equivalents at end of period $ 4,965 $ 4,083
========= ==========
Supplemental disclosures:
Cash paid for:
Interest $ 1,023 $ 831
Income taxes 326 976
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") and its subsidiaries, including COMFORCE
Operating, Inc. ("COI") (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, 2000. The results for the
three months ended April 1, 2001 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
and permanent placement services. This transaction is not material to the
Company.
3. DEBT
Long-term debt at April 1, 2001 and December 31, 2000 consisted of (in
thousands):
April 1, December 31,
2001 2000
-------- -----------
12% Senior Notes, due 2007 $ 87,000 $100,000
15% Senior Secured PIK Debentures,
due 2009 25,726 30,932
Revolving line of credit, due December 14, 2003,
with interest payable monthly at LIBOR plus
2.50%. At April 1, 2001, the
weighted average rate was 7.89% 67,238 66,489
-------- --------
Total long-term debt $179,964 $197,421
======== ========
During the first quarter, the Company repurchased $13.0 million principal
amount of its Senior Notes due 2007 (the "Senior Notes") and $5.2 million
principal amount of its 15% Senior Secured PIK Debentures due 2009 (the "PIK
Debentures") for a purchase price of $8.9 million and $2.5 million, respectively
(including accrued and unpaid interest of $340,000). The extraordinary gain
realized by these repurchases was $3.9 million, which includes the reduction of
$540,000 of deferred financing costs associated with the repurchases, net of tax
expense of $2.7 million.
4. CHANGE IN FISCAL YEAR
On March 22, 2001, the Company's Board of Directors adopted a resolution to
change the Company's fiscal year, which was previously a calendar year.
Beginning in 2001, the fiscal year will consist of the 52 or 53 weeks ending on
the last Sunday in December. Accordingly, the Company's current fiscal year
will end on Sunday, December 30, 2001.
6
5. EARNINGS PER SHARE
Basic income (loss) per common share is computed by dividing net income
(loss) 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 period ended April
1, 2001 and March 31, 2000 (in thousands):
Three Months Ended
April 1, March 31,
2001 2000
------- --------
Numerator:
Income (loss) before extraordinary gain $ 162 $(1,542)
Gain on early debt extinguishment, net of taxes 3,857 ---
------- -------
Net income (loss) $ 4,019 $(1,542)
======= =======
Denominator:
Weighted-average shares 16,659 16,426
Effect of dilutive securities:
Warrants and Employee stock options 211 ---
------- -------
Denominator for diluted income (loss) per share -
adjusted weighted average shares and assumed conversions 16,870 16,426
======= =======
Outstanding options and warrants to purchase shares of common stock,
representing approximately 3,100,000 shares of common stock, were not included
in the computations of diluted net income per share for the three months ended
April 1, 2001 because their effect would be anti-dilutive.
6. SETTLEMENT OF LITIGATION:
On November 30, 2000, immediately prior to a scheduled jury trial, the
Company settled its long-standing litigation with two former executives of the
Company, Austin Iodice and Anthony Giglio. Under the terms of settlement, the
Company agreed to pay to the plaintiffs $325,000 on January 2, 2001 (which
amount was paid on this date) and $300,000 on May 1, 2001 (which amount was paid
on this date) and to issue options to them to purchase 555,628 shares of common
stock in the aggregate at an exercise price of $0.6625 per share on January 2,
2001 (which options were issued as of this date).
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.
The Company has previously been reporting its results through two operating
segments -- Staff Augmentation and Financial Services. Principally as a result
of the development by the Company's PrO Unlimited(R) subsidiary of a business
offering web-enabled solutions for the procurement, tracking and engagement of
contingent labor, beginning with its annual report on Form 10-K for the year
ended December 31, 2000, the Company has been reporting its results through
three operating segments -- Staff Augmentation, Human Capital Management
Services and Financial Services.
