<PAGE>
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, 2000
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 August 9, 2000
------------------------------- -----------------------------
COMFORCE Corporation:
Common stock, $.01 par value 16,430,813 shares
COMFORCE Operating, Inc.:
Common stock, $.01 par value 100 shares (all owned by COMFORCE Corporation)
<PAGE>
COMFORCE Corporation and
COMFORCE Operating, Inc.
<TABLE>
<CAPTION>
INDEX
Page
Number
------
<S> <C>
PART I FINANCIAL INFORMATION............................................ 3
Item 1. Financial Statements............................................. 3
Consolidated Balance Sheets at June 30, 2000 (unaudited)
and December 31, 1999........................................... 3
Consolidated Statements of Operations for the three and six
months ended June 30, 2000 and 1999 (unaudited)................. 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 (unaudited)........................ 5
Notes to Unaudited 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........ 13
PART II OTHER INFORMATION................................................ 14
Item 1. Legal Proceedings................................................ 14
Item 2. Changes in Securities and Use of Proceeds (not applicable)....... 14
Item 3. Defaults Upon Senior Securities (not applicable)................. 14
Item 4. Submission of Matters to a Vote of Security Holders.............. 14
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 share and per share amounts)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
(unaudited)
-------------- -----------------
ASSETS:
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 5,330 $ 7,818
Accounts receivable, net 52,237 45,872
Funding and service fees receivable, net 42,818 35,962
Prepaid expenses and other current assets 3,237 2,786
Deferred income taxes, net 1,500 1,554
-------------- -----------------
Total current assets 105,122 93,992
Property and equipment, net 12,001 11,490
Intangible assets, net 139,368 139,010
Deferred financing costs, net 4,800 5,218
-------------- -----------------
Total assets $ 261,291 $ 249,710
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ -- $ 4,000
Accounts payable 2,370 3,015
Accrued expenses 21,822 20,988
-------------- -----------------
Total current liabilities 24,192 28,003
Long-term debt 195,274 178,346
Other liabilities 78 198
-------------- -----------------
Total liabilities 219,544 206,547
-------------- -----------------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized; 16,430,799 shares
and 16,395,549 shares issued and outstanding at June 30, 2000 and December
31, 1999, respectively 164 164
Additional paid-in capital 48,393 48,328
Accumulated deficit since January 1, 1996 (6,810) (5,329)
-------------- -----------------
Total stockholders' equity 41,747 43,163
-------------- -----------------
Total liabilities and stockholders' equity $261,291 $249,710
============== =================
</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,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Revenue:
Net sales of services $117,718 $111,119 $224,563 $218,194
-------- -------- -------- --------
Costs and expenses:
Cost of services 93,294 89,529 179,089 176,925
Selling, general and administrative 16,084 14,296 31,326 28,362
Depreciation and amortization 1,827 1,745 3,636 3,405
-------- -------- -------- --------
Total costs and expenses 111,205 105,570 214,051 208,692
-------- -------- -------- --------
Operating income 6,513 5,549 10,512 9,502
-------- -------- -------- --------
Other income (expense):
Interest expense (5,889) (5,464) (11,483) (10,757)
Other income, net (19) 10 34 12
-------- -------- -------- --------
(5,908) (5,454) (11,449) (10,745)
-------- -------- -------- --------
Income (loss) before income taxes 605 95 (937) (1,243)
Income tax provision 544 439 544 291
-------- -------- -------- --------
Net income (loss) $ 61 $ (344) $ (1,481) $ (1,534)
========= ======== ======== ========
Basic income (loss) per common share $ -- $(0.02) $(0.09) $(0.09)
========= ======== ======== ========
Diluted income (loss) per common share $ -- $(0.02) $(0.09) $(0.09)
========= ======== ======== ========
Basic weighted average shares 16,431 16,291 16,428 16,232
========= ======== ======== ========
Diluted weighted average shares 16,464 16,291 16,428 16,232
========= ======== ======== ========
