SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York 11797
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 437-3300
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 1, 1998
- --------------------- -------------------------------
COMFORCE Corporation:
Common stock, $.01 par value 16,072,179 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
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 1998
and September 30, 1997 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998
and September 30, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
( in thousands)
September 30, December 31,
1998 1997
---------- ----------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 4,943 $ 6,512
Restricted cash 1,036
Accounts receivable, net 85,296 73,116
Prepaid expenses 2,004 793
Other assets 2,361 5,755
Deferred income tax 1,314 1,710
---------- ----------
Total current assets 95,918 88,922
Property and equipment, net 8,551 4,271
Intangible assets, net 138,524 134,687
Deferred financing costs 5,418 5,790
Other assets 2,535 2,515
---------- ----------
Total assets $ 250,946 $ 236,185
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, Continued
(in thousands)
September 30, December 31,
1998 1997
---------- ----------
(unaudited)
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ 4,597 $ 5,038
Accounts payable 4,032 4,954
Accrued expenses 32,191 19,647
---------- ----------
Total current liabilities 40,820 29,639
Long-term debt 167,200 166,000
Other liabilities 721 1,144
---------- ----------
Total liabilities 208,741 196,783
---------- ----------
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; 15,790,747 shares issued
and outstanding in s1998 and 15,344,247
shares issued and outstanding in 1997. 158 153
Additional paid-in capital 45,768 43,323
Accumulated (deficit) since January 1,1996 (3,722) (4,075)
---------- ----------
Total stockholders' equity 42,204 39,402
---------- ----------
Total liabilities and stockholders'
equity $ 250,946 $ 236,185
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Net sales of services $117,230 $54,509 $347,347 $145,986
--------- --------- --------- ---------
Costs and expenses:
Cost of services 94,764 47,476 282,644 127,227
Selling, general and administrative 14,136 4,503 42,458 11,842
Depreciation and amortization 1,320 439 4,017 1,241
--------- --------- --------- ---------
Total costs and expenses 110,220 52,418 329,119 140,310
--------- --------- --------- ---------
Operating income 7,010 2,091 18,228 5,676
--------- --------- --------- ---------
Other income (expense):
Bridge and financing charges -- -- -- (5,822)
Interest expense (5,419) (1,135) (16,020) (2,151)
Other income, net 11 -- 34 344
--------- --------- --------- ---------
(5,408) (1,135) (15,986) (7,629)
--------- --------- --------- ---------
Earnings (loss) before income taxes 1,602 956 2,242 (1,953)
(Provision) credit for income taxes (925) (391) (1,871) 646
--------- --------- --------- ---------
Net income (loss) 677 565 371 (1,307)
Dividends on preferred stock 6 6 18 732
--------- --------- --------- ---------
Net income (loss)
applicable to common
stockholders 671 559 353 (2,039)
--------- --------- --------- ---------
Basic income (loss) per common share $0.04 $0.04 $0.02 $(0.15)
========= ========= ========= =========
Diluted income (loss) per common share $0.04 $0.04 $0.02 $(0.15)
========= ========= ========= =========
Basic weighted average shares 16,072 14,197 15,958 13,256
========= ========= ========= =========
Diluted weighted average shares 16,623 15,116 16,820 13,256
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net cash flows provided by (used in) operating
activities $8,337 $(2,755)
---------- ----------
Cash flows from investing activities:
Acquisition payments, net of cash acquired (3,574) (14,355)
Officer loans -- 30
Restricted cash 1,039 (360)
Increase in other assets (1,703) --
Additions to property, plant and equipment (5,050) (548)
---------- ----------
Net cash flows (used in) investing activities (9,288) (15,233)
---------- ----------
Cash flows from financing activities:
Net proceeds from line of credit agreement (986) 7,354
Proceeds from short-term debt -- 20,628
Payment of short-term debt -- (27,930)
Proceeds from long-term debt -- 20,000
Repurchase of common stock -- (2,421)
Principal payments on capital lease obligations (155) --
Proceeds from exercise of stock options 137 142
Proceeds from exercise of warrants 458 171
Payment of registration costs (44) (61)
Dividends paid (25) (275)
---------- ----------
Net cash flows (used in) provided by financing activities (615) 17,050
---------- ----------
(Decrease) increase in cash and cash equivalents (1,566) (938)
Cash and equivalents, beginning of period 6,509 3,608
---------- ----------
Cash and equivalents, end of period $4,943 $2,670
========== ==========
Supplemental cash flow information: Cash paid during the
period for:
Interest $9,630 $1,044
Income taxes paid 1,211 227
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 2 102
Common stock issued in connection with acquisitions 1,900 --
Common stock issued to settle liabilities -- 633
Warrants issued in connection with the sale of convertible
debentures -- 1,004
Warrants issued in connection with short-term loan -- 100
Warrants issued in connection with credit facility -- 170
Issuance of Senior Secured PIK Debentures in lieu of interest
payment 1,542 --
Repayment of officer loans -- 352
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<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 nine months ended September 30, 1998 and 1997 are not
necessarily indicative of the results of operations for the entire year.
