SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 5, 1997
Common stock, $.01 par value 13,259,025
<PAGE>
COMFORCE CORPORATION
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION 1
Item 1. Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 1
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1997
and March 31, 1996 3
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the three months ended
March 31, 1997 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1997
and March 31, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 4,654 $ 3,608
Restricted cash 1,000 --
Accounts receivable, net of allowance of
doubtful accounts of $423 in 1997
and $213 in 1996 25,465 12,042
Prepaid expenses 1,086 243
Deferred income tax 1,639 278
Deferred financing fees 2,436 --
Other 493 373
------- -------
Total current assets 36,773 16,544
------- -------
Property, plant and equipment 1,652 890
Less: accumulated depreciation and
amortization 212 146
------- -------
1,440 744
------- -------
Other assets:
Excess of cost over net assets acquired,
net of accumulated amortization of $787
in 1997 and $526 in 1996 39,223 24,756
Other 134 1,322
------- -------
39,357 26,078
------- -------
$77,570 $43,366
======= =======
The accompanying notes are an integral part of the
condensed consolidated financial statements.
1
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1997 1996
---- ----
(unaudited)
<S> <C> <C>
LIABILITIES
Current liabilities:
Borrowings under revolving line of credit $ 6,328 $ 3,850
Accounts payable 1,957 1,398
Accrued expenses 7,502 1,961
Payroll tax liabilities 3,495 969
Income taxes 275 354
Short-term debt 25,163 --
------- -------
Total current liabilities 44,720 8,532
------- -------
Deferred income tax 90 90
Other liabilities 868 --
------- -------
Total liabilities 45,678 8,622
------- -------
Commitments and contingencies
Common stock subject to redemption 4,600 --
STOCKHOLDERS' EQUITY
6% Series D convertible preferred stock, $.01 par value; 15,000 authorized,
6,480 issued and outstanding in 1997, and 7,002 shares issued and outstanding in
1996. Liquidation value of $1,000 per share ($6,480,000) 1 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, 12,873,434 issued
and outstanding in 1997 and 12,701,934 issued
and outstanding in 1996 129 127
Additional paid-in capital 27,035 34,253
Retained earnings since January 1, 1996 126 362
------- -------
27,292 34,744
------- -------
$77,570 $43,366
======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
2
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues $ 35,808 $ 3,265
-------- --------
Costs and expenses:
Cost of revenues 31,086 2,452
Selling, general and administrative 3,060 568
Depreciation and amortization 341 77
-------- --------
34,487 3,097
-------- --------
Operating income 1,321 168
-------- --------
Interest expense:
Bridge financing costs (1,418) --
Other interest, net of interest income (291) (1)
Other income 344 3
-------- --------
(1,365) 2
-------- --------
Earnings (loss) before income taxes (44) 170
Provision for income taxes (58) (70)
-------- --------
Net income (loss) (102) 100
Dividends on preferred stock 134 --
-------- --------
Income (loss) available to common stockholders ($ 236) $ 100
======== ========
Earnings (loss) per share ($ 0.02) $ 0.01
-------- --------
Net earnings (loss) ($ 0.02) $ 0.01
======== ========
Weighted average number of shares of common stock and
common stock equivalents outstanding 12,776 10,884
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Series D Series F
Common Stock Preferred Stock Preferred Stock
------------ --------------- ---------------
Shares Dollars Shares Dollars Shares Dollars
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 12,701,934 $ 127 7,002 $ 1 3,250 $ 1
Exercise of stock options 118,000 1 -- -- -- --
Exercise of stock warrants 10,000 -- -- -- -- --
Redemption of Series F
preferred stock -- -- -- -- (2,750) --
Conversion of Series D
preferred stock 43,500 1 (522) -- -- --
SEC Registration fees -- -- -- -- -- --
Issuance of warrants in
connection with debt
placement -- -- -- -- -- --
Reclassification of common -- -- -- -- -- --
stock subject to redemption
Net earnings -- -- -- -- -- --
Dividends: -- -- -- -- -- --
Series D preferred stock -- -- -- -- -- --
Series F preferred stock -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
12,873,434 $ 129 6,480 $ 1 500 $ 1
=========== =========== =========== =========== =========== ===========
<CAPTION>
Retained
Earnings Total
Additional Since Stock-
Paid-in January 1, holders'
Capital 1996 Equity
------- ---- ------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 34,253 $ 362 $ 34,744
Exercise of stock options 131 -- 132
Exercise of stock warrants 21 -- 21
Redemption of Series F
preferred stock (3,162) -- (3,162)
Conversion of Series D
preferred stock -- -- 1
SEC Registration fees (196) -- (196)
Issuance of warrants in
