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, 1998
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)
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 11, 1998
- - ---------------------------------------- ---------------------------
COMFORCE Corporation:
Common stock, $.01 par value 15,753,747 shares
COMFORCE Operating, Inc.:
Common stock, $.01 par value 100 shares (all owned by
COMFORCE Corporation)
<PAGE>
COMFORCE Corporation and
COMFORCE Operating, Inc.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 1-2
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1998
and March 31, 1997 3
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1998
and March 31, 1997 4
Notes to Condensed Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
1998 1997
-------- --------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 1,853 $ 6,512
Restricted cash 1,039 1,036
Accounts receivable, net 85,767 73,116
Prepaid expenses 2,068 793
Other assets 2,780 5,755
Deferred income tax 2,939 1,710
-------- --------
Total current assets 96,446 88,922
-------- --------
Property and equipment, net 5,727 4,271
Intangible assets, net 139,455 134,687
Deferred financing costs 5,803 5,790
Other assets 2,630 2,515
-------- --------
Total assets $250,061 $236,185
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, Continued
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ 4,597 $ 5,038
Accounts payable 5,142 4,954
Accrued expenses 32,273 19,647
--------- ---------
Total current liabilities 42,012 29,639
--------- ---------
Long-term debt 166,000 166,000
Other liabilities 1,088 1,144
--------- ---------
Total liabilities 209,100 196,783
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Series F convertible preferred stock, $.01 par value;
10,000 shares authorized, 500 shares issued and
outstanding; liquidation value of $1,000 per share
($500,000) 1 1
Common stock, $.01 par value; 100,000,000 shares
authorized; 15,647,947 shares issued and outstanding
in 1998 and 15,344,247 shares issued and outstanding
in 1997 156 153
Additional paid-in capital 45,342 43,323
Accumulated (deficit) since January 1, 1996 (4,538) (4,075)
--------- ---------
Total stockholders' equity 40,961 39,402
--------- ---------
Total liabilities and stockholders' equity $ 250,061 $ 236,185
========= =========
</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)
Three Months Ended March 31,
----------------------------
1998 1997
--------- ---------
(unaudited)
Revenue:
Net sales of services $ 112,007 $ 35,808
--------- ---------
Costs and expenses:
Cost of services 91,706 31,086
Selling, general and administrative 13,949 3,060
Depreciation and amortization 1,337 341
--------- ---------
Total costs and expenses 106,992 34,487
--------- ---------
Operating income 5,015 1,321
--------- ---------
Other income (expense):
Bridge and financing charges -- (1,418)
Interest expense (5,159) (291)
Other income net 16 344
--------- ---------
(5,143) (1,365)
--------- ---------
Loss before income taxes (128) (44)
Provision for income taxes (329) (58)
--------- ---------
Net loss (457) (102)
Dividends on preferred stock 6 134
--------- ---------
Loss applicable to
common stockholders $ (463) $ (236)
--------- ---------
Basic and diluted income (loss) per common share $ (0.03) $ (0.02)
========= =========
Basic and diluted weighted average shares 15,544 12,776
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Net cash flows provided by (used in) operating activities $ 2,064 $ (1,146)
-------- --------
Cash flows from investing activities:
Acquisition payments, net of cash acquired (3,574) (14,178)
Restricted cash (1,000)
Increase in other assets (871)
Additions to property, plant and equipment (1,693) (247)
-------- --------
Net cash flows (used in) investing activities (6,138) (15,425)
-------- --------
Cash flows from financing activities:
Proceeds from revolving lines of credit 10,526 8,336
Repayment on revolving lines of credit (11,170) (11,141)
Proceeds from short-term debt 20,628
Principal payments on capital lease obligations (50) --
Proceeds from exercise of stock options 15 131
Proceeds from exercise of warrants 118 21
Payment of registration costs (11) (196)
Dividends paid (13) (162)
-------- --------
Net cash flows (used in) financing activities (585) 17,617
-------- --------
(Decrease) increase in cash and cash equivalents (4,659) 1,046
Cash and equivalents, beginning of period 6,512 3,608
-------- --------
Cash and equivalents, end of period $ 1,853 $ 14,654
======== ========
Supplemental cash flow information: Cash paid during the period for:
Interest $ 930 $ 120
Income taxes paid 44 71
Supplemental schedule of noncash investing and financing activities:
Issuance of short-term debt to redeem Series F preferred stock 3,162
Dividends accrued but not yet paid 6 68
Common stock issued in connection with acquisitions 1,900 --
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.