Revenues and profits in the Staff Augmentation segment are generated by
providing supplemental staffing to
7
client companies, generally on a time-and-materials basis. In the IT field, the
Company provides highly skilled programmers, help desk personnel, systems
consultants and analysts, software engineers and project managers for a wide
range of technical assignments, including client server, mainframe, desktop
services, help desk and Internet/Intranet. In the telecom sector, the Company
provides skilled telecom personnel to plan, design, engineer, install and
maintain wireless and wireline telecommunications systems, including cellular,
PCS, microwave, radio, satellite and other networks. In addition, the Company
provides a broad range of other staffing services to its customers in the Staff
Augmentation segment, including laboratory support (through the Company's
Labforce(R) division), medical office support, professional, scientific,
clerical and call center staffing.
Revenues and profits in the Human Capital Management segment are generated
through consulting and payrolling services to its clients. Through its PrO
Unlimited subsidiary, the Company provides end-to-end web-enabled solutions for
the effective procurement, tracking and engagement of contingent or non-employee
labor. The contingent labor force consists of independent contractors,
temporary workers, consultants, returning retirees and freelancers.
Revenues and profits in the Financial Services segment are generated
through contracts for payrolling, funding and outsourcing services to its
clients. In this segment, the Company processes payrolls, prepares reports,
pays payroll taxes and prepares and files tax returns for the contingent
personnel employed by independent staffing firms. The Company also purchases
the accounts receivable of independent staffing firms and receives payments
directly from these firms' 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, 2000. The
Company evaluates the performance of its segments and allocates resources to
them based on operating contribution, which represents segment revenues less
direct costs of operations, excluding the allocation of corporate general and
administrative expenses. Assets of the operating segments reflect primarily net
accounts receivable associated with segment activities; all other assets are
included as corporate assets. The Company does not track expenditures for long-
lived assets on a segment basis.
The table below presents information on the revenues and operating
contribution for each segment for the three months ended April 1, 2001 and March
31, 2000, and items which reconcile segment operating contribution to the
Company's reported pre-tax income (loss) (in thousands).
Three months ended
April 1, March 31,
2001 2000
-------- --------
Net sales of services:
Staff Augmentation $ 87,363 $ 74,104
Human Capital Management Services 32,697 30,082
Financial Services 3,292 2,659
-------- --------
$123,352 $106,845
======== ========
Operating contribution:
Staff Augmentation $ 10,138 $ 6,713
Human Capital Management Services 431 1,424
Financial Services 2,596 1,945
-------- --------
13,165 10,082
-------- --------
Consolidated expenses:
Interest, net 5,691 5,541
Depreciation and amortization 1,918 1,809
Corporate general and administrative expenses 4,452 4,274
-------- --------
12,061 11,624
-------- --------
Income (loss) before income tax and extraordinary gain $ 1,104 $ (1,542)
======== ========
8
At April 1, At December 31,
2001 2000
-------- --------
Total assets:
Staff Augmentation $ 51,304 $ 51,849
Human Capital Management Services 15,139 17,826
Financial Services 46,788 49,392
Corporate 163,091 164,347
-------- --------
$276,322 $283,414
======== ========
8. ACCOUNTING AND DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, the Company adopted Statement of Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." However, since the Company does not have any derivatives and does
not engage in hedging activities, the adoption of SFAS No. 133 had no impact on
the Company's consolidated financial statements.
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") and its subsidiaries, including COMFORCE Operating,
Inc. ("COI") (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 facility to fund current operations.
The Company had been reporting its results through two operating segments
- -- Staff Augmentation and Financial Services. Principally as a result of the
development by the Company's PrO Unlimited subsidiary of a business offering
web-enabled solutions for the procurement, tracking and engagement of contingent
labor, the Company has determined to begin reporting its results through three
operating segments -- Staff Augmentation, Human Capital Management Services and
Financial Services. The Staff Augmentation segment provides information
technology (IT), telecom and other staffing services. The Human Capital
Management Services segment provides contingent workforce management services.
The Financial Services segment provides payroll, funding and outsourcing
services to independent consulting and staffing companies.
Recent Developments
Set forth below is a description of certain recent developments. This
information was previously reported in the Company's annual report on Form 10-K
for the year ended December 31, 2000.