connection with debt
placement 588 -- 588
Reclassification of common (4,600) -- (4,600)
stock subject to redemption
Net earnings -- (102) (102)
Dividends: -- -- --
Series D preferred stock -- (102) (102)
Series F preferred stock -- (32) (32)
-------- -------- --------
$ 27,035 $ 126 $ 27,292
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Net cash flows used by operating activities $ (1,146) $ (216)
------- ------
Cash flows from investing activities:
Acquisition payments, net of cash acquired (14,178) (2,086)
Officer loans -- (38)
Restricted cash (1,000) --
Additions to property, plant and equipment (247) (6)
------- ------
Net cash flows (used by) from investing activities (15,425) (2,130)
------- ------
Cash flows from financing activities:
Proceeds from revolving line of credit 8,336 1,900
Repayment on line of credit (11,141) --
Proceeds from short-term debt 20,628 --
Proceeds from exercise of stock options 131 22
Proceeds from exercise of warrants 21 --
Payments of registration costs (196) --
Dividends paid (162) --
------- ------
Net cash flows from financing activities 17,617 1,922
------- ------
Increase (decrease) in cash and cash equivalents 1,046 (424)
Cash and equivalents, beginning of period 3,608 649
------- ------
Cash and equivalents, end of period $ 4,654 $ 225
======= ======
Supplemental cash flow information: Cash paid during the period for:
Interest $ 120 $ 1
Income taxes paid 71 --
Supplemental schedule of noncash investing and financing activities:
Quasi-reorganization -- (93,848)
Issuance of short-term debt to redeem Series F preferred stock 3,162 --
Accrued dividends 68 --
Amounts assumed by ARTRA -- 909
Warrants issued in connection with the sale of convertible debentures 488 --
Warrants issued in connection with short-term loan 100 --
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE>
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 convertible debentures. See Note 4. RHO provides specialists
primarily in the technical services and IT sectors.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
The following unaudited pro forma summary presents the consolidated results of
operations (in thousands, except per share data) as if the RHO acquisition has
occurred on January 1, 1996 and does not purport to be an indication of what
would have occurred had the acquisition been made as of that date or of results
which may occur in the future.
Three Months Ended
March 31,
--------------------------
1997 1996
-------- --------
(Unaudited)
Revenue $ 50,118 $ 23,715
Net loss from operations $ (934) $ (137)
======== ========
Net loss per share $ (0.07) $ (0.01)
======== ========
The above pro forma data assumes the issuance of $15.0 million of short term
debt to finance the RHO acquisition. Pro forma adjustments include an interest
cost increase of $95,000 in 1997 and $112,000 in 1996, additional goodwill
amortization of $62,000 and $89,000 in the 1997 and 1996 periods, respectively,
and the related income tax effect.
4. DEBT
At March 31, 1997, notes payable and long-term debt (in thousands) consisted of:
March 31, December 31,
1997 1996
--------- ------------
Outstanding debt
Revolving line of credit, due in July 1997,
with interest payable monthly at the bank's
prime rate. At March 31, 1997,
the bank's prime rate was 8.25% $ 6,328 $ 3,850
Convertible Debt 25,163 --
------- -------
$31,491 $ 3,850
======= =======
The revolving line of credit agreement allows for borrowings up to a maximum of
$7.5 million. Borrowings against the line cannot exceed 80% of eligible
receivables, as defined. The borrowing is collateralized by accounts receivable
and other assets of RHO. As of March 31, 1997, the Company was not in compliance
with certain loan covenants and had received waivers of compliance with these
covenants.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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"). The Debentures bear
interest at the rate of 8% per annum during the 180 day period following each
Closing Date and thereafter at the rate of 10% per annum continuing until fully
paid or converted. Interest on the Debentures is payable quarterly in cash or in
common stock of the Company, at the Company's option.
The Debentures may be redeemed by the Company in whole or in part at any time
from issuance through 360 days after any Closing Date at a redemption price
equal to the sum of (i) the principal amount thereof, (ii) all accrued, unpaid
interest thereon, and (iii) premiums ranging from 5% (2.5% in the case of
Debentures exchanged for Series F Preferred Stock) for Debentures redeemed
within 60 days after any Closing Date and increasing up to 25% for Debentures
redeemed between 181 and 360 days after any Closing Date. The Company is
currently seeking long-term financing to redeem these Debentures and to provide
capital for continued expansion of its operations.
