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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the fiscal year ended December 31, 1999
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
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
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
COMFORCE Corporation: Common stock, $.01 par value American Stock Exchange
COMFORCE Operating, Inc.: None
Securities registered pursuant to Section 12(g) of the Act:
COMFORCE Corporation: None
COMFORCE Operating, Inc.: None
(Cover page continued next page)
(Cover page continued)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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 ___
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 24, 2000:
COMFORCE Corporation: $ 22,807,088
COMFORCE Operating, Inc.: Not Applicable
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMFORCE Corporation:
Class Outstanding at March 24, 2000
-------------------------- -----------------------------
Common stock, $.01 par value 16,430,575
COMFORCE Operating, Inc.: COMFORCE Corporation owns all of the 100 issued
and outstanding shares of Common Stock of COMFORCE
Operating, Inc.
Documents Incorporated by Reference: None
2
PART I
ITEM 1. BUSINESS
Overview
COMFORCE Corporation ("COMFORCE") is a leading provider of specialty
staffing, consulting and outsourcing services primarily to Fortune 500 companies
for their information technology, telecommunications, scientific and
engineering-related needs. COMFORCE Operating, Inc. ("COI"), a wholly-owned
subsidiary of COMFORCE, was formed for the purpose of facilitating certain of
the Company's financing transactions in November 1997. Unless the context
otherwise requires, the term the "Company" refers to COMFORCE, COI and all of
their direct and indirect subsidiaries.
Through a national network of 62 offices (47 company-owned and 15
licensed), the Company recruits and places highly skilled contingent personnel
and provides financial and outsourcing services for a broad customer base,
including Sun Microsystems, Bellsouth Telecommunications, Inc. (directly and
through Anderson Consulting, LLP) and Microsoft Corporation. The Company's labor
force consists primarily of computer programmers, systems consultants and
analysts, engineers, technicians, scientists, researchers and skilled office
support personnel.
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.
Services
The Company provides a wide range of staffing, consulting, financial and
outsourcing services. The Company's extensive proprietary database and national
presence enable it to draw from a wealth of resources to link highly-trained
computer, telecommunications and other professionals, as well as clerical
personnel, with businesses that need highly skilled labor. The Company's
services are designed to give its customers maximum flexibility and maximum
choice. The Company's professionals are available on a short-term or long-term
basis. The Company's services permit businesses to increase the volume of their
work without increasing fixed overhead and permanent personnel costs.
The Company operates in two business segments -- Staff Augmentation and
Financial Services. The Staff Augmentation segment provides Information
Technology (IT), Telecom and Staffing services. The Financial Services segment
provides outsourcing and consulting services. A description of the types of
services provided by each segment follows.
STAFF AUGMENTATION
Information Technology
In the IT field, the Company provides highly skilled programmers, help desk
personnel, systems consultants and analysts, software engineers and project
managers for a wide range of technical assignments, including client server,
mainframe, desktop services and Internet/Intranet. In 1999, placements related
to internet development represented an increasing percentage of new placements
in this field. In addition to these staffing services, the Company also provides
non-recruited payrolling services to certain of its IT customers. These services
consist of acting as the employer for workers identified by the customer,
preparing payrolls, withholding taxes, and tracking hours, vacation and sick
days. In addition, these employees participate in the Company's benefit programs
rather than those of the customer.
The Company's IT customers include Microsoft Corporation, BellSouth
Telecommunications, Inc. (directly and through Anderson Consulting, LLP), Boeing
Information Services, Inc., Eastman Kodak Company, Bank of America, Xerox
Corporation, Southwest Airlines and Fidelity Investments.
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Telecom
The Company has significantly increased the amount of Telecom services it
has provided to its clients in recent years, fueled by the surge in demand for
voice and data transfer capacity. The Company provides skilled Telecom personnel
to plan, design, engineer, install and maintain wireless and wireline
telecommunications systems, including cellular, PCS, microwave, radio, satellite
and other networks.
The Company's Telecom customers include AT&T Corporation, Northern Telecom,
Inc., Reltec Corporation, ALCATEL Network Systems, Inc., Motorola, Inc.,
Ericsson Corporation and Pacific Intertel.
Staffing
The Company provides both Technical Staffing services and Professional
Staffing services.
Technical Staffing. The Company provides Technical Staffing services for
national laboratory research in such areas as environmental safety, alternative
energy source development and laser technology, and provides highly-skilled
labor meeting diverse commercial needs in the avionics and aerospace,
architectural, automotive, energy and power, pharmaceutical, marine and
petrochemical fields. The Company also provides non-recruited payrolling
services to certain Technical Staffing customers.
The Company's Technical Staffing customers include Boeing Company,
Westinghouse Electric Corporation, and the National Department of Energy
National Research Laboratories at Los Alamos and Sandia.
Professional Staffing. The Company offers Professional Staffing services
through 12 Company-owned and 15 licensed locations. In this field, the Company
provides highly specialized professional chemists, biologists, engineers,
laboratory instrumentation operators, technicians and others to companies
involved in pharmaceutical, environmental, biotech and processing businesses.
The Company also recruits and trains skilled clerical personnel who provide more
traditional services for medical office, legal and accounting professionals.
The Company's Professional Staffing customers include R.R. Donnelley & Sons
Co., Estee Lauder Companies, Inc. and Dial Corporation, as well as many smaller
companies such as independent medical providers and accounting firms.
FINANCIAL SERVICES
PrO Unlimited
PrO Unlimited has become the industry leader in providing confidential
consulting and conversion services to companies that require assistance in
complying with regulations associated with the use of independent contractors,
returning retirees and consultants. If appropriate, the Company may become the
employer of some or all of these clients' staff (on a non-recruited basis) and,
in such cases, will provide various services for these employees, including
preparing payrolls, withholding taxes and tracking hours and vacation and sick
days. In 1999, an increasing proportion of PrO Unlimited's revenue was derived
from its "Managing the Contingent Workforce" capability, in which PrO Unlimited
assumes responsibility for all of a client's contingent workforce.
Funding and Support Services
The Company also provides payroll funding services and back office support
to approximately 115 independent consulting and staffing companies. The
Company's back office services include payroll processing and billing,
preparation of various management reports and analysis, payment of all federal,
state and local payroll taxes and preparation and filing of quarterly and annual
payroll tax returns for the contingent personnel employed and placed by
independently owned and operated staffing and consulting firms. Contingent
personnel placed by such independent staffing and consulting firms remain
employees of such firms. In providing payroll funding services, the Company
purchases the accounts receivable of
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independent staffing firms and receives payments directly from these firms'
clients. The Company pursues the collection of those receivables; however, the
amount of any account receivable which is not collected within a specified
period after billing is charged back by the Company to such firm.
Customers
The Company provides staffing, consulting and outsourcing services to a
broad range of customers including telecommunication equipment manufacturers,
telecommunication service providers (wireline and wireless), computer software
and hardware manufacturers, aerospace and avionics firms, utilities, national
laboratories, pharmaceutical companies, cosmetics companies, health care
facilities, educational institutions and accounting firms. Services to Fortune
500 companies represent a majority of the Company's revenues.
In certain cases, the Company's contracts with its customers provide that
the Company will have the first opportunity to supply the personnel required by
that customer. Other staffing companies not under contract with the customer are
then offered the opportunity to supply personnel only if the Company is unable
to meet the customer's requirements.
The Company generally invoices its customers weekly. IT, Telecom and
Professional Staffing customers generally obtain the Company's services on a
purchase order basis, while Technical Staffing and Financial Services customers
generally enter into long-term contracts with the Company.
During the year ended December 31, 1999, no single customer accounted for
10% or more of the Company's revenues. The largest four customers accounted for
approximately 27.7% of the Company's revenues.
Sales and Marketing
The Company services its customers through a network of 47 company-owned
and 15 licensed branch offices located in 22 states across the United States and
its corporate headquarters located in Woodbury, New York. The Company's sales
and marketing strategy is focused on increasing its share of existing customer
business, expanding its business with existing customers through cross-selling
to customers and by establishing relationships with new customers. The Company
solicits customers through personal sales presentations, telephone marketing,
direct mail solicitation, referrals from customers, and advertising in a variety
of local and national media including the Yellow Pages, magazines, newspapers,
trade publications and through the Company's Internet home page.
The Company's sales and marketing strategy is to maintain its existing
account relationships while developing new relationships with smaller,
faster-growing companies. The Company's Relationship Managers are responsible
for maintaining contact with existing clients, maximizing the number of
requisitions that the Company will have the opportunity to fill, and then
working with the recruiting staff to offer the client the candidate or
candidates that best fit the specification. New account targets are chosen by
assessing: (1) their need for contract labor with skill sets provided by the
Company; (2) the appropriateness of the Company's niche products to the client's
needs; (3) the potential growth and profitability of the account; and (4) the
creditworthiness of the client. While the Company's corporate office assists in
the selection of target accounts, the majority of account selection and
marketing occurs locally, and the emphasis is on smaller, faster-growing
companies rather than larger, national accounts. Relationship Managers are
compensated primarily by commissions on gross profits generated.
