Back to GetFilings.com
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, 2000
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 1-6081
COMFORCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-23262248
- ------------------------------------ ---------------------------------
(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
- ---------------------- -------------------
Common stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
---
(Cover page continued next page)
(Cover page continued)
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 22, 2001: $22,030,667
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 22, 2001
-------------- -----------------------------
Common stock, $.01 par value 16,659,062
Documents Incorporated by Reference: Portions of the Registrant's proxy
statement to be filed by April 30, 2001 are incorporated herein by reference in
Items 10, 11, 12 and 13.
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 (48 company-owned and 14
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 Accenture, formerly Anderson Consulting, LLP), Boeing Company and
Microsoft Corporation. The Company's labor force consists primarily of computer
programmers, systems consultants, telecommunications engineers, analysts,
engineers, technicians, scientists, researchers and skilled office support
personnel.
Services
The Company provides a wide range of staffing, consulting, financial and
outsourcing services, including web-enabled solutions for the effective
procurement, tracking and engagement of contingent or non-employee labor. The
Company's extensive proprietary database and national presence enable it to draw
from a wealth of resources to link highly-trained computer technicians,
telecommunications engineers 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 has previously been reporting its results through two operating
segments -- Staff Augmentation and Financial Services. Principally as a result
of the development by the Company's PrO Unlimited(R) subsidiary of a business
offering web-enabled solutions for the procurement, tracking and engagement of
contingent labor, the Company has determined to begin reporting its results
through three operating segments -- Staff Augmentation, Human Capital Management
Services and Financial Services. The Staff Augmentation segment provides
information technology (IT), telecom and other staffing services. The Human
Capital Management Services segment provides contingent workforce management
services. The Financial Services segment provides payroll, funding and back
office support services to independent consulting and staffing companies. 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, help desk and Internet/Intranet. In 2000,
placements related to Internet development represented an increasing percentage
of new placements in this field. These services consist of recruiting, preparing
payrolls, withholding taxes, and tracking hours, vacation and sick days. These
employees also participate in the Company's benefit programs rather than those
of the customer. In addition to these staffing services, the Company also
provides non-recruited payrolling services to certain of its IT customers.
The Company's IT customers include Microsoft Corporation, BellSouth
Telecommunications, Inc. (directly
3
and through Accenture) and Boeing Information Services, Inc.
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 Northern Telecom, Inc., ALCATEL
Network Systems, Inc. and Ericsson Corporation.
Other Staffing.
In addition to providing staffing services in the IT and telecom fields, as
described above, the Company provides a broad range of staffing services to its
customers, including laboratory support (through the Company's Labforce(R)
division), medical office support, professional, scientific, clerical and call
center staffing.
The Company provides engineer-related 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's engineer-related staffing customers include Boeing Company,
Gulfstream Aerospace, Raytheon Company and the National Department of Energy
National Research Laboratories, including Los Alamos and Sandia.
In the professional staffing area, the Company offers highly specialized
chemists, biologists, engineers, laboratory instrumentation operators,
technicians and others to companies involved in pharmaceutical, environmental,
biotech and other businesses.
The Company also recruits and trains skilled billing, data entry and other
clerical personnel who provide support services for smaller businesses,
particularly for medical, accounting and law offices. In addition, the Company
provides staff for inbound call center operations, including telemarketing
personnel.
Human Capital Management Services
The Company provides Human Capital Management services through its PrO
Unlimited subsidiary. PrO Unlimited has become a market leader in providing end-
to-end web-enabled solutions for the effective procurement, tracking and
engagement of contingent or non-employee labor. PrO Unlimited utilizes a
combination of proprietary web-based software and intellectual capital to manage
all aspects of this rapidly growing segment of the workforce. While the Company
focuses on selling its services primarily to Fortune 500 companies, including
customers such as Sun Microsystems and Pfizer, PrO Unlimited's contingent
workforce management tools are suitable for a cross-section of large employers
throughout the United States and Canada.
The contingent labor force consists of independent contractors, temporary
workers, consultants, returning retirees and freelancers. A growing number of
corporations are utilizing contingent labor solutions to enable them to manage
their cost structures more effectively and to better position them to weather
business strategy transition and maintain streamlined "just-in-time" labor
pools. PrO Unlimited has been a pioneer in assisting companies with government
regulatory compliance regarding contingent personnel, particularly the
management, tax, benefit and liability issues associated with the contingent
workforce.
PrO Unlimited's program is designed to replace vendor-on-premise programs
that large companies have been using in recent years to manage their contingent
workforces. PrO Unlimited seeks to draw upon its own resources as well as
Internet-based information and tools, and to provide a range of services and
software that enable large companies to effectively manage their contingent
workforces. Rather than competing with traditional staffing firms, PrO
Unlimited acts as a "vendor neutral" facilitator providing customized management
reports and
4
proprietary Total Quality Management ("TQM") programs that are designed to
generate cost savings and improve efficiencies for client companies. PrO
Unlimited's typical client is a large company that relies upon contingent labor
to meet important elements of its staffing needs. Pro Unlimited currently
provides the following solutions:
Services
. Contingent Staffing Management - act as impartial staffing desk for
procuring contingent employees by utilizing many different service
providers to provide client's hiring managers with the most qualified
candidate in the shortest period of time at the lowest cost.
