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, 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 October 27, 1999
- -------------------- -------------------------------
COMFORCE Corporation:
Common stock, $.01 par value 16,395,493 shares
COMFORCE Operating, Inc.:
Common stock, $.01 par value 100 shares (all owned by COMFORCE Corporation)
<PAGE>
COMFORCE Corporation and
COMFORCE Operating, Inc.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I FINANCIAL INFORMATION....................................................................................3
Item 1. Financial Statements.....................................................................................3
Consolidated Balance Sheets September 30, 1999
and December 31, 1998 (unaudited).........................................................................3
Consolidated Statements of Operations for the three and
nine months ended September 30, 1999 and 1998 (unaudited).................................................4
Consolidated Statements of Cash Flows for the nine months
ended September 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......................................................10
Item 3. Quantitative and Qualitative Disclosure about Market Risk..........................................14
PART II OTHER INFORMATION..................................................................................15
Item 1. Legal Proceedings..................................................................................15
Item 2. Changes in Securities and Use of Proceeds (not applicable).........................................15
Item 3. Defaults Upon Senior Securities (not applicable)...................................................15
Item 4. Submission of Matters to a Vote of Security Holders (not applicable)...............................15
Item 5. Other Information (not applicable).................................................................15
Item 6. Exhibits and Reports on Form 8-K ................................................................15
SIGNATURES.......................................................................................................16
</TABLE>
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>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 4,911 $ 4,599
Accounts receivable, net 53,415 47,727
Funding and service fee receivable, net 35,903 33,953
Prepaid expenses and other current assets 3,174 3,342
Deferred income taxes 2,306 2,306
--------- ---------
Total current assets 99,709 91,927
Property and equipment, net 11,254 9,256
Intangible assets, net 139,018 138,847
Deferred financing costs 5,427 6,052
--------- ---------
Total assets $ 255,408 $ 246,082
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ 4,000 $ 4,000
Accounts payable 3,264 4,296
Accrued expenses 26,412 18,068
--------- ---------
Total current liabilities 33,676 26,364
Long-term debt 177,445 174,579
Deferred income taxes 224 224
Other liabilities 380 581
--------- ---------
Total liabilities 211,725 201,748
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares
authorized; 16,395,457 shares and 16,129,322 shares
issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 164 161
Additional paid-in capital 48,328 47,464
Accumulated deficit since January 1, 1996 (4,809) (3,291)
--------- ---------
Total stockholders' equity 43,683 44,334
--------- ---------
Total liabilities and stockholders' equity $ 255,408 $ 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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Net sales of services $ 109,394 $ 117,230 $ 327,588 $ 347,347
--------- --------- --------- ---------
Costs and expenses:
Cost of services 87,957 94,764 264,882 282,644
Selling, general and administrative 13,640 14,136 42,002 42,458
Depreciation and amortization 1,632 1,320 5,037 4,017
--------- --------- --------- ---------
Total costs and expenses 103,229 110,220 311,921 329,119
--------- --------- --------- ---------
Operating income 6,165 7,010 15,667 18,228
--------- --------- --------- ---------
Other income (expense):
Interest expense (5,537) (5,419) (16,294) (16,020)
Other income, net 2 11 14 34
--------- --------- --------- ---------
(5,535) (5,408) (16,280) (15,986)
--------- --------- --------- ---------
Income (loss) before income taxes 630 1,602 (613) 2,242
Income tax provision 614 925 905 1,871
--------- --------- --------- ---------
Net income (loss) 16 677 (1,518) 371
Dividends on preferred stock -- 6 -- 18
--------- --------- --------- ---------
Net income (loss) applicable to
common stockholders $ 16 $ 671 $ (1,518) $ 353
========= ========= ========= =========
Basic income (loss) per common share $ 0.00 $ 0.04 $ (0.09) $ 0.02
========= ========= ========= =========
Diluted income (loss) per common share $ 0.00 $ 0.04 $ (0.09) $ 0.02
========= ========= ========= =========
Basic weighted average shares 16,395 16,072 16,287 15,958
========= ========= ========= =========
Diluted weighted average shares 16,406 16,623 16,287 16,820
========= ========= ========= =========
</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>
Nine Months Ended
September 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Net cash flows provided by operating activities $ 5,700 $ 8,337
-------- --------
Cash flows from investing activities:
Acquisition, net of cash acquired -- (3,574)
Purchases of property and equipment (3,655) (5,050)
Payments of contingent consideration (2,689) (1,886)
Restricted cash -- 1,036
Decrease in other assets -- 183
-------- --------
Net cash flows used in investing activities (6,344) (9,291)
-------- --------
Cash flows from financing activities:
Net proceeds (repayments) on line of credit agreement 1,130 (986)
Reduction of capital lease obligation (174) (155)
Proceeds from exercise of stock options -- 137
Proceeds from exercise of warrants -- 458
Payment of registration costs -- (44)
Dividends paid -- (25)
-------- --------