Recruiting and Training of Billable Employees
The Company's success depends on its ability to effectively and efficiently
match skilled personnel with specific customer assignments. The Company has
established an extensive national resume database of prospective employees with
expertise in the disciplines served by the Company. To identify qualified
personnel for inclusion in this database, the Company solicits referrals from
its existing personnel and customers, places advertisements in local newspapers,
trade magazines, its Internet home page and other Internet sites, and otherwise
actively recruits through the Internet. The Company continuously updates its
proprietary database to reflect changes in personnel skill levels and
availability. Upon receipt of assignment specifications, the Company searches
the database to identify suitable personnel. Once an individual's skills are
5
matched to the specifications, the Company considers other selection criteria
such as interpersonal skills, availability and geographic preferences to ensure
there is a proper fit between the employee and the assignment being staffed. The
Company can search its resume database by a number of different criteria,
including specific skills or qualifications, to match the appropriate employee
with the assignment.
Management believes that the Company enhances its ability to attract
recruits by making extensive training opportunities available to its employees.
The Company employs Internet-based educational programs to train employees in
the latest developments in IT, telecommunications and other technologies. The
Company also maintains a training facility in Dallas, Texas, where Telecom
staffers are trained to install and test telecommunications equipment, and
provides a telephone hot line to assist its clerical employees with software
problems or questions.
The Company believes it has a competitive advantage in attracting and
retaining specialty staffing and consulting personnel as it provides assignments
with high-profile customers that make use of advanced technology and offer the
employees the opportunity to obtain additional experience that can enhance their
skills and overall marketability. The Company also offers flexible schedules,
wages and, depending on the contract or assignment, paid holidays, vacation, and
certain benefit plan opportunities to attract and retain qualified personnel.
Information Systems
During 1999, the Company completed the implementation of its PeopleSoft(R)
Enterprise Resource Planning system, which the Company believes is the industry
standard. With its PeopleSoft(R) system, the Company has been able to
substantially consolidate its back office operations. Through this system, the
Company has also been able to substantially integrate the management information
systems of its 11 acquired companies.
The Company is in the process of implementing its EZAccess(R) recruiting
and database software system to consolidate the resume databases of its acquired
companies. This software allows easier, faster and more accessible updating of
its resume database and posting of job openings on a national basis. The Company
believes that EZAccess(R) will enhance both its recruiting efforts and its
customer service capabilities.
Competition
The contingent staffing and consulting industry is very competitive and
fragmented. There are relatively limited barriers to entry and new competitors
frequently enter the market. The Company's competitors vary depending on
geographic region and the nature of the service(s) being provided. The Company
faces substantial competition from both larger firms possessing substantially
greater financial, technical and marketing resources than the Company and
smaller, regional firms with a strong presence in their respective local
markets.
Management believes that the availability and quality of candidates, the
effective monitoring of job performance, the scope of geographic service and the
price of service are the principal elements of competition. The availability of
quality contingent personnel is an especially important facet of competition.
The Company believes its ability to compete also depends in part on a number of
competitive factors outside its control, including the ability of its
competitors to hire, retain and motivate skilled technical and management
personnel and the extent of its competitors' responsiveness to customer needs.
Employees
The Company currently employs approximately 600 full-time staff employees
at its headquarters and Company-owned offices. The Company issued approximately
52,000 W-2s to employees who provided services to the Company's clients during
1999. In addition to employees on assignment, the Company maintains a
proprietary database of prospective employees with expertise in the disciplines
served by the Company. Billable employees are employed by the Company on an
as-needed basis dependent on customer demand and are paid only for time they
actually work. Non-billable administrative personnel provide management, sales
and marketing and other services in support of the Company's staffing services.
6
Licensed Offices
The Company has granted a limited number of licenses to operate COMFORCE
offices. The most recent license for a new office was granted in July 1992, and
the Company does not presently expect to grant more licenses. Licensees recruit
contingent personnel and promote their services to both existing and new clients
obtained through the licensees' marketing efforts. Performance of the contingent
personnel and overall service quality is the direct responsibility of licensees,
and the licensees are ultimately responsible for the collection of accounts
receivable. The Company and the licensees share the gross profits from each
licensed office.
Regulations
Contingent staffing and consulting services firms are generally subject to
one or more of the following types of government regulations: (1) registration
of the employer/employees; (2) licensing, record keeping and recording
requirements; and (3) substantive limitations on operations. Contingent staffing
and consulting firms are the legal employers of their workers. Therefore, the
Company is governed by laws regulating the employer/employee relationship, such
as tax withholding or reporting, social security or retirement,
antidiscrimination and workers' compensation. In addition, the Company's
licenses are considered to be franchises, which are subject to regulation, both
by the Federal Trade Commission and a number of states.
ITEM 2. PROPERTIES
The Company leases all of its office space. Excluding the Company's
headquarters, these leases are for office space ranging in size from
approximately 150 square feet to approximately 15,600 square feet and have
remaining lease terms of from less than one year to five years. The Company's
headquarters in Woodbury, New York occupies approximately 23,500 square feet and
the lease term for this space extends until 2010. Effective March 1, 2000, the
Company entered into a lease for an additional 14,500 square feet of space in
Woodbury, New York for headquarters expansion. The Company owns no real estate,
except for an approximately 700 square foot condominium.
The Company believes that its facilities are adequate for its present and
reasonably anticipated future business requirements, except to the extent of
future acquisitions of existing businesses. In the case of such acquisitions,
the Company expects to assume the leases of businesses acquired or, to the
extent possible, consolidate such operations with existing offices. The Company
does not anticipate difficulty locating additional facilities, if needed.
ITEM 3. LEGAL PROCEEDINGS
In January 1997, Austin A. Iodice, who served as the Company's Chief
Executive Officer, President and Vice Chairman while the Company was engaged in
the jewelry business, and Anthony Giglio, who performed the functions of the
Company's Chief Operating Officer while the Company was engaged in the jewelry
business, filed separate suits against the Company in the Connecticut Superior
Court alleging that the Company had breached the terms of management agreements
entered into with them by failing to honor options to purchase Common Stock
awarded to them in connection with the management of the jewelry business under
the terms of such management agreements and the Company's Long-Term Stock
Investment Plan. The suits allege that the plaintiffs are entitled to an
unspecified amount of damages. The Company believes that the option to purchase
370,419 shares granted to Mr. Iodice (through Nitsua, Ltd., a corporation
wholly-owned by him) and the option to purchase 185,210 shares granted to Mr.
Giglio, each having an exercise price of $1.125 per share, expired in 1996,
three months after Messrs. Giglio and Iodice ceased to be employed by the
Company. Messrs. Giglio and Iodice maintain that they were agents and not
employees of the Company and that the options continue to be exercisable. In
October 1998, plaintiffs filed motions for partial summary judgment, which
motions were denied by the court in March 1999. The parties attended a
non-binding mediation conference in February 2000 but were unable to resolve the
dispute. The Company intends to continue to vigorously defend itself against
these suits. Trial has been scheduled for November 2000.
The Company is a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are believed
by management to be material to the business or financial condition of the
Company. The Company maintains general liability insurance, property insurance,
automobile insurance, employee benefit liability insurance, fidelity insurance
and directors' and officers'
7
liability insurance. The Company is generally self-insured with respect to
workers' compensation, but maintains umbrella workers' compensation coverage to
limit its maximum exposure to such claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the American Stock Exchange
(AMEX:CFS). The high and low sales prices for the Common Stock, as reported by
the American Stock Exchange in the Monthly Market Statistics for the periods
indicated, were as follows:
High Low
---- ---
1998 First Quarter ........................ 9 6 9/16
Second Quarter ....................... 11 7/16 7 1/8
Third Quarter ........................ 9 3/4 4 5/8
Fourth Quarter ....................... 6 3/16 3 1/2
1999 First Quarter ........................ 6 1/4 3 1/2
Second Quarter ....................... 3 15/16 2 5/8
Third Quarter ........................ 3 1/16 2
Fourth Quarter ....................... 3 1
2000 First Quarter (through March 24, 2000) 3 5/8 1 7/8
The last reported sale price of the Common Stock of the Company on the
American Stock Exchange on March 24, 2000 was $2.00. As of such date, there were
approximately 4,600 shareholders of record.
The Company anticipates that it will not pay cash dividends on the Common
Stock for the foreseeable future and that it will retain its earnings to finance
future growth. The declaration and payment of dividends by the Company are
subject to the discretion of its Board of Directors and compliance with
applicable law. Any determination as to the payment of dividends in the future
will depend upon, among other things, general business conditions, the effect of
such payment on the Company's financial condition and other factors the
Company's Board of Directors may in the future consider relevant. The revolving
credit facility entered into with Heller Financial, Inc., as lender and agent
for other participating lenders (the "Credit Facility"), prohibits the payment
of cash dividends. In addition, the terms of COI's 12% Senior Notes due 2007
restrict COI's payment of dividends to the Company, which is expected to be the
only source of funds from which the Company could pay dividends. No dividends
were declared or paid on the Common Stock during 1999.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of the
Company as of and for each of the five years in the period ended December 31,
1999. The Company derived the statement of operations and balance sheet data as
of and for each of the five years in the period ended December 31, 1999 from its
audited historical consolidated financial statements.