</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
------------------------
2000 1999
---- ----
<S> <C> <C>
Net cash flows used in operating activities $ (8,838) $ (1,011)
----------- ---------
Cash flows from investing activities:
Acquisition, net of cash acquired (781) -
Purchases of property and equipment (1,861) (2,724)
Payments of contingent consideration (1,873) (2,013)
----------- ---------
Net cash flows used in investing activities (4,515) (4,737)
----------- ---------
Cash flows from financing activities:
Net borrowings under long-term line of credit
agreement 10,920 8,427
Reduction of capital lease obligation (95) (115)
Proceeds from exercise of stock options 40 -
----------- ---------
Net cash flows provided by financing
Activities 10,865 8,312
----------- ---------
(Decrease) increase in cash and cash equivalents (2,488) 2,564
Cash and cash equivalents, beginning of period 7,818 4,599
----------- ---------
Cash and cash equivalents, end of period $ 5,330 $ 7,163
=========== =========
Supplemental cash flow information:
Cash paid during the period for:
Interest paid $ 8,592 $ 8,501
Income taxes paid 1,288 462
Non-cash investing and financing activities:
Common stock issued in connection with acquisitions -- 867
Issuance of senior secured PIK Debentures in lieu of
interest payments 2,008 1,732
</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, 1999. The results for the three and six months ended June
30, 2000 are not necessarily indicative of the results of operations for the
entire year.
2. ACQUISITION
On February 7, 2000, the Company purchased, through its Uniforce Staffing
Services, Inc. subsidiary, all of the issued and outstanding stock of Gerri G.,
Inc. for total consideration of $800,000 in cash. In addition, the Company
agreed to contingent payments under which it would pay a minimum of $200,000 and
a maximum of $600,000 in cash over a two-year period, provided certain
contingencies are satisfied. Gerri G. is in the business of providing staffing,
permanent placement and training services. This transaction is not material to
the Company. Pro forma results have not been provided as their effect is not
material to the financial statements of the Company.
3. DEBT
Long-term debt at June 30, 2000 and December 31, 1999 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
12% Senior Notes, due 2007 $110,000 $110,000
15% Senior Secured PIK Debentures, due 2009 28,774 26,766
Revolving line of credit, due November 26, 2002, monthly at LIBOR plus up
to 2.0%. At June 30, 2000, the average rate was 8.7%. 56,500 45,580
---------- ------------
195,274 182,346
Less, current portion -- 4,000
---------- ------------
Total long-term debt $195,274 $178,346
========== ============
</TABLE>
The debt service costs associated with the 15% Senior Secured PIK
Debentures due 2009 ("PIK Debentures") may be satisfied through the issuance of
new notes. For the six months ended June 30, 2000, the Company issued $2,008,000
of additional PIK Debentures in lieu of interest.
6
<PAGE>
4. EQUITY
During the first six months of 2000, options were exercised to purchase
35,000 shares of common stock at an exercise price of $1.13 per share.
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, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 61 $ (344) $(1,481) $(1,534)
=============================================================
Denominator:
Weighted-average shares 16,431 16,291 16,428 16,232
Effect of dilutive securities:
Employee stock options -- -- -- --
Contingent stock - acquisitions -- -- -- --
Warrants 33 -- -- --
-------------------------------------------------------------
Denominator for diluted income (loss) per
share - adjusted weighted average shares
and assumed conversions 16,464 16,291 16,428 16,232
=============================================================
</TABLE>
Outstanding options and warrants to purchase shares of common stock,
representing approximately 5,200,000 shares of common stock on June 30, 2000,
were not included in the computations of diluted loss per share for the six
months ended June 30, 2000 because their effect would be anti-dilutive.
6. STOCK OPTIONS:
At the Company's annual meeting of stockholders held on June 13, 2000, the
Company's stockholders approved an amendment to the Company's Long-Term Stock
Investment Plan increasing the number of shares of common stock which may be
issued under the plan from 4,000,000 to 5,000,000.