2. NEWLY-ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of FAS 133 will not have a significant effect on the Company's results
of operations or its financial position.
3. RECENT 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. Camelot is
in the business of selling and installing telecommunications equipment and of
providing staffing services.
7
<PAGE>
4. DEBT
Notes payable and long-term debt at September 30, 1998 (unaudited) and December
31, 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
12% Senior Notes, due 2007 $ 110,000 $ 110,000
15% Senior Secured PIK Debentures, due 2009 21,542 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 September 30, 1998, the bank's prime
rate was 8.25%) and/or LIBOR plus 2.25% 40,255 41,038
---------- ----------
171,797 171,038
---------- ----------
Less, current portion 4,597 5,038
---------- ----------
Total long-term debt $ 167,200 $ 166,000
========== ==========
</TABLE>
5. EQUITY
During the first nine months of 1998, warrants to purchase 108,132 shares of
common stock at prices ranging from $2.00 to $7.575 per share were exercised.
During the first nine months of 1998, options to exercise 80,500 shares of
common stock at prices ranging from $1.125 to $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 Consulting Group, Inc.
and certain affiliated companies. (See note 3.)
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.
6. EARNINGS PER SHARE
At December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic earnings (loss) per common share
is computed by dividing net earnings (losses) available for common shareholders
by the weighted average number of shares of common stock outstanding during each
period. Diluted earnings (loss) per share is computed assuming the conversion of
stock options and warrants with a market value greater than the exercise price.
The following represents a reconciliation of the denominator for basic and
diluted earnings (loss) per share for the three and nine-month periods ended
September 30, 1998 and 1997:
8
<PAGE>
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares 16,072 14,197 15,958 13,256
Employee stock options 179 442 390 --
Warrants 372 477 472 --
Dilutive potential common shares
Denominator for diluted
earnings (loss) per share -
adjusted weighted-average
shares and assumed conversions 16,623 15,116 16,820 13,256
====== ====== ====== ======
</TABLE>
7. 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
$78,000 in fees during the first nine months of 1998 for tax-related advisory
services.
9
<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 September 30, 1998, the Company has 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. As a
result, the Company's historical results of operations include bridge financing
costs, which are not expected to be incurred in future periods, and preferred
stock dividends. 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 significantly 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 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 September 30, 1998 Compared to Three Months Ended September
30, 1997
Revenues of $117.2 million for the three months ended September 30, 1998
were $62.7 million or 115% higher than revenues for the three months ended
September 30, 1997. The increase in 1998 revenues is attributable principally to
the Company's acquisition of Uniforce Services, Inc. ("Uniforce") on November
26, 1997.
10
<PAGE>
Cost of services for the three months ended September 30, 1998 was 80.8%
of services compared to cost of services of 87.1% for the three months ended
September 30, 1997. The cost of services decrease of 6.3% for the third quarter
of 1998 is a result of the Company's business mix in the 1998 period, which
reflected the full period impact of acquisitions completed during 1997, as well
as the Company's growth in the information technology, telecommunications and
financial services sectors. These sectors have historically generated higher
gross margins than the more mature technical staffing sector.
Selling, general and administrative expenses as a percentage of revenue
was 12.1% for the three months ended September 30, 1998, compared to 8.3% for
the three months ended September 30, 1997. Included in selling and general and
administrative expenses are $1.7 million in licensee costs related to the
Company's franchise operations.
Operating income for the three months ended September 30, 1998 was $7.0
million, compared to operating income of $2.1 million for the three months ended
September 30, 1997. This increase was principally attributable to the Company's
completion of the Uniforce acquisition.