8
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data: (1)
Net sales of services ................... $ 2,387 $ 55,867 $ 216,521 $ 459,022 $ 436,221
Operating income (loss) ................. (3,679) 2,413 6,865 24,924 21,863
--------- --------- --------- --------- ---------
Income (loss) from continuing operations (4,332) 1,352 (3,700) 805 (2,038)
--------- --------- --------- --------- ---------
Income (loss) available to common
stockholders ......................... (14,886) 362 (4,437) 784 (2,038)
========= ========= ========= ========= =========
Diluted net income (loss) per share ..... $ (3.24) $ 0.03 $ (0.33) $ 0.05 $ (0.12)
Balance Sheet Data:
Working capital (deficit) ............... $ (1,697) $ 8,012 $ 59,762 $ 65,563 $ 65,989
Accounts receivable, net ................ 1,698 12,042 72,865 81,680 81,834
Intangible assets, net .................. 4,801 24,756 135,516 138,847 139,010
Total assets ............................ 8,536 43,366 235,934 246,082 249,710
Total debt, including current maturities 500 3,850 171,038 178,579 182,346
Preferred stock ......................... -- 2 1 -- --
Stockholders' equity .................... 2,238 34,744 39,402 44,334 43,163
- ----------
(1) Results for the year ended December 31, 1995 represent results of COMFORCE
Telecom, Inc. from the date of its acquisition, October 17, 1995. Results for
the year ended December 31, 1996 represent results of COMFORCE Telecom for the
entire year, results of Williams Communications Services, Inc. from the
acquisition date of March 3, 1996 through December 31, 1996, results of RRA,
Inc. and certain related entities from the acquisition date of May 10, 1996
through December 31, 1996, results of Force Five, Inc. from the effective date
of acquisition of July 31, 1996 through December 31, 1996, results of AZATAR
Computer Systems, Inc. from the effective date of acquisition of November 1,
1996 through December 31, 1996, and results of Continental Field Services
Corporation and a related entity from the effective date of acquisition of
November 8, 1996 through December 31, 1996. Results for the year ended December
31, 1997 represent results of RHO Company, Incorporated from the acquisition
date of February 28, 1997 through December 31, 1997 and results of Uniforce
Services, Inc. from the acquisition date of November 26, 1997 through December
31, 1997. Results for the year ended December 31, 1998 represent results of
Camelot Consulting Group Inc., Camelot Communications Group Inc., Camelot
Control Group Inc. and Camelot Group Inc. (collectively, "Camelot") from the
beginning of January 1998 through December 31, 1998. The Company's jewelry
operations were discontinued effective as of September 30, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth below supplements the information found in the
consolidated financial statements and related notes.
Overview
Since October 1995, the Company has completed 11 acquisitions, including
one in the first quarter of 2000 (see "Overview" in Item 1 of this Report). Each
of these acquisitions has been accounted for on a purchase basis and the results
of operations of each of the businesses acquired have been included in the
Company's historical consolidated financial
9
statements from the date of acquisition. Certain of these acquisitions provide
for contingent payments by the Company as a part of the purchase consideration
based upon the operating results of the acquired businesses for specified future
periods. The acquisitions were financed by the Company principally through its
issuance of debt and equity securities and borrowings under credit facilities.
As a result, the Company's historical results of operations include bridge
financing costs, which are not expected to be incurred in future periods, and
preferred stock dividends. All previously issued preferred stock has been
repurchased or redeemed by the Company.
Staffing personnel placed by the Company are employees of the Company. The
Company is responsible for employee related expenses for its employees,
including workers' compensation, unemployment compensation insurance, Medicare
and Social Security taxes and general payroll expenses. The Company offers
health, dental, disability and life insurance to its billable employees.
Staffing and consulting companies, including the Company, typically pay their
billable employees for their services before receiving payment from their
customers, often resulting in significant outstanding receivables. To the extent
the Company increases revenues through acquisitions and/or internal growth,
these receivables will grow and there will be greater requirements for borrowing
availability under its credit facilities to fund current operations.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales of services for the year ended December 31, 1999 were $436.2
million, a decline of 5.0% from net sales of services for the year ended
December 31, 1998 of $459.0. The decrease in 1999 net sales of services is
principally attributable to a decrease in sales to Staffing and Information
Technology customers, offset partially by higher sales to the Company's Telecom
and Financial Services customers. The Company's business with Boeing
Corporation, its largest customer in 1998, was substantially lower in 1999. This
represented the majority of the decline the Company experienced in sales to
Staffing customers. The Company also experienced a decline in IT sales in the
second half of 1999 as result of the Year 2000 lockdown, which slowed contract
activity, as many customers limited or delayed IT development work until after
January 1, 2000.
Cost of services for the year ended December 31, 1999 was 80.7% of net
sales of services compared to cost of services of 81.2% for the year ended
December 31, 1998. The cost of services decrease as a percentage of net sales
for the 1999 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 sales and declines in certain of the Company's lower margin
Staffing services businesses.
Selling, general and administrative expenses as a percentage of net sales
of services was 12.7% for the year ended December 31, 1999, compared to 12.1%
for the year ended December 31, 1998. This percentage increase was principally
attributable to the decline of net sales of services discussed above.
Operating income for the year ended December 31, 1999 was $21.9 million,
compared to operating income of $24.9 million for the year ended December 31,
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 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 year ended December 31, 1999 was $2.2
million on a profit before taxes of $131,000, as compared to an income tax
provision for the year ended December 31, 1998 of $2.7 million on pretax income
of $3.5 million. The difference between the Federal statutory income tax rate
and the Company's effective tax rate relates
10
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 adjustments to prior period tax
estimates.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales of services of $459.0 million for the year ended December 31,
1998 were $242.0 million, or nearly 112% higher than net sales of services for
the year ended December 31, 1997. The increase in 1998 net sales of services is
attributable principally to the Company's acquisition of Uniforce on November
26, 1997.
Cost of services for the year ended December 31, 1998 was 81.2% of net
sales of services compared to cost of services of 86.1% for the year ended
December 31, 1997. The cost of services decrease of 4.9% for 1998 is a result of
the Company's business mix in that year, which reflected the full period impact
of acquisitions completed during 1997 as well as growth in sales to the
Company's IT, Telecom and Financial Services customers. Sales in these fields
have historically generated higher gross margins than those in the more mature
Technical Staffing field.
Selling, general and administrative expenses as a percentage of revenue was
12.1% for the year ended December 31, 1998, compared to 9.1% for the year ended
December 31, 1997. This percentage increase was principally attributable to the
operations of the Company's Uniforce subsidiary, which was acquired in 1997.
Uniforce's selling, general and administrative fees, which include significant
licensee costs related to its franchise operations, are substantially higher on
a percentage basis than those historically recorded by the Company. The licensee
costs included in selling, general and administrative fees were $6.9 million for
1998 and $0.5 million for 1997 (which included only one month of Uniforce's
operations).
Operating income for the year ended December 31, 1998 was $24.9 million,
compared to operating income of $6.9 million for the year ended December 31,
1997. This increase was principally attributable to the Company's completion of
the Rhotech and Uniforce acquisitions in 1997.
The Company's interest expense for 1998 is attributable to the interest on
the Credit Facility, the COI Notes and COMFORCE's 15% Senior Secured PIK
Debentures, all of which obligations were incurred in November 1997. For the
year ended December 31, 1997, interest expense is attributable to the $25.2
million principal amount of the Subordinated Debentures issued by the Company in
February and March 1997 (the "Old Subordinated Debentures"), the Company's
credit facilities outstanding during the year and the COI Notes and PIK
Debentures issued in November 1997. The amortization of the costs payable on the
Old Subordinated Debentures is reflected in bridge and financing charges for
1997.
The income tax provision for the year ended December 31, 1998 was for $2.7
million on pretax income of $3.5 million, compared to a tax credit of $1.4
million on a loss before taxes of $5.1 million for the year ended December 31,
1997. The difference between the Federal statutory income tax rate and the
Company's effective tax rate relates primarily to state income taxes and the
nondeductibility of amortization expense associated with certain intangible
assets.
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 in approximately 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 Credit Facility will be sufficient to
service the Company's indebtedness and to meet anticipated working capital
requirements for the foreseeable future.
As of December 31, 1999, the Company had outstanding $26.8 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
$45.6 million outstanding under the Credit Facility bearing interest at an
average rate of 8.6% per annum. The debt service costs
11
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.
As of December 31, 1999, approximately $139.0 million, or 55.7%, 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 $4.5 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. The maximum amount of
the remaining potential earn-out payments is $3.1 million in cash payable in the
two-year period beginning January 1, 2000. The Company cannot currently estimate
whether it will be obligated to pay the maximum amount; however, the Company
anticipates that the cash generated by the operations of the acquired companies
will provide all or a substantial part of the capital required to fund the cash
portion of the earn-out payments.
During the year ended December 31, 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 $3.2
million during the year ended December 31, 1999. Cash flows provided by
operating activities of $11.0 million exceeded cash flows used in financing
activities of $75,000 and $7.7 million of cash flows used in investing
activities.
Year 2000
As described in the Company's annual report on Form 10-K for the year ended
December 31, 1998 and its quarterly reports on Form 10-Q for the quarters ended
March 31, 1999, June 30, 1999 and September 30, 1999, the Company has examined
its critical IT and non-IT operating systems for Year 2000 compliance. Since
entering the year 2000, the Company has not experienced any significant
disruptions to its business either directly or by reason of any Year 2000
problems affecting the Company's customers or suppliers. The Company will
continue to monitor its critical systems over the next several months, but does
not anticipate any significant Year 2000 impact on its business. As previously
disclosed, the Company significantly upgraded its computing systems over the
last several years, principally for reasons unrelated to Year 2000 issues.
Consequently, the Company did not incur significant incremental costs in seeking
to become Year 2000 compliant.
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.
12
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, to
have a significant effect on the Company's results of operations or its
financial position.
Forward Looking Statements
Various statements made in this Item 7 and elsewhere 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's 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
"http://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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The preponderance of the Company's borrowings are fixed rate obligations.