In addition, the Debentures may be converted, in whole or in part, at the option
of the holder beginning 181 days following each Closing Date. If any holder
elects to convert Debentures, the Company has the option to effect the requested
conversion in either cash or in shares of the Company's common stock, or in any
combination thereof. Cash conversions are payable at 125% of face value (plus
accrued interest). Stock conversions are payable at 100% of face value (plus
accrued interest) in common stock valued at 75% of the average closing bid price
for the five trading days ending on the trading day before the conversion. Any
portion of any Debenture which remains outstanding on the 360th day following
the applicable Closing Date will be automatically converted to cash or shares of
common stock, or any combination thereof, as determined by the Company. Under
certain circumstances, the aggregate number of shares of common stock issuable
is limited, which could require that the Company effect certain conversions
through cash payments.
From February 27 to March 21, 1997, the Company issued three year warrants
("Warrants") to purchase up to 504,000 shares of its Company's common stock at
exercise prices ranging from $6.85 to $7.65 per share. Warrants to purchase
201,600 shares of common stock with a value of $488,000 have vested and will
become exercisable six months after each Closing Date (each an "Exercise Date").
Warrants to purchase the remaining 302,400 shares of common stock will vest in
one-third increments (and become exercisable on the respective Exercise Dates)
if the Debentures are not repaid within 90, 120 and 150 days after the Closing
Dates. The Company also issued additional three year warrants ("Additional
Warrants") to purchase 504,000 shares of the Company's common stock, which
Additional Warrants will vest (and become exercisable on the respective Exercise
Dates) if the Debentures are not redeemed within 180 days following the Closing
Dates. The Additional Warrants will have an exercise price equal to the average
closing price of the Company's common stock over the five-day trading period
ending 179 days after the respective Closing Dates.
5. EQUITY
In January 1997, 63,000 stock options were exercised at an average price of
$1.125.
In January 1997, 10,000 warrants were exercised at an average price of $2.062.
In February 1997, 55,000 stock options were exercised at an average price of
$1.125.
8
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
In February and March 1997, the Company issued 201,600 warrants in connection
with the sale of the Debentures with a value of $488,000.
In February 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).
On February 28, 1997, the Company issued 100,000 warrants with a value of
$100,000 in connection with a short-term loan made to the Company.
In March 1997, 522 shares of Series D Preferred Stock were converted into 43,500
shares of common stock at price of $12 per share.
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 equivalents for this calculation.
The shares of Series D Preferred Stock are not considered common stock
equivalents and are excluded from primary earnings per share. The dividends of
$102,000 accrued or paid on the Series D Preferred Stock and the dividends of
$32,000 accrued or paid on the Series F Preferred Stock have been deducted for
computing earnings available to common stockholders. For the period ended March
31, 1997, common stock equivalents have not been included in this calculation as
their effect is anti-dilutive. For the period ended March 31, 1996, fully
diluted earnings per share have not been presented as the result is
anti-dilutive or does not differ from primary earnings per share.
Primary earnings per share is calculated as follows (in thousands):
1997 1996
-------- --------
Earnings (loss) available for common stockholders ($ 236) $ 100
======== ========
Weighted average number of shares outstanding for the
period 12,776 9,310
Dilutive effect of common stock equivalents -- 1,574
-------- --------
12,776 10,884
======== ========
Primary earnings (loss) per share ($ 0.02) $ 0.01
======== ========
7. INCOME TAXES
In the first quarter of 1997 and 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.
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
9
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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
10
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
located any current or former employees who have advised, that the Company
deposited hazardous substances at the 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, 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 $2 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
$69,000 in fees during 1997 for tax-related advisory services.
10. SUBSEQUENT EVENTS
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.
11
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 at a purchase price of
$10.00 per share, payable in cash, subject to adjustment based on payments 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, 1997, the
investors elected to exercise the first put option. As a result of the Company's
satisfaction of the payment right through its issuance of shares of common stock
as of April 1, 1997, the number of shares the Company is required to repurchase
has been increased by 40,391 shares. Consequently, the Company is repurchasing
155,391 shares of its common stock for $1,150,000.
12
<PAGE>
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. The matters
discussed below and elsewhere in this Report contain forward looking statements
that involve risks and uncertainties, many of which may be beyond the Company's
control.