During the first six months of 2000, the Company granted options to
purchase in aggregate of 652,000
7
<PAGE>
shares of the Company's common stock at an exercise price of $2.00 per share,
which was equal to or greater than the fair market value on the date of grant.
Substantially all of the options were granted to 23 officers and employees of
the Company. These options, which were granted under the Company's Long-Term
Stock Investment Plan, will vest in equal increments on each of the next two
anniversaries 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
sectors. 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 involves providing non-
recruited payrolling services to those clients. 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
Note 2 to the consolidated financial statements of the Company included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999. 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. Assets of the operating segments reflect primarily net
accounts receivable associated with segment activities; all other assets are
included as corporate assets. The Company does not track expenditures for long-
lived assets on a segment basis.
8
<PAGE>
The table below presents information on the revenues and operating
contribution for each segment for the three and six months ended June 30, 2000
and 1999, and items that reconcile segment operating contribution to the
Company's reported pre-tax income (loss) (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales of services:
Financial Services $ 35,035 $ 27,896 $ 67,776 $ 52,081
Staff Augmentation 82,683 83,223 156,787 166,113
-------- -------- -------- ---------
$117,718 $111,119 $224,563 $218,194
Operating contribution:
Financial Services $ 3,836 $ 3,568 $ 7,205 $ 6,352
Staff Augmentation 8,731 7,608 15,444 14,592
-------- -------- -------- ---------
12,567 11,176 22,649 20,944
-------- -------- -------- ---------
Consolidated expenses:
Interest 5,889 5,464 11,483 10,757
Depreciation and amortization 1,827 1,745 3,636 3,405
Corporate general and
administrative 4,246 3,872 8,467 8,025
-------- -------- -------- ---------
11,962 11,081 23,586 22,187
-------- -------- -------- ---------
Income (loss) before income taxes $ 605 $ 95 $ (937) $ (1,243)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At June 30, 2000 At December 31, 1999
----------------- --------------------
<S> <C> <C>
Total Assets:
Financial Services $ 56,748 $ 42,812
Staff Augmentation 38,307 39,022
Corporate 166,236 167,876
---------------- --------------------
$261,291 $249,710
================ ====================
</TABLE>
8. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
established standards for the reporting and display of comprehensive income and
its components with the same prominence as other items in annual consolidated
financial statements. The Company has no elements of comprehensive income other
than net income (loss); therefore, comprehensive income (loss) equals reported
net income (loss).
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
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.
The Company operates in two business segments -- Staff Augmentation and
Financial Services. The Staff Augmentation segment provides Information
Technologies (IT), Telecom and Staffing services. The Financial Services segment
provides outsourcing and consulting services. For a detailed discussion of the
Company's business, see Item 1 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
In February 2000, the Company completed the acquisition of Gerri G. Inc., a
Staten Island based provider of staffing, permanent placement and training
services. In 1999, Gerri G. generated sales of approximately $4.8 million.
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Net sales of services for the three months ended June 30, 2000 were $117.7
million, an increase of 5.9% from net sales of services for the three months
ended June 30, 1999 of $111.1 million. The increase in 2000 net sales of
services is principally attributable to higher sales to the Company's Financial
Services customers, substantially in PrO Unlimited, and to Telecom customers,
and the contribution of sales by Gerri G. since its acquisition in February
2000, partially offset by a decrease in sales to Staff Augmentation customers in
the technical and information technologies sectors.
Cost of services for the three months ended June 30, 2000 was 79.3% of net
sales of services as compared to cost of services of 80.6% for the three months
ended June 30, 1999. The cost of services decrease as a percentage of net sales
for the second quarter of 2000 is a result of the continued strategies
undertaken by management to increase margins throughout the Company, as well as
increases in permanent placement fees.
Selling, general and administrative expenses as a percentage of net sales
of services were 13.7% for the three months ended June 30, 2000, compared to
12.9% for the three months ended June 30, 1999. This increase resulted
principally from higher payroll and recruiting costs with respect to non-
billable staff and investments to expand PrO Unlimited's infrastructure.