During 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 the
Company's results of operations in the immediate future. Assuming an immediate
10% increase in the interest rate under the Credit Facility, the impact to the
Company in annualized interest payable would be approximately $450,000. Since
management does not believe that any adjustments to the rate under the Credit
Facility are likely to have a material impact on the Company's results of
operations, the Company has not entered into any swap agreements or other
hedging transactions as a means of limiting exposure to interest rate
fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Schedules as listed on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this section will be included in the Company's
Proxy Statement which will be filed with the Securities and Exchange Commission
on or before April 29, 2000 and is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section will be included in the Company's
Proxy Statement which will be filed with the Securities and Exchange Commission
on or before April 29, 2000 and is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this section will be included in the Company's
Proxy Statement which will be filed with the Securities and Exchange Commission
on or before April 29, 2000 and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section will be included in the Company's
Proxy Statement which will be filed with the Securities and Exchange Commission
on or before April 29, 2000 and is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements as listed on page F-1.
2. Financial Statement Schedules as listed on page F-1.
3. Exhibits as listed on page E-1.
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed by the Company during the fourth
quarter of 1999.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COMFORCE Corporation
By: /s/ John C. Fanning
-----------------------------------------------------
John C. Fanning, Chairman and Chief Executive Officer
Date: March 29, 2000
COMFORCE Operating, Inc.
By: /s/ John C. Fanning
-----------------------------------------------------
John C. Fanning, Chairman and Chief Executive Officer
Date: March 29, 2000
15
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of each
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John C. Fanning Chairman, Chief Executive
- ---------------------------- Officer and Director
John C. Fanning (Principal Executive Officer) March 29, 2000
/s/ Harry Maccarrone Executive Vice President
- ---------------------------- and Director (Principal
Harry Maccarrone Accounting Officer) March 29, 2000
/s/ Robert H.B. Baldwin, Jr. Senior Vice President and
- ---------------------------- Chief Financial Officer
Robert H.B. Baldwin, Jr. (Principal Financial Officer) March 29, 2000
/s/ Michael D. Madden Vice Chairman and
- ---------------------------- Director March 24, 2000
Michael D. Madden
Director
- ----------------------------
Daniel Raynor
/s/ Gordon Robinett Director March 24, 2000
- ----------------------------
Gordon Robinett
/s/ Keith Goldberg Director March 24, 2000
- ----------------------------
Keith Goldberg
/s/ Kenneth J. Daley Director March 24, 2000
- ----------------------------
Kenneth J. Daley
16
COMFORCE CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Reports F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Operations for the
years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-10
Schedule
Schedule II Valuation and Qualifying Accounts F-26
F-1
Independent Auditors' Report
Board of Directors and Stockholders
COMFORCE Corporation:
We have audited the accompanying consolidated balance sheet of COMFORCE
Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1999. In connection with our audit of the
consolidated financial statements, we have also audited the financial statement
schedule as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of COMFORCE Corporation
and subsidiaries as of December 31, 1999, and the results of their operations
and their cash flows for the year ended December 31, 1999, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Melville, New York
February 28, 2000
F-2
Report of Independent Accountants
To the Shareholders and Board of Directors of
of COMFORCE Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing on page F-1, present fairly, in all material respects, the financial
position of COMFORCE Corporation and Subsidiaries at December 31,1998, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31,1998, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedules for 1998 and 1997, listed in the index appearing
on page F-1, present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 25,1999
F-3
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands, except share and per share amounts)
Assets 1999 1998
--------- ---------
Current assets:
Cash and cash equivalents $ 7,818 4,599
Accounts receivable, less allowance of
$868 and $790 in 1999 and 1998, respectively 45,872 47,727
Funding and service fees receivable 35,962 33,953
Prepaid expenses and other current assets 2,786 3,342
Deferred income taxes, net 1,554 2,306
--------- ---------
Total current assets 93,992 91,927
Property and equipment, net 11,490 9,256
Intangible assets, net 139,010 138,847
Deferred financing costs 5,218 6,052
--------- ---------
Total assets $ 249,710 246,082
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings under revolving line of credit $ 4,000 4,000
Accounts payable 3,015 4,296
Accrued expenses 20,988 18,068
--------- ---------
Total current liabilities 28,003 26,364
Long-term debt 178,346 174,579
Deferred income taxes -- 224
Other liabilities 198 581
--------- ---------
Total liabilities 206,547 201,748
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized,
16,395,549 and 16,129,322 shares issued and
outstanding in 1999 and 1998, respectively 164 161
Additional paid-in capital 48,328 47,464
Accumulated deficit, since January 1, 1996 (note 1) (5,329) (3,291)
--------- ---------
Total stockholders' equity 43,163 44,334
--------- ---------
Total liabilities and stockholders' equity $ 249,710 246,082
========= =========
See accompanying notes to consolidated financial statements.
F-4
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
(in thousands, except per share amounts)
1999 1998 1997
--------- --------- ---------
Revenue:
Net sales of services $ 436,221 459,022 216,521
--------- --------- ---------
Costs and expenses:
Cost of services 352,101 372,877 186,455
Selling, general and administrative expenses 55,596 55,827 19,718
Restructuring charge (credit) (163) (211) 1,600
Depreciation and amortization 6,824 5,605 1,883
--------- --------- ---------
Total costs and expenses 414,358 434,098 209,656
--------- --------- ---------
Operating income 21,863 24,924 6,865
--------- --------- ---------
Other income (expense):
Bridge and financing charges -- -- (7,672)
Interest expense (21,825) (21,490) (4,588)
Other income (expense), net 93 35 344
--------- --------- ---------
(21,732) (21,455) (11,916)
Income (loss) before income taxes 131 3,469 (5,051)
Provision (credit) for income taxes 2,169 2,664 (1,351)
--------- --------- ---------
Net income (loss) (2,038) 805 (3,700)
--------- --------- ---------
Dividends on preferred stock -- 21 737
--------- --------- ---------
Income (loss) available to common
stockholders $ (2,038) 784 (4,437)
========= ========= =========
Basic net income (loss) per common share $ (0.12) 0.05 (0.33)
========= ========= =========
Weighted average common shares outstanding, basic 16,315 15,971 13,493
========= ========= =========
Diluted net income (loss) per common share $ (0.12) 0.05 (0.33)
========= ========= =========
Weighted average common shares outstanding, diluted 16,315 16,648 13,493
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
(in thousands, except share amounts)
Series D
Common stock preferred stock
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Balance at December 31, 1996 12,701,934 $ 127 7,002 $ 1
Exercise of stock options 124,000 1 -- --
Exercise of stock warrants 80,000 1 -- --
Redemption of Series F preferred stock -- -- -- --
Conversion of Series D preferred stock 583,500 6 (7,002) (1)
Issuance of common stock as inducement
to effect Series D conversion 87,750 1 -- --
SEC registration fees -- -- -- --
Issuance of warrants in connection with debt placement -- -- -- --
Issuance of common stock in
connection with payment right 385,591 4 -- --
Issuance of common stock as consideration
for interest owed on debt 118,145 1 -- --
Issuance of common stock in connection
with the acquisition of Uniforce Services, Inc. 1,585,208 16 -- --
Issuance of warrants in connection with the
acquisition of Uniforce Services, Inc. -- -- -- --
Redemption of common stock (321,881) (4) -- --
Net loss -- -- -- --
Dividends:
Series D preferred stock -- -- -- --
Series F preferred stock -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1997 15,344,247 153 -- --
----------- ----------- ----------- -----------
Exercise of stock options 80,500 1 -- --
Exercise of stock warrants 108,132 1 -- --
Conversion of Series F preferred stock 57,143 1 -- --
SEC registration fees -- -- -- --
Issuance of common stock in connection
with the acquisition of Camelot 203,307 2 -- --
Issuance of common stock in connection with acquisitions 335,993 3 -- --
Tax benefit from exercise of stock options -- -- -- --
Net income -- -- -- --
Dividends:
Series F preferred stock -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1998 16,129,322 161 -- --
----------- ----------- ----------- -----------
Series F Retained Total
preferred stock Additional earnings stock-
----------- ----------- paid-in (accumulated holders'
Shares Amount capital deficit) equity
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 3,250 $ 1 34,253 362 34,744
Exercise of stock options -- -- 141 -- 142
Exercise of stock warrants -- -- 214 -- 215
Redemption of Series F preferred stock (2,750) -- (3,162) -- (3,162)
Conversion of Series D preferred stock -- -- (5) -- --
Issuance of common stock as inducement
to effect Series D conversion -- -- 492 (493) --
SEC registration fees -- -- (625) -- (625)
Issuance of warrants in connection with debt placement -- -- 1,511 -- 1,511
Issuance of common stock in
connection with payment right -- -- (4) -- --
Issuance of common stock as consideration
for interest owed on debt -- -- 632 -- 633
Issuance of common stock in connection
with the acquisition of Uniforce Services, Inc. -- -- 12,143 -- 12,159
Issuance of warrants in connection with the
acquisition of Uniforce Services, Inc. -- -- 150 -- 150
Redemption of common stock -- -- (2,417) -- (2,421)
Net loss -- -- -- (3,700) (3,700)
Dividends:
Series D preferred stock -- -- -- (195) (195)
Series F preferred stock -- -- -- (49) (49)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 500 1 43,323 (4,075) 39,402
----------- ----------- ----------- ----------- -----------
Exercise of stock options -- -- 137 -- 138
Exercise of stock warrants -- -- 459 -- 460
Conversion of Series F preferred stock (500) (1) (298) -- (298)
SEC registration fees -- -- (46) -- (46)
Issuance of common stock in connection
with the acquisition of Camelot -- -- 1,498 -- 1,500
Issuance of common stock in connection with acquisitions -- -- 2,005 -- 2,008
Tax benefit from exercise of stock options -- -- 386 -- 386
Net income -- -- -- 805 805
Dividends:
Series F preferred stock -- -- -- (21) (21)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 -- -- 47,464 (3,291) 44,334
----------- ----------- ----------- ----------- -----------
(Continued)
F-6
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
(in thousands, except share amounts)
Series D
Common stock preferred stock
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Balance at December 31, 1998 16,129,322 $161 -- $ --
---------- ---- ------- -------
Issuance of common stock 17,549 -- -- --
Issuance of common stock in connection with acquisitions 248,678 3 -- --
Net loss -- -- -- --
---------- ---- ------- -------
Balance at December 31, 1999 16,395,549 $164 -- $ --
========== ==== ======= =======
Series F Retained Total
preferred stock Additional earnings stock-
----------- ----------- paid-in (accumulated holders'
Shares Amount capital deficit) equity
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 -- $ -- 47,464 (3,291) 44,334
------- ------- ------ ------ -------
Issuance of common stock -- -- -- -- --
Issuance of common stock in connection with acquisitions -- -- 864 -- 867
Net loss -- -- -- (2,038) (2,038)
------- ------- ------ ------ -------
Balance at December 31, 1999 -- $ -- 48,328 (5,329) 43,163
======= ======= ====== ====== =======
See accompanying notes to consolidated financial statements.
