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 June 30, 1999
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 July 29, 1999
- ------------------------------- ----------------------------
COMFORCE Corporation:
Common stock, $.01 par value 16,395,263 shares
COMFORCE Operating, Inc.: 100 shares
Common stock, $.01 par value (all owned by COMFORCE Corporation)
<PAGE>
COMFORCE Corporation and
COMFORCE Operating, Inc.
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 1999
and December 31, 1998 (unaudited)....................................3
Consolidated Statements of Operations for the three and
six months ended June 30, 1999 and 1998 (unaudited)..................4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 (unaudited).............................5
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................9
Item 3. Quantitative and Qualitative Disclosure about Market Risk...........13
PART II OTHER INFORMATION...................................................13
Item 1. Legal Proceedings...................................................13
Item 2. Changes in Securities and Use of Proceeds...........................13
Item 3. Defaults Upon Senior Securities (not applicable)....................13
Item 4. Submission of Matters to a Vote of Security Holders.................14
Item 5. Other Information (not applicable)..................................14
Item 6. Exhibits and Reports on Form 8-K .................................14
SIGNATURES....................................................................15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 7,163 $ 4,599
Accounts receivable, net 55,993 47,727
Funding and service fee receivable, net 37,491 33,953
Prepaid expenses and other current assets 3,584 3,342
Deferred income taxes 2,306 2,306
--------- ---------
Total current assets 106,537 91,927
Property and equipment, net 10,800 9,256
Intangible assets, net 139,907 138,847
Deferred financing costs 5,636 6,052
--------- ---------
Total assets $ 262,880 $ 246,082
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ 4,000 $ 4,000
Accounts payable 6,855 4,296
Accrued expenses 22,872 18,068
--------- ---------
Total current liabilities 33,727 26,364
Long-term debt 184,738 174,579
Deferred income taxes 224 224
Other liabilities 524 581
--------- ---------
Total liabilities 219,213 201,748
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series F convertible preferred stock, $0.01 par value,
10,000 shares authorized, no shares issued and
outstanding -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; 16,395,255 shares and 16,129,322 shares
issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 164 161
Additional paid-in capital 48,327 47,464
Accumulated deficit since January 1, 1996 (4,824) (3,291)
--------- ---------
Total stockholders' equity 43,667 44,334
--------- ---------
Total liabilities and stockholders' equity $ 262,880 $ 246,082
========= =========
</TABLE>
The accompanying notes are an integral part of the
unaudited consolidated financial statements.
3
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Net sales of services $ 111,119 $ 118,110 $ 218,194 $ 230,118
--------- --------- --------- ---------
Costs and expenses:
Cost of services 89,529 96,174 176,925 187,881
Selling, general and administrative 14,296 14,373 28,362 28,321
Depreciation and amortization 1,745 1,360 3,405 2,697
--------- --------- --------- ---------
Total costs and expenses 105,570 111,907 208,692 218,899
--------- --------- --------- ---------
Operating income 5,549 6,203 9,502 11,219
--------- --------- --------- ---------
Other income (expense):
Interest expense (5,464) (5,443) (10,757) (10,602)
Other income, net 10 8 12 24
--------- --------- --------- ---------
(5,454) (5,435) (10,745) (10,578)
--------- --------- --------- ---------
Income (loss) before income taxes 95 768 (1,243) 641
Income tax provision 439 617 291 947
--------- --------- --------- ---------
Net income (loss) (344) 151 (1,534) (306)
Dividends on preferred stock -- 6 -- 12
--------- --------- --------- ---------
Net income (loss) applicable to
common stockholders $ (344) $ 145 $ (1,534) $ (318)
========= ========= ========= =========
Basic income (loss) per common share $ (0.02) $ 0.01 $ (0.09) $ (0.02)
========= ========= ========= =========
Diluted income (loss) per common share $ (0.02) $ 0.01 $ (0.09) $ (0.02)
========= ========= ========= =========
Basic weighted average shares 16,291 15,911 16,232 15,629
========= ========= ========= =========
Diluted weighted average shares 16,291 17,368 16,232 15,629
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
unaudited consolidated financial statements.