Change in Fiscal Year
On March 22, 2001, the Company's Board of Directors adopted a resolution to
change the Company's fiscal year, which was previously a calendar year.
Beginning in 2001, the fiscal year will consist of the 52 or 53 weeks ending on
the last Sunday in December. Accordingly, the Company's current fiscal year
will end on Sunday, December 30, 2001.
9
Repurchase of Senior Notes and PIK Debentures
As part of its strategy to reduce its higher interest rate debt and improve
its balance sheet, on February 28, 2001, the Company completed the repurchase of
$11.0 million principal amount of its Senior Notes due 2007 (the "Senior Notes")
for $7.5 million and on March 5, 2001, the Company completed the repurchase of
an additional $2.0 million of Senior Notes for $1.4 million, the repurchase
prices of which were paid from lower interest rate borrowings under the
Company's revolving credit facility agented by IBJ Whitehall Business Credit
Corporation (the "IBJ Credit Facility"). In addition, on March 5, 2001, the
Company entered into an amendment of the IBJ Credit Facility to permit
borrowings thereunder to repurchase the Company's 15% Senior Secured PIK
Debentures due 2009 (the "PIK Debentures") under certain circumstances. As
amended, the IBJ Credit Facility permits the use of up to $16.5 million in loan
proceeds to pay the aggregate repurchase prices of Senior Notes and PIK
Debentures and costs associated therewith (including related tax expenses), not
more than $9.0 million of which may be used to pay the repurchase price of PIK
Debentures and such associated costs. On March 6, 2001, the Company completed
the repurchase of $5.2 million principal amount of PIK Debentures for $2.5
million using lower interest rate borrowings under the IBJ Credit Facility.
Prior thereto, during the third quarter of 2000, the Company repurchased $10.0
million principal amount of the Senior Notes for a purchase price of $5.1
million, the repurchase price of which was paid from lower interest rate
borrowings under the now retired Heller Credit Facility.
Results of Operations
Quarter Ended April 1, 2001 Compared to Quarter Ended March 31, 2000
Net sales of services for the three months ended April 1, 2001 were $123.4
million, an increase of 15.4% from net sales of services for the three months
ended March 31, 2000 of $106.8 million. The increase in net sales of services
for the first quarter of 2001 is attributable to higher sales in each of the
Company's three operating segments -- Human Capital Management Services, Staff
Augmentation, and Financial Services. This increase was principally driven by
higher sales to information technology and telecom customers in the Staff
Augmentation segment and to an increased client base in the Financial Services
segment.
Cost of services for the three months ended April 1, 2001 was 78.5% of net
sales of services as compared to cost of services of 80.3% for the three months
ended March 31, 2000. The cost of services decreased as a percentage of net
sales for the first quarter of 2001 as compared to the first quarter of 2000 as
a result of the continued strategies undertaken by management to increase
margins throughout the Company.
Selling, general and administrative expenses as a percentage of net sales
of services were 14.4% for the three months ended April 1, 2001, compared to
14.3% for the three months ended March 31, 2000. This increase resulted
principally from higher payroll and recruiting costs with respect to non-
billable staff and investments to expand the infrastructure for the Company's
Human Capital Management Services segment.
Operating income for the three months ended April 1, 2001 was $6.8 million
as compared to operating income of $4.0 million for the three months ended March
31, 2000. This 70.0% increase in operating income for the first quarter of 2001
resulted principally from an increase in sales and corresponding gross margin,
partially offset by higher selling, general and administrative expenses and an
increase in depreciation and amortization.
The Company's interest expense for the quarter ended April 1, 2001 and
March 31, 2000 is attributable to the interest on the Company's credit facility
with Heller Financial, Inc. (the "Heller Credit Facility"), which had been
retired in 2000, and with the IBJ Credit Facility, the Senior Notes and the PIK
Debentures. During the first quarter of 2001, the Company repurchased $13.0
million principal amount of Senior Notes for $8.9 million and $5.2 million
principal amount of PIK Debentures for $2.5 million (including accrued and
unpaid interest of $340,000), the repurchase prices of which were paid from
lower interest rate borrowings under the IBJ Credit Facility. The
extraordinary gain that was realized by these repurchases was $3.9 million,
which includes the reduction of $540,000 of deferred financing costs
associated with the repurchases net of tax expense of $2.7 million. See
"Financial Condition, Liquidity and Capital Resources" in this Item 2.