4
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited interim 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,
1997. The results of the three months ended March 31, 1998 and 1997 are not
necessarily indicative of the results of operations for the entire year.
2. RECENT ACQUISITIONS AND PROPOSED ACQUISITIONS
On January 26, 1998, COMFORCE Telecom, Inc., a wholly-owned subsidiary of the
Company, purchased all of the issued and outstanding stock of Camelot Consulting
Group Inc., Camelot Communications Group Inc., Camelot Control Group Inc. and
Camelot Group Inc. (collectively, "Camelot"), for total consideration of $3.7
million in cash and 203,307 shares of the Company's Common Stock. In addition,
the Company issued contingent payment certificates under which it could be
required to pay up to $3.25 million in cash over a three-year period, provided
certain contingencies are satisfied. Camelot is in the business of selling and
installing telecommunications equipment and of providing related staffing
services. This transaction is not material to the Company.
3. DEBT
Notes payable and long-term debt at March 31, 1998 (unaudited) and December 31,
1997 (in thousands) consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
12% Senior Notes, due 2007 $110,000 $110,000
15% Senior Secured PIK Debentures, due 2009 20,000 20,000
Revolving line of credit, due in November 26, 2002, with interest payable monthly
at the bank's prime rate plus up to .50% (at March 31, 1998, the bank's prime rate
was 8.5%) and/or LIBOR plus 2.25% 40,597 41,038
-------- --------
Less, current portion 4,597 5,038
-------- --------
Total long-term debt $166,000 $166,000
======== ========
</TABLE>
5
<PAGE>
4. EQUITY
During the first three months of 1998, warrants to purchase 43,332 shares of
common stock at prices ranging from $2.00 to $3.375 per share were exercised.
During the first three months of 1998, options to exercise 2,500 shares of
common stock at a price of $6.00 per share were exercised.
In January 1998 203,307, shares of common stock with a value of $1.5 million
were issued in connection with the acquisition of Camelot. (See Note 2.)
In February 1998, 54,561 shares of common stock with a value of $400,000 were
issued in connection with the contingent payment due on the acquisition of
AZATAR Computer Systems, Inc.
5. EARNINGS PER SHARE
At December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic loss per common share is computed
by dividing net losses available for common shareholders by the weighted average
number of shares of common stock outstanding during each period. Diluted loss
per share is computed assuming the conversion of stock options and warrants with
a market value greater than the exercise price. For the periods ended March 31,
1998 and March 31, 1997, common stock equivalents have not been included as
their effect is antidilutive on dilutive loss per share.
6. RELATED PARTY TRANSACTION
The Company paid L.H. Frishkoff & Company, a certified public accounting firm at
which Richard Barber, a Director of the Company, is a partner, approximately
$20,000 in fees during the first three months of 1998 for tax-related advisory
services.
6
<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 condensed consolidated financial statements and related notes of
COMFORCE Corporation, COMFORCE Operating, Inc. ("COI") and their subsidiaries
(collectively, the "Company").
Overview
Set forth below are discussions and analyses of financial condition and
results of operations of the Company. The Company believes that its future
operating results may not be directly comparable to historical operating results
because of the Company's increased size, related cost savings and marketing
synergies.