Net cash flows provided by (used in) financing
activities 956 (615)
-------- --------
Increase (decrease) in cash and cash equivalents 312 (1,569)
Cash and cash equivalents, beginning of period 4,599 6,512
-------- --------
Cash and equivalents, end of period $ 4,911 $ 4,943
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest paid $ 10,591 $ 9,630
Income taxes paid 607 1,211
Supplemental schedule of noncash investing and
financing activities:
Common stock issued in connection with acquisitions 867 1,900
Dividends accrued but not paid -- 2
Issuance of Senior Secured PIK Debentures in lieu of
interest payment 1,736 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 nine months ended
September 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 September 30, 1999 and December 31,
1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C> <C>
12% Senior Notes, due 2007 $110,000 $110,000
15% Senior Secured PIK Debentures, due 2009 24,898 23,162
Revolving line of credit, due November 26, 2002, with interest payable
monthly at LIBOR plus up to 2.25%. At September 30, 1999, the
average rate of such borrowings was 7.6% 46,547 45,417
------------ -----------
181,445 178,579
Less, current portion 4,000 4,000
------------ -----------
Total long-term debt $177,445 $174,579
============ ===========
</TABLE>
6
<PAGE>
4. EQUITY
The increase in common stock outstanding during the nine months ended
September 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 nine-month periods ended September 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 16 $ 677 $ (1,518) $ 371
Preferred stock dividends -- (6) -- (18)
-------- -------- -------- --------
Numerator for basic and diluted
income (loss) per share--income
(loss) available to common
stockholders $ 16 $ 671 $ (1,518) $ 353
======== ======== ======== ========
Denominator:
Weighted-average shares 16,395 16,072 16,287 15,958
Effect of dilutive securities:
Stock options -- 179 -- 390
Warrants 11 372 -- 472
-------- -------- -------- --------
Denominator for diluted income (loss) per
share-adjusted weighted average shares
and assumed conversions 16,406 16,623 16,287 16,820
======== ======== ======== ========
</TABLE>
Outstanding options and warrants to purchase shares of common stock,
representing approximately 4,000,000 shares of common stock on September 30,
1999, were not included in the computations of diluted earnings (loss) per share
for the three-month and nine-month periods ended September 30, 1999 because
their effect would be anti-dilutive.
6. STOCK OPTIONS:
Effective as of June 9, 1999, the date the annual meeting of shareholders
of the Company was held, the Company granted to each of its five non-employee
directors of the Company an option to purchase 10,000 shares of the Company's
common stock at an exercise price of $3.13 per share. These options, which were
granted under the
7
<PAGE>
Company's Long-Term Stock Investment Plan, will fully vest on the first
anniversary of the date of grant.
7. INDUSTRY SEGMENT INFORMATION:
The Company has determined that its reportable segments can be
distinguished principally by the types of services offered to the Company's
clients.
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 provides non-recruited
payrolling services to those clients. Through its THISCO and Brentwood
divisions, the Financial Services segment also offers 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 nine months ended September 30,
1999 and 1998, and items which reconcile segment operating contribution to the
Company's reported pre-tax income (loss).
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Net sales of services:
Financial Services $ 30,300 $ 23,490 $ 82,381 $ 66,977
Staff Augmentation 79,094 93,740 245,207 280,370
--------- --------- --------- ---------
109,394 117,230 327,588 347,347
--------- --------- --------- ---------
Operating contribution:
Financial Services 3,794 3,300 10,146 9,402
Staff Augmentation 7,599 8,713 22,191 24,439
--------- --------- --------- ---------
11,393 12,013 32,337 33,841
--------- --------- --------- ---------
Consolidated expenses:
Interest 5,537 5,419 16,294 16,020
Depreciation and amortization 1,632 1,320 5,037 4,017
Corporate general and
administrative 3,594 3,672 11,619 11,562
--------- --------- --------- ---------
10,763 10,411 32,950 31,599
--------- --------- --------- ---------
Income (loss) before income taxes $ 630 $ 1,602 $ (613) $ 2,242
========= ========= ========= =========
At September 30, At December 31,
1999 1998
------------------- --------------------
Identifiable Assets:
Financial Services $41,524 $39,967
Staff Augmentation 48,461 41,714
Corporate 20,978 19,502
------------------- --------------------
$110,963 $101,183
=================== ====================
</TABLE>
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 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 September 30, 1999 Compared to Three Months Ended September
30, 1998
Net sales of services for the three months ended September 30, 1999 were
$109.4 million as compared to $117.2 million for the three months ended
September 30, 1998. This 6.7% decline in net sales of services is attributable
principally to a decrease in sales in the Staffing Services and Information
Technologies divisions, offset partially by higher sales in the Company's
Telecom and Financial Services divisions. The Company's business with Boeing
Corporation, its largest customer in 1998, remained substantially lower in the
third quarter of 1999 than in the comparable prior year period. This represented
the majority of the Staffing Services revenue decline. The Company's Information
Technologies division also experienced a decline in sales for the 1999 third
quarter as compared to the comparable prior year period as result of the current
Year 2000 lockdown, which has slowed contract activity, as many customers have
limited or delayed development work until the Year 2000.