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, 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 March 31, 1997 Compared to Three Months Ended March 31, 1996
Revenues of $35.8 million for the three months ended March 31, 1997 were $32.5
million, or 997% higher than revenues for the three months ended March 31, 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 telecommunications and information technology sectors which are
served by the Company.
Cost of revenues of the three months ended March 31, 1997 was 86.8% of revenues
compared to cost of revenues of 75.1% for the three months ended March 31, 1996.
The 1997 cost of revenues increase of 11.7% is a result of the Company's
expansion into more mature technical staffing markets.
13
<PAGE>
Selling, general and administrative expenses as a percentage of revenue was 8.5%
for the three months ended March 31, 1997, compared to 17.4% for the three
months ended March 31, 1996. The decrease of 8.9% is attributable to the
acquisitions completed during 1996 and 1997 which contributed greater revenue
with lower incremental selling, general and administrative costs.
Operating income for the three months ended March 31, 1997 was $1.3 million,
compared to operating income of $168,000 for the three months ended March 31,
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 March 31, 1997 is
attributable principally to 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 income tax provision for the three months ended March 31, 1997 was $58,000
on a loss before income taxes of $44,000, compared to taxes of $70,000 on pretax
income of $170,000 for the three months ended March 31, 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.
Financial Condition, Liquidity and Capital Resources
During the first quarter 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 (the "U.S. Bank Credit Facility") entered into in February
1997 which provides for up to $7.5 million in availability. A portion of the
proceeds from the Debenture offering was used to retire the Company's $10.0
million credit facility with The Chase Manhattan Bank.
The Company is presently seeking to obtain a credit facility providing for term
loan and revolving credit availability of from $50 million to $75 million to
fund additional acquisitions, to retire the U.S. Bank Credit Facility (which
matures in July 1997) and to finance future working capital needs. In respect of
its working capital requirements, 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 such a replacement credit facility will be sufficient
to meet its anticipated level of business activity in 1997. However, the Company
can give no assurance that such a credit facility will be available or, if
available, that it will be available on terms acceptable to the Company.
Although management believes that the funds provided by operations, the U.S.
Bank Credit Facility and funds remaining under the $25.2 million placement of
Debentures will be sufficient to meet its present working capital requirements
through July 1997, the Company's inability to obtain a new credit facility could
require the Company to delay, scale back or eliminate all or some of its market
development and acquisition projects and could have a material adverse effect on
the Company's business, financial condition and results of operations.
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. The maximum amount of these
potential earn-out payments is $717,000 in cash payable in 1997 and $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.
14
<PAGE>
Cash and cash equivalents increased $1.0 million during the three months ended
March 31, 1997. During the first quarter of 1997, cash flows of $17.6 million
provided by financing activities exceeded cash flows of $1.2 million used in
operating activities and cash flows of $15.4 million used by investing
activities. 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 attributable
to net proceeds available to the Company in connection with its sale of $25.2
million of Debentures and net borrowings under the U.S. Bank Credit Facility.
As of March 31, 1997, approximately $39.2 million, or 51%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.
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.
15
<PAGE>
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 January 13, 1997, the Company filed Amendment No. 2 to a Current Report
on Form 8-K/A to amend the financial statements of the acquired business
filed in connection with the Force Five acquisition.
On January 13, 1997, the Company filed Amendment No. 1 to a Current Report
on Form 8-K/A to include the financial statements and the pro forma
financial statements required in connection with the AZATAR acquisition.
On January 13, 1997, the Company filed Amendment No. 1 to a Current Report
on Form 8-K/A to include the financial statements and the pro forma
financial statements required in connection with the RHO definitive
agreement and the Continental acquisition.
On February 3, 1997, the Company filed Amendment No. 2 to a Current Report
on Form 8-K/A to amend the pro forma financial statements filed in
connection with the AZATAR acquisition.
On February 4, 1997, the Company filed Amendment No. 3 to a Current Report
on Form 8-K/A to amend the financial statements of the acquired business
filed in connection with the RRA acquisition.
On February 4, 1997, the Company filed Amendment No. 2 to a Current Report
on Form 8-K/A to amend the pro forma financial statements filed in
connection with the RHO definitive agreement and Continental acquisition.
On March 14, 1997, the Company filed a Current Report on Form 8-K to report
the completion of the RHO acquisition, changes in management and the
offering of debentures in a private placement.
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.
16
<PAGE>
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: May 15, 1997 /s/ PAUL J. GRILLO
--------------------------------
Vice President/Finance
Chief Financial Officer
17
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