10
<PAGE>
Operating income for the three months ended June 30, 2000 was $6.5 million
as compared to operating income of $5.5 million for the three months ended June
30, 1999. This 17.4% increase in operating income for the second quarter of
2000 resulted from an increase in gross margin, partially offset by higher
selling, general and administrative expenses discussed above and an increase in
depreciation and amortization.
The Company's interest expense for the second quarter of 2000 and 1999 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, 2000 was
$544,000 on income before taxes of $605,000, compared to an income tax provision
of $439,000 on income before taxes of $95,000 for the three months ended June
30, 1999. The Company provides for income taxes, based upon the estimated
effective tax rate (on a year to date basis). 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, 2000 Compared to Six Months Ended June 30, 1999
Net sales of services for the six months ended June 30, 2000 were $224.6
million, an increase of 2.9% from net sales of services for the six months ended
June 30, 1999 of $218.2 million. The increase in 2000 net sales of services is
principally attributable to higher sales to the Company's Financial Services
customers, substantially in PrO Unlimited, and to Telecom customers, and the
contribution of sales by Gerri G. since its acquisition in February 2000,
partially offset by a decrease in sales to Staff Augmentation customers in the
technical and information technologies sectors.
Cost of services for the six months ended June 30, 2000 was 79.8% of net
sales of services as compared to cost of services of 81.1% for the six months
ended June 30, 1999. The cost of services decrease as a percentage of net sales
for the first six months of 2000 is a result of the continued strategies
undertaken by management to increase margins throughout the Company, as well as
increases in permanent placement fees.
Selling, general and administrative expenses as a percentage of net sales
of services were 13.9% for the six months ended June 30, 2000, compared to 13.0%
for the six months ended June 30, 1999. This increase resulted principally from
higher payroll and recruiting costs with respect to non-billable staff and
investments to expand PrO Unlimited's infrastructure.
Operating income for the six months ended June 30, 2000 was $10.5 million
as compared to operating income of $9.5 million for the six months ended June
30, 1999. This 10.6% increase in operating income for the first six months of
2000 resulted from an increase in gross margin, offset by higher selling,
general and administrative expenses discussed above and an increase in
depreciation and amortization.
The Company's interest expense for the first six months of 2000 and 1999 is
attributable to the interest on the Credit Facility, the COI Notes and 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, 2000 was
$544,000 on a loss before taxes of $937,000, compared to an income tax provision
of $291,000 on a loss before taxes of $1.2 million for the six months ended June
30, 1999. The company provides for income taxes, based upon the estimated
effective tax rate (on a year to
11
<PAGE>
date basis). 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, and
remits certain statutory payroll and related taxes as well as other fringe
benefits. Invoices are generated to reflect these costs plus the Company's
markup. These bills are typically paid within 45 days. 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.
Management of the Company believes that cash flow from operations and funds
anticipated to be available under the Company's Credit Facility will be
sufficient to service the Company's indebtedness and to meet anticipated working
capital requirements based on its current operational needs.
As of June 30, 2000, the Company had outstanding $28.8 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 $56.5
million outstanding under the Credit Facility bearing interest at an average
rate of 8.7% per annum. 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. In July 2000, the Company
repurchased $2.0 million principal amount of COI Notes for a purchase price of
$920,000. The Company may seek to take advantage of future opportunities to
repurchase COI Notes and PIK Debentures, through public market purchases or
privately negotiated transactions, subject to certain limitations provided for
under the Credit Facility.
As of June 30, 2000, approximately $139.4 million, or 53.3%, 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 non-cash charge of approximately $4.5 million.
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. During the six months
ended June 30, 2000, contingent payments in connection with these acquisitions
were approximately $1.9 million in cash. The maximum amount of the remaining
potential earn-out payments is approximately $2.1 million in cash payable
through December 31, 2002. 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, 2000, the Company's primary sources of
funds to meet working capital needs were from borrowings under the Credit
Facility. Cash and cash equivalents decreased $2.5 million during the six
months ended June 30, 2000. Cash flows provided by financing activities of
$10.9 million were exceeded by cash flows used in operating activities of $8.8
million and cash flows used in investing activities of $4.5 million. The
increase in cash flows used in operations over the same period in the prior year
is primarily attributable to the need to fund growth in accounts receivable.