4
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Net cash flows used in operating activities $ (1,011) $ (3,760)
-------- --------
Cash flows from investing activities:
Acquisition, net of cash acquired -- (3,574)
Purchases of property and equipment (2,724) (3,528)
Payments of contingent consideration (2,013) (1,757)
Restricted cash -- (32)
Decrease in other assets -- 21
-------- --------
Net cash flows used in investing activities (4,737) (8,870)
-------- --------
Cash flows from financing activities:
Net proceeds on line of credit agreement 8,427 9,872
Reduction of capital lease obligation (115) (102)
Proceeds from exercise of stock options -- 137
Proceeds from exercise of warrants -- 458
Payment of registration costs -- (35)
Dividends paid -- (12)
-------- --------
Net cash flows provided by financing
activities 8,312 10,318
-------- --------
Increase (decrease) in cash and cash equivalents 2,564 (2,312)
Cash and cash equivalents, beginning of period 4,599 6,512
-------- --------
Cash and equivalents, end of period $ 7,163 $ 4,200
======== ========
Supplemental cash flow information: Cash paid during the period for:
Interest paid $ 8,501 $ 8,627
Income taxes paid 462 106
Supplemental schedule of noncash investing and financing activities:
Common stock issued in connection with acquisitions 867 1,900
Dividends accrued but not paid -- 6
Issuance of Senior Secured PIK Debentures in lieu of
interest payment 1,732 1,542
</TABLE>
The accompanying notes are an integral part of the
unaudited consolidated financial statements.
5
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited interim consolidated financial statements of
COMFORCE Corporation, COMFORCE Operating, Inc. ("COI") and their subsidiaries
(collectively, the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in annual financial statements have been
condensed or omitted pursuant to those rules and regulations. In the opinion of
management, all adjustments, consisting of normal, recurring adjustments
considered necessary for a fair presentation, have been included. Although
management believes that the disclosures made are adequate to ensure that the
information presented is not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998. The results for the three and six months ended June 30,
1999 and 1998 are not necessarily indicative of the results of operations for
the entire year.
2. NEWLY-ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). The FASB issued SFAS No. 137 in
June 1999 to delay the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000 (January 1, 2001 for the Company). The Company does not
expect the adoption of SFAS 133, as amended by SFAS 137, to have a significant
effect on the Company's results of operations or its financial position.
3. DEBT
Notes payable and long-term debt at June 30, 1999 and December 31, 1998
consisted of the following (in thousands):
June 30, December 31,
1999 1998
-------- --------
12% Senior Notes, due 2007
$110,000 $110,000
15% Senior Secured PIK Debentures, due 2009
24,894 23,162
Revolving line of credit, due November 26, 2002, with
interest payable monthly at LIBOR plus up to 2.0%
At June 30, 1999, the rate was 7.2% 53,844 45,417
188,738 178,579
Less, current portion 4,000 4,000
-------- --------
Total long-term debt $184,738 $174,579
======== ========
6
<PAGE>
4. EQUITY
The increase in common stock outstanding during the six months ended June
30, 1999 relates principally to 55,554 shares issued on February 17, 1999 at a
price of $4.75 per share and 193,124 shares issued on May 20, 1999 at a price of
$3.125 per share. These shares were issued as contingent payments in connection
with two of the Company's prior acquisitions.