F-7
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
-------- ------- --------
Cash flows from operating activities:
Net income (loss) $ (2,038) 805 (3,700)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation and amortization of fixed assets 2,342 1,255 482
Amortization of intangible assets 4,482 4,326 1,401
Amortization of deferred financing costs 835 836 --
Allowance for doubtful accounts 79 (17) 106
Deferred income taxes 529 1,747 (578)
Issuance of notes in lieu of interest 3,604 3,162 --
Changes in assets and liabilities, net of the effects
of acquisitions of businesses:
Accounts receivables (233) (3,848) (1,177)
Prepaid expenses and other current assets (323) (746) 714
Income taxes receivable 879 2,896 (1,218)
Other noncurrent assets -- -- 2,021
Accounts payable and accrued expenses 874 (5,966) (8,162)
Other liabilities -- -- (1,322)
-------- ------- --------
Net cash provided by (used in)
operating activities 11,030 4,450 (11,433)
-------- ------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired -- (3,574) (97,006)
Purchase of property and equipment (4,576) (6,182) (832)
Increase in deferred costs and other assets (471) -- --
Payments of contingent consideration (2,689) (1,912) --
Decrease in restricted cash -- 1,036 (1,036)
Other -- -- (636)
-------- ------- --------
Net cash used in investing activities (7,736) (10,632) (99,510)
-------- ------- --------
Cash flows from financing activities:
Net decrease in short-term debt -- -- (7,302)
Net borrowings (repayments) under line of credit agreements 162 4,170 (4,790)
Proceeds from issuance of equity securities -- 639 983
Dividends paid -- (21) (244)
Proceeds from long-term borrowings -- -- 130,000
Debt financing costs -- (309) (4,800)
Reduction of capital lease obligations (237) (210) --
-------- ------- --------
Net cash provided by (used in) financing activities (75) 4,269 113,847
-------- ------- --------
Increase (decrease) in cash and cash equivalents 3,219 (1,913) 2,904
Cash and cash equivalents, beginning of year 4,599 6,512 3,608
-------- ------- --------
Cash and cash equivalents, end of year $ 7,818 4,599 6,512
======== ======= ========
(Continued)
Supplemental cash flow information:
F-8
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
-------- ------- --------
Cash paid during the year for:
Interest $16,712 17,068 2,575
Income taxes 669 1,585 347
Details of acquisition (note 3):
Fair value of assets acquired -- 9,071 185,175
Liabilities assumed -- (3,855) (70,700)
Less stock issued -- (1,500) (12,157)
------- ------- --------
Cash paid -- 3,716 102,318
Less cash acquired -- 142 5,312
------- ------- --------
Net cash paid $ -- 3,574 97,006
======= ======= ========
Supplemental schedule of significant noncash
investing and financing activities:
Common stock issued in connection with acquisitions 867 3,508 12,159
Tax benefit from exercise of stock options -- 386 --
Common stock issued to restructure and settle liabilities -- -- 636
Issuance of short-term debt to redeem
Series F preferred stock -- -- 3,162
Dividends paid through issuance of common stock -- -- 493
Warrants issued in connection with debt and acquisitions -- -- 1,931
Forgiveness of officer loans -- -- 352
See accompanying notes to consolidated financial statements.
F-9
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) Basis of Presentation
COMFORCE Corporation (COMFORCE), is a leading provider of staffing,
outsourcing and consulting solutions primarily to Fortune 500 companies in
the information technology (IT), telecommunications, technical,
professional and financial market sectors. COMFORCE Operating, Inc. (COI),
a wholly-owned subsidiary of COMFORCE, was incorporated as a Delaware
corporation in October 1997 for the purpose of facilitating certain of the
Company's financing transactions in November 1997 (see note 9). Unless the
context otherwise requires, the term "Company" refers to COMFORCE, COI and
all of their wholly-owned direct and indirect subsidiaries.
Effective January 1, 1996, the Company effected a quasi-reorganization
through the application of $93,847,000 of its $95,993,000 additional
paid-in capital account to eliminate its accumulated deficit. The Company's
Board decided to effect a quasi-reorganization given that the Company
achieved profitability following its entry into the technical staffing
business and discontinuation of its unprofitable jewelry business.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of COMFORCE, COI
and their subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
Revenue for providing staffing services is recognized at the time such
services are rendered.
A portion of the Company's revenue is attributable to franchise operations.
The Company includes such revenues and related direct costs in its net
sales of services and cost of services, respectively. The net distribution
to the franchisee is based on a percentage of gross profit generated and is
included in operating expenses. The licensee share in operating expenses at
December 31, 1999, 1998 and 1997 was approximately $5,374,000, $6,946,000
and $8,976,000, respectively.
Funding and support services provide payroll funding services and back
office support to independent consulting and staffing companies. In
providing payroll funding services, the Company purchases the accounts
receivable of independent staffing firms and receives payments directly
from these firms' clients. The Company pursues the collection of these
receivables; however, the amount of any account receivable which is not
collected within a specified period after billing is charged back by the
Company to such firm. The Company receives a fee for providing such funding
and other services, which is included in net sales of services in the
accompanying consolidated statements of operations.
(Continued)
F-10
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with an
original maturity of three months or less to be cash and cash equivalents.
Cash equivalents consists primarily of money market funds.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided
primarily on a straight-line basis over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the shorter of
the life of the lease or of the improvement. Maintenance and repairs are
charged to expense as incurred and improvements that extend the useful life
are capitalized. Upon retirement or sale, the cost and accumulated
depreciation are removed from the respective accounts, and the gain or
loss, if any, is reflected in earnings.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the
long-lived asset, an impairment loss is recognized. To date, no impairment
losses have been recognized.
Intangible Assets
The net assets of a purchased business are recorded at their fair value at
the date of acquisition. Goodwill represents the excess of purchase price
over the fair value of identifiable net assets of companies acquired.
Goodwill is amortized on a straight-line basis over periods of 20 to 40
years (see note 6).
The Company assesses the recoverability of this asset by determining
whether the amortization of the goodwill balance over its remaining life
can be recovered through forecasted future operations. Impairment is
evaluated by comparing future cash flows (undiscounted and without interest
charges) expected to result from the use or sale of the asset and its
eventual disposition, to the carrying amount of the asset.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense consists of the tax payable for
the period and the change during the period in deferred tax assets and
liabilities.
(Continued)
F-11
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Values of Financial Instruments
Cash and cash equivalents, accounts receivable, funding and service fees
receivable, accounts payable and accrued expenses are reflected in the
financial statements at fair value because of the short-term maturity of
these financial instruments.
The Company's fixed rate debt obligations are traded very infrequently, and
their fair market value may fluctuate significantly due to changes in the
demand for securities of their type, the overall level of interest rates,
conditions in the high yield capital markets, and perceptions as to the
Company's condition and prospects. After giving consideration to similar
debt issues, indicated bid levels, and other market information, the
Company believes that the approximate fair value of the COI Notes and the
PIK Debentures is $66.0 million and $10.9 million, respectively, at
December 31,1999.
Deferred Licensee Acquisition Costs
In connection with the Uniforce acquisition (see note 3), the Company
acquired executed contracts for affiliations with existing supplemental
staffing service companies. Such contracts required the payment of
affiliation fees which are being amortized on a straight-line method over
the minimum terms of the affiliation agreements which range from five to
ten years. Amortization of deferred licensee acquisition costs was not
significant for 1999 and 1998.
Deferred Financing Costs
Deferred financing costs consist of costs associated with the issuance of
the Company's long-term debt (see note 9). Such costs are being amortized
on a straight-line basis over the life of each financing source, which
ranges from 5 to 12 years.
Income (Loss) Per Share
Basic earnings (loss) per common share is computed by dividing net earnings
(losses) available for common shareholders by the weighted average number
of shares of common stock outstanding during each period. Diluted earnings
(loss) per share is computed assuming the conversion of stock options,
warrants and contingent shares with a market value greater than the
exercise price.