The IBJ Credit Facility was entered into in December 2000 to repay the
Heller Credit Facility and provide the Company additional borrowing
availability. The Heller Credit Facility as well as the financings evidenced by
the Senior
10
Notes and PIK Debentures were incurred in 1997, principally in connection with
the funding of business acquisitions. The interest expense is higher in the
first quarter of 2001 due to increased borrowings under the IBJ Credit Facility
as compared to the borrowings under the Heller Credit Facility in the first
quarter of 2000, partially offset by the reduction of Senior Notes and PIK
Debentures through the repurchases described above as well as the repurchase of
$10.0 million principal amount of Senior Notes during the third quarter of 2000.
The income tax provision for the three months ended April 1, 2001 was
$942,000 on income before taxes and extraordinary gain of $1.1 million. No tax
recovery was recognized for the three months ended March 31, 2000 since its
realization in future periods was not then determinable. 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.
Management of the Company believes that cash flow from operations and funds
anticipated to be available under the IBJ Credit Facility will be sufficient to
service the Company's indebtedness and to meet anticipated working capital
requirements for the foreseeable future.
During the three months ended April 1, 2001, the Company's primary sources
of funds to meet working capital needs were from borrowings under the IBJ Credit
Facility. Cash and cash equivalents increased $25,000 during the three months
ended April 1, 2001. Cash flows provided by operating activities of $12.5
million exceeded cash flows used in financing activities of $10.6 million and
cash flows used in investing activities of $1.9 million.
As of April 1, 2001, the Company had outstanding $67.2 million in principal
amount under the IBJ Credit Facility bearing interest at an average rate of
7.89% per annum. In addition, as of April 1, 2001, the Company had outstanding
$25.7 million in principal amount of PIK Debentures bearing interest at a rate
of 15%, and $87.0 million in principal amount of Senior 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 December 2000, the Company entered into the IBJ Credit Facility to
provide greater borrowing availability. The maximum availability of $100.0
million was increased to $110.0 million in January 2001 when additional lending
institutions requested to join the loan syndicate. The IBJ Credit Facility was
further amended in March 2001 to permit the Company to use certain borrowed
funds to repurchase PIK Debentures (in addition to Senior Notes, the repurchase
of which was previously permitted).
The Company continues to examine strategies to reduce its higher interest
rate debt and improve its balance sheet. These strategies include, but are not
limited to, repurchasing Senior Notes or PIK Debentures through public market
purchases or privately negotiated transactions or exchanging Senior Notes or PIK
Debentures for other securities of the Company. As part of this strategy, in
the first quarter of 2001, the Company repurchased $13.0 million principal
amount of Senior Notes for $8.9 million and $5.2 million principal amount of PIK
Debentures for $2.5 million, the repurchase prices of which were paid from lower
interest rate borrowings under the IBJ Credit Facility. The IBJ Credit Facility
permits the use of up to $16.5 million in loan proceeds to pay the aggregate
repurchase prices of Senior Notes and PIK Debentures and costs associated
therewith (including related tax expenses), not more than $9.0 million of which
may be used to pay the repurchase price of PIK Debentures and such associated
costs. In the case of each repurchase to date, the Company has incurred tax
liabilities for the forgiveness of indebtedness as a result of its repurchase of
Senior Notes or PIK Debentures for consideration that is less than par.
Subsequent to these purchases, management believes the remaining availability
under the credit facility is sufficient to service the Company's indebtedness
and to meet anticipated
11
working capital requirements in the foreseeable future.