From October 1995 through March 31, 1998, the Company completed 10
acquisitions. Each of these acquisitions has been accounted for on a purchase
basis and the results of operations of each of the businesses acquired have been
included in the Company's historical financial statements from the date of
acquisition. Certain of these acquisitions provide for contingent payments by
the Company as a part of the purchase consideration based upon the operating
results of the acquired businesses for specified future periods. The
acquisitions were financed by the Company principally through its issuance of
debt and equity securities and borrowings under bank credit facilities. In
addition, as a result of its rapid growth through acquisitions, the discussion
and comparison of the Company's historical results of operations set forth below
may not be meaningful.
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 lower than those in the
telecommunications and information technology sectors. 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 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 weekly 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.
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenues of $112 million for the three months ended March 31, 1998 were
$76.2 million, or nearly 213% higher than revenues for the three months ended
March 31, 1997. The increase in 1998 revenues is attributable principally to the
Company's acquisitions of The Rho Company Incorporated ("Rhotech") on February
28, 1997 and Uniforce Services, Inc.
("Uniforce") on November 26, 1997.
7
<PAGE>
Cost of services for the three months ended March 31, 1998 was 81.9% of
revenues compared to cost of revenues of 86.8% for the three months ended March
31, 1997. The cost of revenues decrease of 4.9% for the first quarter of 1998 is
a result of the Company's business mix during this quarter, which reflected the
full quarter impact of acquisitions completed during 1997, as well as the
Company's expansion in the information technology and telecommunications sectors
which generate higher gross margins than the more mature technical staffing
sectors.
Selling, general and administrative expenses as a percentage of revenue was
12.5% for the three months ended March 31, 1998, compared to 8.6% for the three
months ended March 31, 1997. Included in selling, general and administrative
expenses are $1.8 million in licensee costs related to the Company's franchised
operations.
Operating income for the three months ended March 31, 1998 was $5.0
million, compared to operating income of $1.3 million for the three months ended
March 31, 1997. This increase was principally attributable to the operating
income generated by Rhotech and Uniforce acquisitions.
The Company's interest expense for the quarter ended March 31, 1998 is
attributable to the interest on the Company's credit facility with Heller
Financial, Inc. (the "New Credit Facility"), the 12% Senior Notes due 2007 (the
"Notes") of COI and the Company's 15% Senior Secured PIK Debentures due 2009
(the "Senior Debentures"). For the quarter ended March 31, 1997, interest
expense is principally attributable to the $25.2 million principal amount of the
Subordinated Convertible Debentures (the "Old Subordinated Debentures") issued
by the Company in February and March 1997, the proceeds of which were used to
partially fund the acquisition of Rhotech and for working capital purposes. The
amortization of the deferred financing costs on the Old Subordinated Debentures
is reflected in bridge and financing charges for such quarter.
The income tax provision for the three months ended March 31, 1998 was
$329,000 on a pretax loss of $128,000, compared to a tax provision of $58,000 on
a loss before taxes of $44,000 for the three months ended March 31, 1997. The
difference between the Federal statutory income tax rate and the Company's
effective tax rate relates primarily to state income taxes and the
nondeductibility of amortization of certain intangible assets.
Financial Condition, Liquidity and Capital Resources
The Company has historically paid its billable employees weekly for their
services before receiving payment from its customers. Additionally, certain
statutory payroll and related taxes, as well as other fringe benefits, are
generally paid by the Company before the Company receives payment from its
customers. Consequently, a significant portion of the Company's cost of revenues
is normally paid by the Company prior to receiving payment from its customers.
Increases in the Company's revenues, resulting from expansion of existing
offices or establishment of new offices, will require additional cash resources
necessary to support such growth. The debt service costs associated with the
borrowings under the Notes, the Senior Debentures and the New Credit Facility
will significantly increase liquidity requirements. Management of the Company
believes that, based on pro forma results of operations and anticipated growth,
including growth through acquisitions, cash flow from operations and funds
anticipated to be available under the New Credit Facility will be sufficient to
service the Company's indebtedness, to fund growth at anticipated levels and to
meet anticipated working capital requirements for the foreseeable future.
However, various factors, including those described or referenced under "Forward
Looking Statements" in Item 1 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 could prevent the Company from realizing these
objectives.