The Company's interest expense for the three months ended September 30,
1998 is attributable to the interest on (i) the Loan and Security Agreement with
Heller Financial, Inc., as lender and agent for other participating lenders, to
provide to the Company a secured revolving credit facility (the "Current Credit
Facility"), (ii) $110.0 million principal amount of 12% Senior Notes due 2007
issued by COI (the "Notes") and (iii) $21.5 million principal amount of 15%
Senior Secured PIK Debentures issued by the Company (the "Senior Debentures"),
all of which obligations were incurred in November 1997. For the three months
ended September 30, 1997, interest expense is principally attributable to the
$40 million revolving credit facility with Fleet National Bank and U.S. Bank,
Washington as lenders.
The income tax provision for the three months ended September 30, 1998 was
$925,000 on pretax income of $1.6 million, compared to a tax provision of
$391,000 on pretax income of $956,000 for the three months ended September 30,
1997. The difference between the Federal statutory income tax rate and the
Company's effective tax rate relates primarily to state income taxes and the
nondeductibility of certain intangible assets.
Nine months ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Revenues of $347.3 million for the nine months ended September 30, 1998
were $201.3 million, or nearly 138% higher than revenues for the nine months
ended September 30, 1997. The increase in 1998 revenues is attributable
principally to the Company's acquisition of Uniforce on November 26, 1997.
Cost of services for the nine months ended September 30, 1998 was 81.3% of
services compared to cost of services of 87.2% for the nine months ended
September 30, 1997. The cost of services decrease of 5.9% for the first nine
months of 1998 is a result of the Company's business mix in the 1998 period,
which reflected the full period impact of acquisitions completed during 1997 as
well as the Company's growth in the information technology, telecommunications
and financial services sectors. These sectors have historically generated higher
gross margins than the more mature technical staffing sector.
Selling, general and administrative expenses as a percentage of revenue
was 12.2% for the nine months ended September 30, 1998, compared to 8.1% for the
nine months ended September 30, 1997. Included in selling general and
administrative expenses are $5.2 million in licensee costs related to the
Company's franchise operations.
Operating income for the nine months ended September 30, 1998 was $18.2
million, compared to operating income of $5.7 million for the nine months ended
September 30, 1997. This increase was principally attributable to the Company's
completion of the Rhotech and Uniforce acquisitions.
11
<PAGE>
The Company's interest expense for the nine months ended September 30,
1998 is attributable to the interest on the Current Credit Facility, the Notes
and the Senior Debentures, all of which obligations were incurred in November
1997. For the nine months ended September 30, 1997, interest expense is
principally attributable to the $25.2 million principal amount of 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 costs payable on the Old
Subordinated Debentures is reflected in bridge and financing charges for such
nine-month period.
The income tax provision for the nine months ended September 30, 1998 was
for $1.9 million on pretax income of $2.2 million, compared to a tax credit of
$646,000 on a loss before taxes of $1.9 million for the nine months ended
September 30, 1997. The difference between the Federal statutory income tax rate
and the Company's effective tax rate relates primarily to state income taxes and
the nondeductibility of certain intangible assets.
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 and the Current Credit Facility have significantly
increased liquidity requirements. The debt service costs associated with the
Senior Debentures may be satisfied through the issuance of new notes. To date,
the Company has chosen to issue new notes to pay these costs. Management of the
Company believes that, based on the results of operations and anticipated
growth, including growth through acquisitions, cash flow from operations and
funds anticipated to be available under the Current 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 September 30, 1998, the Company had outstanding $21.5 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%, $1.3 million outstanding under the Current Credit Facility bearing interest
at a rate of 8.75% and $39.0 million outstanding under the Current Credit
Facility bearing interest at a rate of 7.8%. As of September 30, 1998,
approximately $138.5 million, or 55.2%, 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 $4.0 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 $4.0 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.
12
<PAGE>
During the first nine months 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
Current Credit Facility.
Cash and cash equivalents decreased $1.6 million during the nine months
ended September 30, 1998. Cash flows used in investing activities of $9.3
million and cash flows used in financing activities of $615,000 were in excess
of cash flows provided by operating activities of $8.3 million. Cash flows used
in investing activities were principally related to the purchase of Camelot
Consulting Group, Inc. and certain affiliated companies and additions of
property plant and equipment. Cash flows used by financing activities were
principally attributable to net borrowings under the Current Credit Facility.