5. EARNINGS PER SHARE
Basic income (loss) per common share is computed by dividing net income
(loss) available for common stockholders by the weighted average number of
shares of common stock outstanding during each period. Diluted income (loss) per
share is computed assuming the conversion of stock options and warrants with a
market value greater than the exercise price to the extent such conversion
assumption is dilutive. The following represents a reconciliation of the
numerators and denominators for basic and diluted income (loss) per share for
the three-month and six-month periods ended June 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (344) $ 151 $ (1,534) $ (306)
Preferred stock dividends -- (6) -- (12)
-------- -------- -------- --------
Numerator for basic and diluted
income (loss) per share--income $ (344) $ 145 $ (1,534) $ (318)
(loss) available to common
Stockholders
======== ======== ======== ========
Denominator:
Weighted-average shares 16,291 15,911 16,232 15,629
Effect of dilutive securities:
Employee stock options -- 593 -- --
Contingent stock - acquisitions -- 282 -- --
Warrants -- 582 -- --
-------- -------- -------- --------
Denominator for diluted income (loss) per
share - adjusted weighted average
shares and assumed conversions 16,291 17,368 16,232 15,629
======== ======== ======== ========
</TABLE>
Outstanding options and warrants to purchase shares of common stock,
representing approximately 4.9 million shares of common stock on June 30, 1999,
were not included in the computations of diluted (loss) per share for the three
months ended June 30, 1999 and for the six-month periods ended June 30, 1999 and
1998 because their effect would be anti-dilutive.
6. INDUSTRY SEGMENT INFORMATION:
The Company has determined that its reportable segments can be
distinguished principally by the types of services offered to the Company's
clients.
7
<PAGE>
Revenues and profits in the Staff Augmentation segment are generated by
providing temporary employees to client companies generally on a
time-and-materials basis. Staff Augmentation services are offered through
several divisions. Telecom provides telecommunications workers, primarily to
telecommunications companies; Information Technologies provides programmers,
systems consultants, software engineers and other IT workers to a broad range of
companies which outsource portions of their IT requirements; and Staffing
Services provides primarily technical workers, including engineers, scientists
and laboratory workers, to a variety of corporations and laboratories.
Revenues and profits in the Financial Services segment are generated
through outsourcing and consulting services for client companies. Financial
Services is composed of two distinct activities: The PrO Unlimited division
provides confidential consulting and conversion services related to clients'
employment of independent contractors, and typically involve providing
non-recruited payrolling services to those clients. Through its THISCO and
Brentwood divisions, the Financial Services segment also includes outsourcing
services to independent consulting and staffing companies, in which the Company
provides payroll funding services and back office support to those clients.
The accounting policies of the segments are the same as those described in
the notes to the consolidated financial statements contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. The Company
evaluates the performance of its segments and allocates resources to them based
on operating contribution, which represents segment revenues less direct costs
of operations, excluding the allocation of corporate general and administrative
expenses.
The table below presents information on the revenues and operating
contribution for each segment for the three and six months ended June 30, 1999
and 1998, and items which reconcile segment operating contribution to the
Company's reported pre-tax loss.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Net sales of services:
Financial Services $ 27,896 $ 22,493 $ 52,081 $ 43,488
Staff Augmentation 83,223 95,617 166,113 186,630
--------- --------- --------- ---------
111,119 118,110 218,194 230,118
--------- --------- --------- ---------
Operating contribution:
Financial Services 3,568 3,067 6,352 6,102
Staff Augmentation 7,608 8,464 14,592 15,726
11,176 11,531 20,944 21,828
--------- --------- --------- ---------
Consolidated expenses:
Interest 5,464 5,443 10,757 10,602
Depreciation and amortization 1,745 1,360 3,405 2,697
Corporate general and
administrative 3,872 3,960 8,025 7,888
11,081 10,763 22,187 21,187
--------- --------- --------- ---------
Income (loss) before income taxes $ 95 $ 768 $ (1,243) $ 641
========= ========= ========= =========
</TABLE>
8
<PAGE>
At June 30, At December 31,
Identifiable Assets: 1999 1998
-------- --------
Financial Services $ 47,376 $ 39,967
Staff Augmentation 46,108 41,714
Corporate 23,853 19,502
-------- --------
$117,337 $101,183
======== ========
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion set forth below supplements the information found in the
unaudited consolidated financial statements and related notes of COMFORCE
Corporation, COMFORCE Operating, Inc. ("COI") and their subsidiaries
(collectively, the "Company").