(Continued)
F-12
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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". 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) Acquisitions
During January 1998, COMFORCE Telecom, Inc., a wholly-owned subsidiary of
the Company, purchased all of the issued and outstanding stock of Camelot
Consulting Group Inc., Camelot Communications Group Inc., Camelot Control
Group Inc. and Camelot Group Inc. (collectively, Camelot) for total
consideration of approximately $3.7 million in cash and 203,307 shares of
the Company's common stock. In addition, the Company issued contingent
payment certificates under which it could be required to pay up to $3.25
million in cash over a three-year period. The acquisition has been
accounted for under the purchase method and, accordingly, the results of
operations are included in the financial statements from the date of
acquisition. Camelot is in the business of selling and installing
telecommunications equipment and of providing staffing services.
On November 26, 1997, the Company completed the acquisition of Uniforce
Services, Inc. and subsidiaries (Uniforce). The Company purchased Uniforce
for $93,600,000 in cash and 1,585,208 of its common shares with a value of
approximately $12,200,000. The acquisition has been accounted for under the
purchase method and, accordingly, the results of operations are included in
the financial statements from the date of acquisition. The cash portion of
the purchase price paid at closing was principally funded through the
Company's offering of 12% Senior Notes (see note 9).
On February 28, 1997, the Company purchased all of the stock of RHO
Company, Inc. (Rhotech) for $14,800,000 in cash, plus a contingent payout
to be paid over three years based on future earnings of Rhotech, and
payable in stock in an aggregate amount not to exceed $3,300,000. COMFORCE
issued 386,249 shares in satisfaction of the contingent payment
obligations. Rhotech provides specialists primarily in the technical
services and information technology sectors.
In the year ended December 31, 1996, the Company completed the acquisitions
of the following businesses which have been accounted for under the
purchase method of accounting: Williams Communication Services, Inc.
(Williams), Project Staffing Support Team, Inc., RRA, Inc. and Datatech
Technical Services, Inc. (collectively RRA), Force Five, Inc. (Force Five),
Azatar Computer Systems, Inc. (Azatar), and Continental Field Services
Corporation and its affiliate, and Progressive Telecom, Inc. (collectively,
Continental). The aggregate purchase price of the acquisitions in the year
ended December 31, 1996 was approximately $21,029,000, comprised of
$15,834,000 in cash and approximately $5,195,000 in common stock of the
Company. In addition, certain of the acquisitions contain contingent payout
provisions based on the attainment of specified earnings.
(Continued)
F-13
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
During 1999, contingent payments in connection with these acquisitions were
approximately $2,689,000 in cash and 248,678 shares of the Company's common
stock. At December 31, 1999, maximum future contingent payments in
connection with all acquisitions approximate $3,100,000 in cash.
(4) Restructuring Charges
The Company recorded a $1.6 million restructuring charge in the fourth
quarter of 1997 related to merger and integration charges resulting from
the acquisition of Uniforce. All of the actions under these plans are
completed and have resulted in lower costs than originally estimated. As a
result of these developments, the Company recognized a restructuring credit
of $163,000 in 1999 and $211,000 in 1998. As of December 31, 1999, there
were no remaining restructuring liabilities.
(5) Fixed Assets
Fixed assets consist of (in thousands):
Estimated
useful lives
in years 1999 1998
-------- -------- -------
Computer and related software 3-7 $ 13,243 9,193
Furniture, fixtures and vehicles 3-7 1,921 1,633
Leasehold improvements 3-7 578 346
-------- -------
15,742 11,172
Less accumulated depreciation and amortization (4,252) (1,916)
-------- -------
$ 11,490 9,256
======== =======
Depreciation and amortization expense was $2,342,000, $1,255,000 and
$482,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
(6) Intangibles
Intangibles as of December 31, 1999 and 1998 consisted of (in thousands):
(Continued)
F-14
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Estimated
useful lives
in years 1999 1998
-------- --------- -------
Goodwill 20-40 $ 147,491 143,245
Non-compete covenants 5 1,190 737
Other 5 716 1,130
--------- -------
149,397 145,112
Less accumulated amortization (10,387) (6,265)
--------- -------
$ 139,010 138,847
========= =======
Amortization expense was $4,482,000, $4,326,000 and $1,401,000 in the years
ended December 31, 1999, 1998 and 1997, respectively.
(7) Accrued Expenses
Accrued expenses consist of the following (in thousands):
1999 1998
------- ------
Payroll and payroll taxes $ 9,729 9,023
Vacation/pension plan 1,742 1,382
Income taxes payable 1,048 --
Commissions 1,424 1,401
Medical insurance 1,100 563
Interest 1,867 1,733
Restructuring -- 635
Other 4,078 3,331
------- ------
$20,988 18,068
======= ======
(8) Income Taxes
The provision (benefit) for income taxes as of December 31, 1999, 1998 and
1997 consists of (in thousands):
1999 1998 1997
------ ------ ------
Current:
Federal $1,338 621 (695)
State 303 296 (78)
Deferred 528 1,747 (578)
------ ------ ------
$2,169 2,664 (1,351)
====== ====== ======
(Continued)
F-15
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Total income tax expense differed from the statutory United States Federal
income tax rate of 34% before income taxes as a result of the following
items (in thousands):
1999 1998 1997
------ ------ ------
Statutory Federal tax rate provision
(benefit) at 34.0% $ 45 1,181 (1,719)
State and local taxes, net of Federal benefit 5 133 (193)
Change in deferred tax rates and estimates used 157 -- 116
Effect of non-deductible items 1,820 1,350 232
Alternative minimum tax -- -- 46
Other, individually less than 5% -- -- 167
Change in estimates used for prior years 142 -- --
------ ------ ------
$2,169 2,664 (1,351)
====== ====== ======
The components of deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 (in thousands) are as follows:
1999 1998
------ -----
Deferred tax assets:
Reserves and allowances $ 637 1,277
Accrued severance 19 111
Accrued liabilities and other 3,110 1,823
------ -----
Total deferred tax assets 3,766 3,211
------ -----
Deferred tax liability:
Intangibles 896 677
Excess depreciation 1,316 452
------ -----
Total deferred tax liabilities 2,212 1,129
------ -----
Net deferred tax asset $1,554 2,082
====== =====
The net deferred income tax assets are reflected in the accompanying
balance sheets as follows (in thousands):
1999 1998
------ -----
Net deferred income tax assets - current $1,554 2,306
Net deferred income tax liability - noncurrent -- 224
------ -----
$1,554 2,082
====== =====
(Continued)
F-16
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income and tax
planning strategies implemented. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which
the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these
deductible differences at December 31, 1999. The amount of the deferred tax
asset considered realizable, however, could be reduced if estimates of
future taxable income change.
(9) Debt
Notes payable and long-term debt at December 31, 1999 and 1998 (in
thousands) consisted of the following:
1999 1998
-------- -------
12% Senior Notes, due 2007 (a) $110,000 110,000
15% Senior Secured PIK Debentures,
due 2009 (b) 26,766 23,162
Revolving line of credit, due November 26, 2002,
with interest payable monthly at LIBOR plus
2.0%. At December 31, 1999 and 1998, the
weighted average rate was 8.17% and
7.53%, respectively (c) 45,580 45,417
-------- -------
182,346 178,579
Less current portion 4,000 4,000
-------- -------
Total long-term debt $178,346 174,579
======== =======
(a) The 12% Senior Notes (the Notes) are senior uncollateralized
obligations of COI and rank equal in right of payment with all
existing and future senior indebtedness of COI and senior in right of
payment to all existing and future subordinated indebtedness of COI.
The Notes provide for the payment of interest semi-annually at the
rate of 12% per annum and mature on December 1, 2007.
COI may redeem the Notes, in whole or in part, at any time on or after
December 1, 2002 at a redemption price of 106% for the 12 months
commencing December 1, 2002, declining annually to 100% at any time on
or after December 1, 2005, together with accrued and unpaid interest
to the date of redemption. In addition, at any time prior to December
1, 2000, COI may, subject to certain requirements, redeem up to 35% of
the aggregate principal amount of the Notes with the cash proceeds
received from one or more equity offerings at a redemption price equal
to 112% of
(Continued)
F-17
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
the principal amount to be redeemed, together with accrued and unpaid
interest to the date of redemption, provided that at least 65% of the
aggregate principal amount of the Notes issued through the date of
redemption remains outstanding immediately after each such redemption.
Upon the occurrence of certain specified events deemed to result in a
change of control, COI will be required to make an offer to repurchase
the Notes at a price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest to the date of repurchase.
Subject to certain qualifications and exceptions the indenture
governing the Notes limits (i) the incurrence of additional
indebtedness by COI and its subsidiaries, (ii) the payment of
dividends on, and redemption of, capital stock of COI and the
redemption of certain subordinated obligations of COI, (iii)
investments, (iv) sales of assets and subsidiary stock, (v)
transactions with affiliates, (vi) consolidations, mergers and
transfers of all or substantially all the assets of COI, and (vii)
distributions from subsidiaries.
(b) The 15% Senior Secured PIK Debentures (the Senior Debentures)
constitute direct and unconditional senior obligations of the Company
and are collateralized by a pledge by the Company of all of the issued
and outstanding common stock of COI. The payment obligations of the
Company under the Senior Debentures must at all times rank at least
equal in priority of payment with all existing and future indebtedness
of the Company. The Senior Debentures are structurally subordinated to
all indebtedness of the Company's direct and indirect subsidiaries.