Cost of services for the three months ended September 30, 1999 was 80.4% of
net sales of services compared to cost of services of 80.8% for the three months
ended September 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 Telecom and Financial Services divisions. These
divisions have historically generated higher gross margins than the more mature
Staffing Services division.
10
<PAGE>
Selling, general and administrative expenses decreased by $496,000, or 3.5%
during the third quarter of 1999 as compared to the prior year comparable
quarter. However, due to the decline of net sales of services discussed above,
selling, general and administrative expenses as a percentage of revenue
increased to 12.5% for the three months ended September 30, 1999 compared to
12.1% for the three months ended September 30, 1998.
Operating income for the three months ended September 30, 1999 was $6.2
million, compared to $7.0 million for the three months ended September 30, 1998.
This decrease was principally attributable to the reduced net sales of services
discussed above, partially offset by increased margins.
The Company's interest expense for the three months ended September 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 September 30, 1999 was
$614,000 on income before taxes of $630,000, compared to an income tax provision
of $925,000 on income before taxes of $1.6 million for the three months ended
September 30, 1998. The difference between the Federal statutory income tax rate
and the Company's effective tax rate relates primarily to the non-deductibility
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.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Net sales of services for the nine months ended September 30, 1999 were
$327.6 million as compared to $347.3 million for the nine months ended September
30, 1998. This 5.7% decline in net sales of services is attributable principally
to a decrease in sales in theStaffing Services division. The Company's business
with Boeing Corporation, its largest customer in 1998, remained substantially
lower for the nine months ended September 30, 1999 than in the nine months ended
September 30, 1998. The decrease in net sales of services was partially offset
by sales increases in the Company's Financial Services and Telecom divisions.
Cost of services for the nine months ended September 30, 1999 was 80.9% of
net sales of services compared to cost of services of 81.4% for the nine months
ended September 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 Telecom 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 $456,000, or
1.1%, during the nine months ended September 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 12.8% for the nine months ended September 30, 1999 compared to
12.2% for the nine months ended September 30, 1998.
Operating income for the nine months ended September 30, 1999 was $15.7
million, compared to operating income of $18.2 million for the nine months ended
September 30, 1998. This decrease was principally attributable to the reduced
net sales of services, partially offset by increased margins.
11
<PAGE>
The Company's interest expense for the nine months ended September 30, 1999
and 1998 is attributable to the interest on the Credit Facility, the COI Notes
and PIK Debentures, which obligations were incurred in 1997, principally in
connection with the funding of business acquisitions.
The income tax provision for the nine months ended September 30, 1999 was
$905,000 on a loss before taxes of $613,000, compared to an income tax provision
of $1.9 million on income before taxes of $2.2 million for the nine months ended
September 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 cash flow from operations and funds
anticipated to be available under the Credit Facility will be sufficient to
service the Company's indebtedness 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 September 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
$46.5 million outstanding under the Credit Facility bearing interest at an
average rate of 7.6% per annum.
As of September 30, 1999, approximately $139.0 million, or 54.4%, 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' having met certain contractual requirements. The maximum amount of
the remaining potential earn-out payments is $3.0 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.
12
<PAGE>
During the nine months ended September 30, 1999, the Company's primary
sources of funds to meet working capital needs were from operating activities
and borrowings under the Credit Facility. Cash and cash equivalents increased
$312,000 during the nine months ended September 30, 1999. Cash flows provided by
operating activities of $5.7 million and cash flows provided by financing
activities of $956,000 exceeded the $6.3 million of cash flows used in investing
activities. 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.
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 all of its critical billing, payable and accounts
receivable functions to Year 2000 compliant systems.
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
13
<PAGE>
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.
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 nine months ended September 30, 1999, only approximately 16% 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.
14
<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
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 as follows. 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 had agreed to enter into binding
mediation to resolve all issues. The plaintiffs, however, withdrew their offer
of binding mediation, and subsequently the parties agreed to go forward with
non-binding mediation.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule of COMFORCE Corporation and COMFORCE
Operating, Inc.
(b) Reports on Form 8-K.
Not applicable.
15
<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: November 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: November 12, 1999
16
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