Overview
The Company operates its Staff Augmentation business through three
divisions -- Information Technologies, Telecom and Staffing Services. The
Company's outsourcing and consulting services are provided through its Financial
Services division.
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, information technology and financial services 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, and
offers retirement plans to eligible employees.
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Net sales of services for the three months ended June 30, 1999 were $111.1
million as compared to $118.1 million for the three months ended June 30, 1998.
This 5.9% decline in net sales of services is attributable principally to a
decrease in sales in the Staffing Services division due to substantially lower
sales at a Staffing Services division customer that had been the Company's
largest customer. The decrease was partially offset by sales increases in the
Company's Financial Services and Telecommunications divisions.
Cost of services for the three months ended June 30, 1999 was 80.6% of net
sales of services compared to cost of services of 81.4% for the three months
ended June 30, 1998. The cost of services decrease as a percentage of net sales
for the 1999 period is a result of the strategies undertaken by management to
increase margins, as well as the Company's business mix, which reflected growth
in the Company's Telecommunications and Financial Services divisions. These
divisions have historically generated higher gross margins than the more mature
Staffing Services division.
9
<PAGE>
Selling, general and administrative expenses decreased by $77,000, or 0.5%
during the second quarter of 1999 as compared to the prior year comparable
quarter. Due to the decline of net sales of services discussed above, selling,
general and administrative expenses as a percentage of revenue increased to
12.9% for the three months ended June 30, 1999 compared to 12.2% for the three
months ended June 30, 1998.
Operating income for the three months ended June 30, 1999 was $5.5 million,
compared to $6.2 million for the three months ended June 30, 1998. This decrease
was principally attributable to the reduced net sales of services discussed
above.
The Company's interest expense for the three months ended June 30, 1999 and
1998 is attributable to the interest on the Company's credit facility with
Heller Financial, Inc. (the "Credit Facility"), COI's 12% Senior Notes due 2007
(the "COI Notes") and the Company's 15% Senior Secured PIK Debentures due 2009
(the "PIK Debentures"), which obligations were incurred in 1997, principally in
connection with the funding of business acquisitions.
The income tax provision for the three months ended June 30, 1999 was
$439,000 on income before taxes of $95,000, compared to an income tax provision
of $617,000 on income before taxes of $768,000 for the three months ended June
30, 1998. The difference between the Federal statutory income tax rate and the
Company's effective tax rate relates primarily to the nondeductibility of
amortization expense associated with certain intangible assets, the
nondeductibility of a portion of the interest expense associated with the PIK
Debentures and state income taxes.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net sales of services for the six months ended June 30, 1999 were $218.2
million as compared to $230.1 million for the six months ended June 30, 1998.
This 5.2% decline in net sales of services is attributable principally to a
decrease in sales in the Staffing Services division due to lower sales at a
Staffing Services division customer that had been the Company's largest
customer. The decrease was partially offset by sales increases in the Company's
Financial Services and Telecommunications divisions.
Cost of services for the six months ended June 30, 1999 was 81.1% of net
sales of services compared to cost of services of 81.6% for the six months ended
June 30, 1998. The cost of services decrease as a percentage of net sales for
the 1999 period is a result of the strategies undertaken by management to
increase margins, as well as the Company's business mix, which reflected growth
in the Company's Telecommunications and Financial Services divisions. These
divisions have historically generated higher gross margins than the more mature
Staffing Services division.
Selling, general and administrative expenses increased by $41,000, or 0.1%,
during the six months ended June 30, 1999 as compared to the prior year
comparable period. Due to the decline of net sales of services discussed above,
selling, general and administrative expenses as a percentage of revenue
increased to 13.0% for the six months ended June 30, 1999 compared to 12.3% for
the six months ended June 30, 1998.