12
<PAGE>
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 Technical Staffing services 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 Telecom and IT services 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 sales to IT, Telecom and Financial Services customers continue to
increase as a percentage of the Company's consolidated net sales of services.
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 the first quarter of the
fiscal year 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 and
SFAS 138, to have a significant effect on the Company's results of operations or
its financial position.
Forward Looking Statements
Various statements made in this Report concerning the manner in which the
Company intends to conduct its future operations, and potential trends that may
impact future results of operations, are forward looking statements. The
Company may be unable to realize its plans and objectives due to various
important factors, including, but not limited to, heightened competition for
customers as well as for contingent personnel which could potentially require
the Company to reduce its current fee scales without being able to reduce the
personnel costs of its billable employees; due to the Company's significant
leverage, its greater vulnerability to economic downturns and its diminished
ability to obtain additional financing for working capital, capital
expenditures, debt service requirements or for other purposes; and if the
Company is unable to sustain the cash flow necessary to support the significant
amortization charges related to goodwill for its acquired businesses, it could
be required to write-off the impaired assets, which could have a material
adverse impact on its financial condition and results of operations. Additional
important factors that could cause the Company to be unable to realize its plans
and objectives are described under "Risk Factors" in the Registration Statement
on Form S-3 of the Company filed with the Securities and Exchange Commission on
July 2, 1999 (Registration No. 333-82201). The disclosure under "Risk Factors"
in the Registration Statement may be accessed through the Web site maintained by
the Securities and Exchange Commission at "www.sec.gov." In addition, the
Company will provide, without charge, a copy of such "Risk Factors" disclosure
to each stockholder of the Company who requests such information. Requests for
copies should be directed to the attention of Linda Annicelli, Vice President of
Administration at COMFORCE Corporation, 415 Crossways Park Drive, P.O. Box 9006,
Woodbury, New York 11797, telephone 516-437-3300.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 has been disclosed in Item 7A of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
There has been no material change in the disclosure regarding market risk.
13
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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, 1999, there have been no material new legal
proceedings involving the Company or any material developments to the
proceedings described in such 10-K.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 13, 2000, the annual meeting of the stockholders of the Company was
held. At this meeting, the stockholders voted on (1) the election of directors,
with each to serve for a term of one year, (2) an amendment to the Company's
Long-Term Stock Investment Plan to increase the maximum number of shares which
may be issued under this plan from 4,000,000 to 5,000,000 and (3) the
ratification of the appointment of KPMG as the Company's auditors for the year
ending December 31, 2000.
The following individuals were elected to the Board of Directors upon the
vote shown:
Nominee For Withheld
John C. Fanning 14,717,424 733,004
Harry Maccarrone 14,717,428 733,000
Kenneth J. Daley 14,717,287 733,141
Keith Goldberg 14,717,279 733,149
Daniel Raynor 14,717,287 733,141
Gordon Robinett 14,717,430 732,998
The proposed amendment to the Company's Long-Term Stock Investment Plan was
approved and adopted upon the following vote:
Absentions and
For Against Broker non-Votes
7,772,275 2,448,613 5,229,540
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The appointment of KPMG LLP was ratified and approved upon the following
vote:
Absentions and
For Against Broker non-Votes
15,420,927 19,591 9,910
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.
None.
15
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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/ Harry Maccarrone
--------------------------------------------
Harry Maccarrone, Executive Vice President
and Chief Financial Officer
Date: August 14, 2000
COMFORCE Operating, Inc.
By: /s/ Harry Maccarrone
--------------------------------------------
Harry Maccarrone, Executive Vice President
and Chief Financial Officer
Date: August 14, 2000
16