Substantially all of the consolidated net assets of the Company are assets
of COI and all of the net income which has been generated by Company through
April 1, 2001 is net income attributable to the operations of COI. Accordingly,
except for permitted distributions, these assets and net income are restricted
as to their use by COMFORCE. The indenture governing the Senior Notes imposes
restrictions on COI making specified payments, which are referred to as
"restricted payments," including making distributions or paying dividends
(referred to as upstreaming funds) to COMFORCE. Under the indenture, COI is not
permitted to make cash distributions to COMFORCE other than (1) to upstream $2.0
million annually ($1.25 million annually prior to 2000) to pay public company
expenses, (2) to upstream up to $10.0 million to pay income tax related to
deemed forgiveness of PIK Debentures to facilitate the purchase or exchange by
COMFORCE of PIK Debentures at less than par, (3) under certain circumstances in
connection with a disposition of assets, to upstream proceeds therefrom to repay
the PIK Debentures, and (4) to upstream funds to the extent COI meets the
restricted payments test under the indenture.
Through December 1, 2002, interest under the PIK Debentures is payable, at
the option of COMFORCE, in cash or in kind through the issuance of additional
PIK Debentures. To date, COMFORCE has paid all interest in kind. Beginning
with the interest payment due June 1, 2003, COMFORCE will be required to pay
interest on the PIK Debentures in cash. Its ability to do so will be dependent
on the ability of COI to upstream funds for this purpose under the restricted
payments test. In addition, COMFORCE's ability to repay the PIK Debentures at
their maturity on December 1, 2009 or on any earlier required repayment or
repurchase date will also be dependent on the ability of COI to upstream funds
for this purpose under the restricted payments test, unless COMFORCE separately
obtains a loan or sells its capital stock or other securities to provide funds
for this purpose.
As of April 1, 2001, approximately $137.2 million, or 49.7%, 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 agreements to make earn-out payments
to the sellers of companies acquired by the Company and to sellers of franchised
businesses repurchased by the Company, subject to the sellers meeting specified
contractual requirements. The maximum amount of the remaining potential earn-
out payments is approximately $675,000 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 or franchised businesses 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 engineer-related, IT and telecom staffing services has
historically been lower during the second half of the fourth quarter through the
following first quarter, and, generally, shows gradual improvement until the
second half of the fourth quarter. The Company believes that the effects of
seasonality will be less severe in the future if sales of its niche, human
capital management and financial service products continue to increase as a
percentage of the Company's consolidated net sales of services.
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 potentially
diminished ability to obtain additional financing for capital expenditures or
for other purposes; 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
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required to write-off the impaired assets, which could have a material adverse
impact on its financial condition and results of operations; or, if COI does not
generate sufficient consolidated net income or have other funds available to
upstream to COMFORCE under the restricted payments test of the Senior Notes
indenture in order for it to pay cash interest on the PIK Debentures (which is
required beginning June 1, 2003) or to repay the PIK Debentures at their
maturity on December 1, 2009 or on any earlier required repayment or repurchase
date, then, unless COMFORCE obtains a loan or sells its capital stock or other
securities to provide funds for this purpose, the Company will default under the
indentures governing the PIK Debentures and the Senior Notes and under the IBJ
Credit Facility. 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 December 21, 2000 (Registration No. 333-52356). 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, 2000.
There has been no material change in the disclosure regarding market risk.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Since the date of the filing of the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, there have been no material new legal
proceedings involving the Company or any material developments to the
proceedings described in such 10-K.
Item 2. Changes in Securities and Use of Proceeds.
Effective as of January 2, 2001, the Company issued options to Austin A.
Iodice and Anthony Giglio to purchase 555,628 shares of the Company's common
stock in the aggregate at an exercise price of $0.6625 per share. These options
are exercisable until March 15, 2006. The options were issued to Messrs. Iodice
and Giglio under the terms of an agreement to settle a lawsuit among the
parties. The Company received no cash consideration for the options. The
Company issued the options in reliance upon the exemption afforded by Section
4(2) of the Securities Act of 1933. The shares of common stock issuable upon
exercise of the options were registered for resale in a Registration Statement
on Form S-3 (Registration No. 333-52356) that became effective on January 10,
2001.
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.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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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: May 11, 2001
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