Operating income for the six months ended June 30, 1999 was $9.5 million,
compared to operating income of $11.2 million for the six months ended June 30,
1998. This decrease was principally attributable to the reduced net sales of
services discussed above.
The Company's interest expense for the six months ended June 30, 1999 and
1998 is attributable to the interest on the Company's credit facility with
Heller Financial, Inc. (the "Credit Facility"), COI's 12% Senior Notes due 2007
(the "COI Notes") and the Company's 15% Senior Secured PIK Debentures due 2009
(the "PIK Debentures"), which obligations were incurred in 1997, principally in
connection with the funding of business acquisitions.
The income tax provision for the six months ended June 30, 1999 was
$291,000 on a loss before taxes of $1.2 million, compared to an income tax
provision of $947,000 on income before taxes of $641,000 for the six months
10
<PAGE>
ended June 30, 1998. The difference between the Federal statutory income tax
rate and the Company's effective tax rate relates primarily to the
nondeductibility of amortization expense associated with certain intangible
assets, the nondeductibility of a portion of the interest expense associated
with the PIK Debentures and state income taxes.
Financial Condition, Liquidity and Capital Resources
The Company pays its billable employees weekly for their services before
receiving payment from its customers. In addition, 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 services is normally paid by the
Company prior to receiving payment from its customers. Increases in the
Company's net sales of services, resulting from expansion of existing offices or
establishment of new offices, will require additional cash resources.
The debt service costs associated with the borrowings under the COI Notes
and the Credit Facility have significantly reduced the Company's liquidity. The
debt service costs associated with the PIK Debentures may be satisfied through
the issuance of new notes. To date, the Company has chosen to issue new 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 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" and "Year 2000" in this Item 2
could prevent the Company from realizing these objectives.
As of June 30, 1999, the Company had outstanding $24.9 million in principal
amount of PIK Debentures bearing interest at a rate of 15%, $110.0 million in
principal amount of COI Notes bearing interest at a rate of 12% and $53.8
million outstanding under the Credit Facility bearing interest at an average
rate of 7.2% per annum.
As of June 30, 1999, approximately $139.9 million, or 53.2%, 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 $4.4 million. Various
factors could impact the Company's ability to generate the earnings necessary to
support this amortization schedule, including the factors described or
referenced under "Forward-Looking Statements" and "Year 2000" in this Item 2.
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 $2.9 million in cash payable in the
three-year period from 1999 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 six months ended June 30, 1999, the Company's primary sources of
funds to meet working capital needs were from borrowings under the Credit
Facility. Cash and cash equivalents increased $2.6 million during the six months
ended June 30, 1999. Cash flows used in investing activities of $4.7 million and
cash flows used in operating activities of $1.0 million were less than the cash
flows provided by financing activities of $8.3 million. Cash flows used in
investing activities were principally related to additions to fixed assets and
the payment of earn-out consideration. Cash flows provided by financing
activities were principally attributable to net borrowings under the Credit
Facility.
11
<PAGE>
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 in early 1998, based principally on
industry-leading PeopleSoft(R) software, in order to improve access to business
information through common, integrated computing systems nationwide. This system
is expected to make the Company's IT systems fully Year 2000 compliant. To date,
the Company has converted substantially all of its billing and payable functions
to the system, and has converted the majority of its accounts receivable. The
remainder of these conversions are expected to be completed by September 30,
1999. By that date, all of the Company's operations will be employing the new
system, with the sole exception of its Camelot Group, which was acquired in
1998. Camelot Group's systems have been certified as Year 2000 compliant.
In assessing potential Year 2000 issues, the Company 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: (1) systems inventory
and assessment, (2) systems testing evaluation and monitoring, (3) third party
suppliers and (4) contingency planning. Each of these sections has been
completed except monitoring and contingency planning, which will continue
through year-end. 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 that will have been incurred by
year-end will not be material. 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 has communicated
with its material 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 has received reasonable assurances from its material
vendors that they are or will before year-end be 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 statements above, 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 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.