The Senior Debentures bear interest at the rate of 15% per annum,
subject to increases in certain circumstances, payable semi-annually,
and mature on December 1, 2009. Through December 1, 2002, interest is
payable in cash or in additional Senior Debentures paid in kind (PIK)
on each interest payment date, at the option of the Company.
Thereafter, interest is payable only in cash. During 1999, the Company
issued $3,604,000 of additional Senior Debentures in lieu of interest.
Subject to certain requirements, the Company may at any time redeem
any or all of the Senior Debentures at the price of 107.5%.
Upon the occurrence of certain specified events deemed to result in a
change of control, COMFORCE will be required to make an offer to
repurchase the Senior Debentures at a price equal to 101% of the
principal amount thereof, together with accrued and unpaid interest,
if any, to the date of repurchase.
Subject to certain qualifications and exceptions, the indenture
governing the Senior Debentures limits (i) the incurrence of
additional indebtedness by the Company and its subsidiaries, (ii) the
payment of dividends on, and redemption of, capital stock of the
Company and the redemption of certain subordinated obligations of the
Company, (iii) investments, (iv) sales of assets and subsidiary stock,
(v) transactions with affiliates, (vi) consolidations, mergers and
transfers of all or substantially all the assets of the Company and
(vii) distributions from subsidiaries.
(Continued)
F-18
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(c) The Company maintains a revolving credit facility (the Credit
Facility) providing for borrowings of up to $75 million based on a
specified percentage of the Company's eligible accounts receivable.
The Company has pledged substantially all of its assets as collateral
for the Credit Facility.
Borrowings under the Credit Facility bear interest, at the Company's
option, at a rate based on a margin over either prime rate or LIBOR.
The terms of the agreement include a commitment fee based on
unutilized amounts.
The agreements evidencing the Credit Facility contain various
financial and other covenants and conditions, including, but not
limited to, limitations on paying dividends, engaging in affiliate
transactions, making acquisitions and incurring additional
indebtedness. The scheduled maturity date of the Credit Facility is
November 26, 2002.
Required principal payments of long-term debt are as follows (in
thousands):
2002 $ 45,580
Thereafter 132,766
--------
$178,346
========
(10) Income (Loss) Per Share
The following represents a reconciliation of the numerators and
denominators of the basic and diluted income (loss) per share computations
(in thousands):
1999 1998 1997
-------- ------- -------
Numerator:
Net income (loss) $ (2,038) 805 (3,700)
Preferred stock dividends -- (21) (737)
-------- ------- -------
Numerator for basic and diluted income
(loss) per share - income (loss)
available to common stockholders $ (2,038) 784 (4,437)
======== ======= =======
Denominator:
Denominator for basic income (loss)
per share - weighted-average shares 16,315 15,971 13,493
-------- ------- -------
Effect of dilutive securities:
Employee stock options -- 280 --
Warrants -- 397 --
-------- ------- -------
-- 677 --
-------- ------- -------
(Continued)
F-19
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1999 1998 1997
-------- -------- ------
Dilutive potential common shares:
Denominator for diluted income (loss)
per share - adjusted weighted-
average shares and assumed
conversions $ 16,315 16,648 13,493
======== ======== ======
Options and warrants to purchase 4,781,487, 2,043,370 and 4,826,818 shares
of common stock were outstanding for the years ended 1999, 1998 and 1997,
respectively, but were not included in the computation of diluted income
(loss) per share because their effect would be anti-dilutive.
(11) Stock Options and Warrants
Long-Term Stock Investment Plan
Effective December 16, 1993, the Company's Board of Directors approved the
Long-Term Stock Investment Plan (the 1993 Plan), which provided for the
granting of options for the purchase of the Company's common stock to
executives, key employees and non-employee consultants and agents of the
Company and its subsidiaries. The 1993 Plan authorizes the awarding of
Stock Options, Incentive Stock Options and Alternative Appreciation Rights.
The 1993 Plan reserved 1,500,000 shares of the Company's common stock for
grant on or before December 31, 2002. All options have generally been
granted at a price equal to or greater than the fair market value of the
Company's common stock at the date of grant. Generally, options are granted
with a vesting period of up to 4 years and expire 10 years from the date of
grant. In October 1996, the 1993 Plan was amended to allow for the issuance
of an additional 2,500,000 options under the plan for a total of 4,000,000
shares.
A summary of stock option transactions for the years ended December 31,
1999, 1998 and 1997 is as follows:
1999 1998 1997
------------------------------- ------------------------------- -------------------------------
Shares Exercise price Shares Exercise price Shares Exercise price
---------- --------------- ---------- --------------- ---------- ---------------
Outstanding, beginning
of year 2,565,625 $1.125 to 18.50 2,135,775 $1.125 to 18.50 2,091,525 $1.125 to 22.75
Granted 440,000 2.00 to 5.25 580,700 5.50 to 12.90 184,750 5.88 to 10.00
Exercised -- -- (95,500) 1.125 to 6.00 (124,000) 1.125
Forfeited/expired (243,800) 1.125 to 18.50 (55,350) 6.00 to 18.50 (16,500) 7.625 to 9.00
---------- --------------- ---------- --------------- ---------- ---------------
Options outstanding,
end of year 2,761,825 $1.125 to 18.50 2,565,625 $1.125 to 18.50 2,135,775 $1.125 to 18.50
========== =============== ========== =============== ========== ===============
Options exercisable,
end of year 2,026,131 1,964,475 1,896,293
========== ========== ==========
(Continued)
F-20
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1999 1998 1997
------------------------------- ------------------------------- -------------------------------
Shares Exercise price Shares Exercise price Shares Exercise price
---------- --------------- ---------- --------------- ---------- ---------------
Options available for
grant, end of year 855,659 1,051,859 1,577,209
========== ========== ==========
Weighted-average fair
value of options
granted during
the year $ 4.53 9.35 4.13
========== ========== ==========
The following table summarizes information about stock options outstanding
at December 31, 1999:
Weighted-
average Weighted- Weighted-
remaining average average
Range of Shares contractual exercise Shares exercisable
exercise prices outstanding life (years) price exercisable price
- --------------- ----------- ------------ ----- ----------- -----
$1 - $4 289,500 6.14 $ 1.93 174,500 $ 1.56
$5 - $7 1,991,500 6.74 6.52 1,607,500 6.76
$8 - $13 436,010 8.35 9.48 210,520 9.33
$14 - $17 7,815 6.85 15.05 5,861 15.05
$18 - $19 37,000 6.54 18.39 27,750 18.39
--------- ------ ------ --------- ------
$1 - $19 2,761,825 6.93 6.69 2,026,131 6.77
The weighted-average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the
following weighted-average assumptions used for grants in 1999, 1998 and
1997, respectively: no dividend yield; expected volatility of 46%;
risk-free interest rate (ranging from 4.61% - 5.94%); and expected lives of
approximately 3 years. Weighted-averages are used because of varying
assumed exercise dates.
The Company applies APB Opinion 25 and related interpretations in
accounting for stock options; accordingly, no compensation cost has been
recognized. Had compensation cost been determined based upon the fair value
of the stock options at grant date consistent with the method in SFAS
Statement 123, the Company's net income (loss) and earnings (loss) per
share would have been reduced (increased) to the pro forma amounts
indicated below:
(Continued)
F-21
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
(in thousands, except per share amounts)
Net income (loss) attributable to
common shareholders as reported $ (2,038) 784 (4,437)
Pro forma income (loss) (2,445) 538 (5,053)
Basic earnings (loss) per share as
reported (.12) .05 (.33)
Pro forma basic earnings (loss)
per share (.15) .03 (.37)
Diluted earnings (loss) per share as
reported (.12) .05 (.33)
Pro forma diluted earnings per share (.15) .03 (.37)
Warrants
At December 31, 1999 and 1998, the Company had outstanding warrants to
purchase a total of 2,019,662 and 2,034,662 of common shares at prices
ranging from $2.00 to $24.00 per share. These warrants expire at various
dates through 2009.
(12) Litigation
In January 1997, Austin A. Iodice, who served as the Company's Chief
Executive Officer, President and Vice Chairman while the Company was
engaged in the jewelry business, and Anthony Giglio, who performed the
functions of the Company's Chief Operating Officer while the Company was
engaged in the jewelry business, filed separate suits against the Company
in the Connecticut Superior Court alleging that the Company had breached
the terms of management agreements entered into with them by failing to
honor options to purchase common stock awarded to them in connection with
the management of the Jewelry business under the terms of such management
agreements and the Company's long-term stock investment plan. The suits
allege that the plaintiffs are entitled to an unspecified amount of
damages. The Company believes that the option to purchase 370,419 shares
granted to Mr. Iodice (through Nitsua, Ltd., a corporation wholly-owned by
him) and the option to purchase 185,210 shares granted to Mr. Giglio, each
having an exercise price of $1.125 per share, expired in 1996, three months
after Messrs. Giglio and Iodice ceased to be employed by the Company.
Messrs. Giglio and Iodice maintain that they were agents and not employees
of the Company and that the options continue to be exercisable. In October
1998, Messrs. Giglio and Iodice filed motions for partial summary judgment,
which motions were denied by the court in March 1999. The parties attended
a non-binding mediation conference in February 2000 but were unable to
resolve the dispute. Trial has been scheduled for November 2000.
The Company is also a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are
believed by management to be material to the business or financial
condition of the Company.