Year 2000
The Company has completed a review of its potential Year 2000 issues by
examining all of its internal and third party applications, operating systems,
interfaces and hardware. Independent of its Year 2000 compliance program, the
Company initiated a major system conversion beginning in early 1998, based
principally on industry-leading PeopleSoft software, in order to improve access
to business information through common, integrated computing systems nationwide.
The Company's conversion to these new systems, which are expected to make the
Company's IT systems fully Year 2000 compliant, is now approximately 85 percent
complete and is expected to be completed in early 1999.
In assessing potential Year 2000 issues, the Company has established a
Year 2000 committee, a compliance program and a budget. The committee has
divided the Company's Year 2000 compliance program into four sections: (i)
systems inventory and assessment, (ii) systems testing evaluation and
monitoring, (iii) third party suppliers and (iv) contingency planning. Systems
inventory and assessment has been completed, and the remaining sections are
expected to be completed by early to mid 1999. The Company expects that all of
its IT systems and non-IT systems will be Year 2000 compliant prior to December
31, 1999. The Company estimates the total Year 2000 expenditures which will be
incurred in the future will be less than $1.0 million. Not included in these
costs are the costs of conversion to the new integrated computing systems, which
was undertaken independently of its Year 2000 compliance initiative.
As a part of its Year 2000 compliance program, the Company is in
communication with its third-party vendors and service providers in order to
assess their Year 2000 readiness and seek to ensure that they will be Year 2000
compliant. The Company is in the process of advising its vendors that it expects
them to provide confirmation of their Year 2000 readiness by March 31, 1999. In
the event the Company does not believe it has received reasonable assurance from
its vendors as to Year 2000 compliance by March 31, 1999, the Company will seek
to establish relationships with vendors that are Year 2000 compliant. With
respect to the purchases of computer systems, or upgrades for existing computer
systems, the Company's policy is to receive Year 2000 certification from the
vendor prior to completing the purchase.
The Company supports, through its IT staff augmentation services, a wide
range of projects dedicated to helping clients solve their Year 2000 issues. The
demand for programming code remediation, new applications implementation (i.e.,
installing new software that is Year 2000 compliant rather than correcting the
old) and computer hardware compliance testing has accelerated over the last
several years. As its clients successfully move their repaired and/or new
programs into use, the Company estimates that the demand for Year 2000 dedicated
analysts, developers, programmers and project leaders will decrease over the
next 18 months. Conversely, as the number of Year 2000 compliant, legacy
(mainframe) or replacement systems increases, the Company anticipates a steady
demand for consultants (beyond the year 2000) to support programming
enhancements and provide ongoing maintenance for these systems.
The statements under "Year 2000" in this Item 2 which express the
Company's belief that Year 2000 problems will not have a material adverse effect
on the Company may be forward-looking statements. Although management
13
<PAGE>
believes that the Company has acted with appropriate diligence to address
potential Year 2000 issues, no assurance can be given that Year 2000 issues will
not materially affect its business or operations. Factors which could
potentially cause the Company to suffer business interruptions or other losses
include the failure of its Year 2000 project team to identify latent or other
non-compliant codes or technologies, the failure of any of the customers,
vendors, service suppliers or financial institutions with which the Company
deals to address their own Year 2000 problems or the ineffectiveness of any
contingency plans put in place by the Company to mitigate the effects of
interruptions in its businesses due to Year 2000 problems.
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 in
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, telecommunications and financial
services sectors continue to increase as a percentage of the Company's
consolidated revenues.
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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule of COMFORCE Corporation.
27.2 Financial Data Schedule of COMFORCE Operating, Inc.
(b) Reports on Form 8-K.
On October 2, 1998, the Company filed a current report on Form 8-K to
report (i) the purchase by John C. Fanning of 3,778,086 shares of the common
stock of the Company held by the founders of the Company's staffing business,
(ii) the resignations of James L. Paterek, formerly the Company's Chairman,
Christopher P. Franco, formerly the Company's Chief Executive Officer, and
Michael Ferrentino, formerly the Company's President, of their offices and seats
on the Board, (iii) the appointment of John C, Fanning as the Company's Chairman
and Chief Executive Officer and (iv) the election of four new members to the
Company's Board of Directors: John C. Fanning, Harry Maccarrone, Gordon
Robinett, and Daniel Raynor.
14
<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: November 13, 1998 /s/ Andrew Reiben
--------------------------------------
Andrew Reiben
Vice President of Finance and
Chief Accounting Officer
15
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