12
<PAGE>
Other Matters
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). The FASB issued SFAS No. 137 in
June 1999 to delay the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000 (January 1, 2001 for the Company). The Company does not
expect the adoption of SFAS 133, as amended by SFAS 137, to have a significant
effect on the Company's results of operations or its financial position.
Forward Looking Statements
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. See "Forward Looking Statements" in Item 1 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, "Year
2000" in Part I, Item 2 herein and "Risk Factors" in the Company's Registration
Statement on Form S-3 filed with the SEC on July 2, 1999 (Reg. No. 333-82201).
These disclosures may be accessed through the Website maintained by the SEC at
"http://www.sec.gov" or, upon request made to Linda Annicelli, Vice President of
Administration at COMFORCE Corporation, 415 Crossways Park Drive, P.O. Box 9006,
Woodbury, NY 11797, telephone 516-437-3300. The Company will provide a copy of
these disclosures without charge.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The preponderance of the Company's borrowings are fixed rate obligations.
During the six months ended June 30, 1999, only approximately 17% of the
Company's interest expense was attributable to variable rate loans, all of which
were under the Credit Facility. Consequently, management does not believe that
any adjustments to the rate under the Credit Facility are likely to have a
material impact on its results of operations in the immediate future. The
Company has not entered into any swap agreements or other hedging transactions
as a means of limiting its exposure to interest rate fluctuations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Since the date of the filing of the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, there have been no material new legal
proceedings involving the Company or any material developments to the
proceedings described in such 10-K except for the following: In the suits before
the Connecticut Superior Court brought by Austin Iodice and Anthony Giglio
against the Company concerning whether stock options issued by the Company to
the plaintiffs remain in effect, the parties have agreed to enter into binding
mediation to resolve all issues.
Item 2. Changes in Securities and Use of Proceeds.
On May 20, 1999, the Company issued 193,124 shares to the former
shareholder of the Company's Rhotech subsidiary under the terms of the earn-out
provisions of the agreement pursuant to which the stock of RHO Company, Inc. was
acquired by the Company. In issuing these shares, the Company relied upon the
exemption from registration under Section 4(2) of the Securities Act of 1933.
The Company subsequently registered these shares for resale under a registration
statement filed with the Securities and Exchange Commission.
Item 3. Defaults Upon Senior Securities.
Not applicable.
13
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On June 9, 1999, the annual meeting of the stockholders of the Company was
held. At this meeting, the stockholders voted on the election of John C.
Fanning, Harry Maccarrone, Michael D. Madden, Keith Goldberg, Daniel Raynor,
Gordon Robinett and Kenneth J. Daley to the Board of Directors of the Company,
with each to serve for a term of one (1) year. All of these individuals were
elected upon the following vote:
Nominee For Withheld
John C. Fanning 13,072,193 59,899
Harry Maccarrone 13,072,212 59,880
Michael D. Madden 13,072,212 59,880
Keith Goldberg 13,072,189 59,903
Daniel Raynor 13,072,203 59,889
Gordon Robinett 13,072,212 59,880
Kenneth J. Daley 13,072,200 59,892
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule of COMFORCE Corporation.
(b) Reports on Form 8-K.
On May 7, 1999, the Company filed a Current Report on Form 8-K to report
under Item 4 a change in independent accountants.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
COMFORCE Corporation
By: /s/ Robert H.B. Baldwin, Jr.
-------------------------------------------------
Robert H.B. Baldwin, Jr.,
Senior Vice President and Chief Financial Officer
Date: August 12, 1999
COMFORCE Operating, Inc.
By: /s/ Robert H.B. Baldwin, Jr.
-------------------------------------------------
Robert H.B. Baldwin, Jr.,
Senior Vice President and Chief Financial Officer
Date: August 12, 1999
15
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