(Continued)
F-22
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(13) Savings Incentive and Profit Sharing Plan
The Company participates in a savings incentive and profit sharing plan
(the Plan). All eligible employees may make contributions to the Plan on a
pre-tax salary reduction basis in accordance with the provisions of Section
401(k) of the Internal Revenue Code. No material contributions were made by
the Company in 1999 and 1998.
Certain employees who work for governmental agencies are required to be
covered under a separate pension plan. During 1999 and 1998, the Company
recorded approximately $1,492,000 and $1,649,000, respectively, of expense
related to these benefits.
(14) Lease Commitments
The Company leases certain office space and equipment. Rent expense for all
operating leases in 1999, 1998 and 1997 approximated $2,952,000, $2,286,000
and $969,000, respectively.
As of December 31, 1999, future minimum rent payments due under the terms
of noncancelable operating leases excluding any amount that will be paid
for operating costs are (in thousands):
2000 $ 3,055
2001 2,377
2002 1,846
2003 1,622
2004 1,091
Thereafter 6,400
-------
$16,391
=======
(15) Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash and cash equivalents and trade receivables.
The Company maintains cash in bank accounts which at times may exceed
federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk
on its cash balances. The Company believes it mitigates such risk by
investing its cash through major financial institutions.
(Continued)
F-23
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
At December 31, 1999, the Company had three customers with accounts
receivable balances that aggregated 17.0% of the Company's total accounts
receivable. At December 31, 1998, one customer aggregated 5.4% of the
Company's total accounts receivable. Percentages of total revenues from
significant customers for the years ended December 31, 1999, 1998 and 1997
are summarized as follows:
1999 1998 1997
------ ------ ------
Customer 1 * 10.1% 14.5%
Customer 2 * * 11.6%
*Less than 10%
(16) Industry Segment Information
COMFORCE 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 COMFORCE 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 "Summary of Significant Accounting Policies." COMFORCE 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.
(Continued)
F-24
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The table below presents information on the revenues and operating
contribution for each segment for the three years ended December 31, 1999,
and items which reconcile segment operating contribution to COMFORCE's
reported pre-tax income.
Year ended December 31,
1999 1998 1997
--------- -------- --------
(in thousands)
Net sales of services:
Financial Services $ 114,930 91,026 6,497
Staff Augmentation 321,291 367,996 210,024
--------- -------- --------
$ 436,221 459,022 216,521
========= ======== ========
Operating contribution:
Financial Services $ 14,579 12,393 754
Staff Augmentation 28,989 32,374 14,319
--------- -------- --------
43,568 44,767 15,073
--------- -------- --------
Consolidated expenses:
Interest 21,732 21,455 4,244
Bridge and financing charges -- -- 7,672
Restructuring charge (163) (211) 1,600
Depreciation and amortization 6,824 5,605 1,883
Corporate general and administrative 15,044 14,449 4,725
--------- -------- --------
43,437 41,298 20,124
--------- -------- --------
Income (loss) before income taxes $ 131 3,469 (5,051)
========= ======== ========
Total assets:
Financial Services $ 42,812 39,967 36,113
Staff Augmentation 39,022 41,714 36,752
Corporate 167,876 164,401 163,069
--------- -------- --------
$ 249,710 246,082 235,934
========= ======== ========
F-25
COMFORCE CORPORATION AND SUBSIDIARIES
Schedule II Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998 and 1997
(in thousands)
Balance at Charged to Charged Balance
beginning costs and to other at end of
of period expenses accounts Deductions period
---------- ---------- -------- ------------ ----------
For the year ended December 31, 1999:
Deducted from assets to which they apply:
Allowance for doubtful accounts $790 78 -- -- 868
==== === === === ===
For the year ended December 31, 1998:
Deducted from assets to which they apply:
Allowance for doubtful accounts $807 (17) -- -- 790
==== === === === ===
For the year ended December 31, 1997:
Deducted from assets to which they apply:
Allowance for doubtful accounts $213 79 515 -- 807
==== === === === ===
F-26
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated as of August 13, 1997, by and
among COMFORCE Corporation, COMFORCE Columbus, Inc. and Uniforce
Services, Inc. (included as an exhibit to COMFORCE Corporation's
Current Report on Form 8-K dated August 20, 1997 and incorporated
herein by reference).
2.2 Stockholders Agreement, dated as of August 13, 1997, by and among
COMFORCE Corporation, COMFORCE Columbus, Inc., John Fanning and
Fanning Limited Partnership, L.P. (included as an exhibit to COMFORCE
Corporation's Current Report on Form 8-K dated August 20, 1997 and
incorporated herein by reference).
2.3 Registration Rights Agreement dated as of August 13, 1997 by and among
COMFORCE Corporation, John Fanning and Fanning Asset Partners, L.P., a
Georgia limited partnership (included as an exhibit to Amendment No. 2
to the Registration Statement on Form S-4 of COMFORCE Corporation
filed with the Commission on October 24, 1997 and incorporated herein
by reference).
3.1 Restated Certificate of Incorporation of COMFORCE Corporation, as
amended by Certificates of Amendment filed with the Delaware Secretary
of State on June 14, 1987 and February 12, 1991 (included as an
exhibit to Amendment No. 1 to the Registration Statement on Form S-1
of COMFORCE Corporation filed with the Commission on May 10, 1996 and
incorporated herein by reference).
3.2 Certificate of Ownership (Merger) of COMFORCE Corporation into Lori
Corporation (included as an exhibit to COMFORCE Corporation's Annual
Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference).
3.3 Bylaws of COMFORCE Corporation, as amended and restated effective as
of February 26, 1997 (included as an exhibit to COMFORCE Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
3.4 Certificate of Ownership (Merger) of AZATAR into COMFORCE Corporation
(included as an exhibit to COMFORCE Corporation's Current Report on
Form 8-K dated November 8, 1996 and incorporated herein by reference).
3.5 Certificate of Incorporation of COMFORCE Operating, Inc., as amended
by Certificates of Amendment filed with the Delaware Secretary of
State on November 24, 1997 (included as an exhibit to the Registration
Statement on Form S-4 of COMFORCE Operating, Inc. filed with the
Commission on December 24, 1997 and incorporated herein by reference).
3.6 Bylaws of COMFORCE Operating, Inc. (included as an exhibit to the
Registration Statement on Form S-4 of COMFORCE Operating, Inc. filed
with the Commission on December 24, 1997 and incorporated herein by
reference).
4.1 Indenture dated as of November 26, 1997 with respect to 12% Senior
Notes due 2007 between COMFORCE Operating, Inc., as issuer, and
Wilmington Trust Company, as trustee (included as an exhibit to
COMFORCE Corporation's Current Report on Form 8-K dated December 9,
1997 and incorporated herein by reference).
4.2 Indenture dated as of November 26, 1997 with respect to 15% Senior
Secured PIK Debentures due 2009 between COMFORCE Corporation, as
issuer, and The Bank of New York, as trustee (included as an exhibit
to COMFORCE Corporation's Current Report on Form 8-K dated December 9,
1997 and incorporated herein by reference).
10.1 Loan and Security Agreement dated as of November 26, 1997 among
COMFORCE Corporation and specified subsidiaries thereof and Heller
Financial, Inc., as lender and agent for other lenders (included as an
exhibit to
E-1
COMFORCE Corporation's Current Report on Form 8-K dated December 9,
1997 and incorporated herein by reference).
10.2 Purchase Agreement, dated as of November 19, 1997, by and between
COMFORCE Operating, Inc. and NatWest Capital Markets Limited, as
Initial Purchaser (included as an exhibit to the Registration
Statement on Form S-4 of COMFORCE Corporation filed with the
Commission on December 24, 1997 and incorporated herein by reference).
10.3 Purchase Agreement, dated as of November 19, 1997, by and between
dated as of November 26, 1997, by and between COMFORCE Operating, Inc.
and NatWest Capital Markets Limited, as Initial Purchaser (included as
an exhibit to the Registration Statement on Form S-4 of COMFORCE
Corporation filed with the Commission on December 24, 1997 and
incorporated herein by reference).
10.4 Warrant Agreement dated November 26, 1997 by and between COMFORCE
Corporation and The Bank of New York, as Warrant Agent (included as an
exhibit to the Registration Statement on Form S-4 of COMFORCE
Corporation filed with the Commission on December 24, 1997 and
incorporated herein by reference).
10.5 Pledge Agreement dated November 26, 1997 by and between COMFORCE
Corporation and The Bank of New York, as Collateral Agent (included as
an exhibit to the Registration Statement on Form S-4 of COMFORCE
Corporation filed with the Commission on December 24, 1997 and
incorporated herein by reference).
10.6 Employment Agreement dated as of January 1, 1999 between COMFORCE
Corporation, COMFORCE Operating, Inc. and John C. Fanning (included as
an exhibit to COMFORCE Corporation's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference).
10.7* Amendment to Employment Agreement dated March 28, 2000 amending
Employment Agreement dated as of January 1, 1999 between COMFORCE
Corporation, COMFORCE Operating, Inc. and John C. Fanning.
10.8 Employment Agreement dated as of January 1, 1999 between COMFORCE
Corporation, COMFORCE Operating, Inc. and Harry Maccarrone (included
as an exhibit to COMFORCE Corporation's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference).
21.1* List of Subsidiaries.
23.1* Consent of KPMG LLP.
23.2* Consent of PricewaterhouseCoopers, LLP
27.1* Financial Data Schedule of COMFORCE Corporation and COMFORCE
Operating, Inc.
- ----------
* Filed herewith.
E-2