As of March 31, 1998, the Company had outstanding $20.0 million in
principal amount of Senior Debentures bearing interest at a rate of 15%, $110.0
million in principal amount of Notes issued by COI bearing interest at a rate of
12%, $36.0 million outstanding under the New Credit Facility bearing interest at
a rate of 8.156% and $4.6 million outstanding under the New Credit Facility
bearing interest at a rate of 9.0%.
8
<PAGE>
As of March 31, 1998, approximately $139 million, or 56% of the Company's
total assets were intangible assets. These intangible assets substantially
represent amounts attributable to goodwill recorded in connection with the
Company's acquisitions and will be amortized over a five to 40 year period,
resulting in an annual charge of approximately $4 million. Various factors could
impact the Company's ability to generate the earnings necessary to support this
amortization schedule, including those described or referenced under "Forward
Looking Statements" in Item 1 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
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 the
remaining potential earn-out payments is $8.3 million in cash and $4.1 million
in stock payable in the three-year period from 1998 to 2001. The Company cannot
currently estimate whether it will be obligated to pay the maximum amount;
however, the Company anticipates that the cash generated by the operations of
the acquired companies will provide all or a substantial part of the capital
required to fund the cash portion of the earn-out payments.
During the first quarter of 1998, the Company's primary sources of funds to
meet working capital needs were (i) cash from operations, (ii) the proceeds of
the Notes and Senior Debentures and (iii) and borrowings under the New Credit
Facility.
Cash and cash equivalents decreased $4.6 million during the quarter ended
March 31, 1998. Cash flows used in investing activities of $6.1 million, and
cash flows used in financing activities of $585,000 were in excess of cash flows
provided by operating activities of $2.1 million. Cash flows used in investing
activities were principally attributable to the acquisition of Camelot in
January 1998 and the addition of fixed assets. Cash flows used in financing
activities were principally attributable to repayments on the the New Credit
Facility.
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 if revenues
contributed by the information technology and telecommunications sectors
continue to increase as a percentage of the Company's consolidated revenues.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Since the date of the filing of the Company's Annual Report on Form 10-K,
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.
On January 26, 1998, the Company issued 203,307 shares in the aggregate to
the three shareholders of Camelot as consideration for all of the outstanding
shares thereof (as more fully described in Note 2 to the condensed consolidated
financial statements). In issuing these shares, the Company relied upon the
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"). The Company subsequently registered these shares
for resale under a registration statement filed with the Securities and Exchange
Commission (the "Commission").
On February 16, 1998, the Company issued 54,561 shares to Mark Holbrook,
formerly the controlling shareholder of AZATAR Computer Systems, Inc.
("AZATAR"), as payment of the contingent earn-out entered into in the agreement
for the purchase of all of AZATAR's outstanding common stock by the Company.
This acquisition was completed in November 1996. In issuing these securities,
the Company relied upon the exemption from registration under Section 4(2) of
the Securities Act. The Company subsequently registered these shares for resale
under a registration statement filed with the Commission.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
10
<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 14, 1998 /s/ Andrew Reiben
--------------------------------
Vice President of Finance and
Chief Accounting Officer
11
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<ARTICLE> 5
<CIK> 0000006814
<NAME> COMFORCE Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,853
<SECURITIES> 0
<RECEIVABLES> 86,349
<ALLOWANCES> 582
<INVENTORY> 0
<CURRENT-ASSETS> 96,446
<PP&E> 6,682
<DEPRECIATION> 955
<TOTAL-ASSETS> 250,061
<CURRENT-LIABILITIES> 42,012
<BONDS> 130,000
0
1
<COMMON> 156
<OTHER-SE> 40,804
<TOTAL-LIABILITY-AND-EQUITY> 250,061
<SALES> 112,007
<TOTAL-REVENUES> 112,007
<CGS> 91,706
<TOTAL-COSTS> 106,992
<OTHER-EXPENSES> (16)
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<INTEREST-EXPENSE> 5,159
<INCOME-PRETAX> (128)
<INCOME-TAX> 329
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