. Supplier Management Services - act as single-source supplier by
consolidating and managing the invoicing, negotiating and monitoring
of services provided by a customer's multiple service providers.
. The 1099 Management Solution - help customers manage the tax and
benefit risks associated with the use of independent contractors to
ensure compliance with all governmental regulations.
. Professional Payrolling Services - provide automated payroll services
and worker benefits as third party processor.
Software
. Workforce Alliance Network Database ("WAND") - web-enabled system
developed for the engagement, management and tracking of the
contingent workforce by providing reports, consolidated billing,
security checks and screening services.
. Staffing & Project Ordering Tool ("SPOT") - custom web-based software
tool that allows hiring managers and staffing vendors to communicate
24 hours a day to place job orders, check status of job orders, submit
resumes, review resumes, schedule interviews, select candidates and
create custom reports on staffing activity.
. YourSource(TM) System - search and retrieval system software that
allows on-line searches for contingent workers originally sourced by a
company who have previously worked in other departments within that
organization.
Financial Services
The Company provides payroll, funding and back office support services to
approximately 130 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. 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
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
5
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 engineer-related staffing and Human Capital
Management Services customers generally enter into long-term contracts with the
Company.
During the year ended December 31, 2000, no single customer accounted for
10% or more of the Company's revenues. The largest four customers accounted for
approximately 28% of the Company's revenues.
Sales and Marketing
The Company services its customers through a network of 48 company-owned
and 14 licensed branch offices located in 19 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
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 website (www.comforce.com).
The Company's Sales and Resource 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.
Although the Company continues to market to its Fortune 500 client base, it also
places a significant marketing focus on smaller, faster-growing companies.
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 website 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 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 maintains training facilities in Dallas, Texas and Raleigh, North
Carolina, where telecom staffers are trained to install and test
telecommunications equipment. The Company also provides training to telecom
staff on assignment for the Company throughout the United States. In addition,
the Company maintains 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
6
and offers 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
The Company uses PeopleSoft(R) system software, which it believes is the
industry standard, and is currently upgrading to the PeopleSoft(R) 8.0 version.
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 final stage of implementation of the 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 personnel and the extent of its
competitors' responsiveness to customer needs.
Employees
The Company currently employs approximately 650 full-time staff employees
at its headquarters and Company-owned offices. The Company issued approximately
30,000 W-2s to employees of the Company who provided services to its customers
during 2000, not including W-2s issued as part of the Financial Services segment
payrolling services provided by the Company to its customers. 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.
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.
7
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, anti-
discrimination 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 38,000 square feet of
space in two facilities under separate leases that expire in 2010. 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 from 1993 to 1995 while the
Company was engaged in the jewelry business, and Anthony Giglio, who performed
the functions of the Company's chief operating officer during this same period,
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 awarded to them in 1993. Mr.
Iodice had received options to purchase 370,419 shares of the Company's common
stock and Mr. Giglio had received options to purchase 185,209 shares of common
stock, each at an exercise price of $1.125 per share. The Company maintained
that these options had expired in 1996, three months after the plaintiffs ceased
to be employed by the Company, as provided in the Company's Long-Term Stock
Investment Plan. The plaintiffs maintained that they were agents and not
employees of the Company and that, therefore, these options had not expired.
The plaintiffs alleged that they were entitled to an unspecified amount of
damages based upon the difference between the exercise price and highest market
price of the Company's common stock following the date of the purported exercise
of all options, plus costs and expenses. They also claimed entitlement to
treble these damages under Connecticut law. They filed offers of judgment with
the court for $6.0 million in the aggregate based upon the significantly higher
prices of the Company's common stock in 1996 and 1997, but this offer did not
limit the amount of damages they could claim at trial.
On November 30, 2000, immediately prior to the scheduled jury trial, the
parties reached settlement of these suits, the terms of which were entered with
the court. Under the terms of settlement, the Company agreed to pay to the
plaintiffs $325,000 on January 2, 2001 (which amount was paid on this date) and
$300,000 on May 1, 2001, and to issue to them options on January 2, 2001 to
purchase 555,628 shares of common stock in the aggregate at an exercise price of
$0.6625 per share. The options are exercisable until March 15, 2006. While
management of the Company believes that the options originally issued to the
plaintiffs had expired, it believes that settlement was advisable given the
exposure faced by the Company in the event of an adverse judgment in the jury
trial. The Company incurred a charge of approximately $1.1 million in
connection with this settlement.
8
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,
errors and omissions insurance and directors' and officers' 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
Market Price and Dividends
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
---- ---
1999 First Quarter................................... $6.25 $3.50
Second Quarter.................................. 3.94 2.63
Third Quarter................................... 3.06 2.00
Fourth Quarter.................................. 3.00 1.00
2000 First Quarter................................... 3.63 1.75
Second Quarter.................................. 2.19 1.25
Third Quarter................................... 2.13 1.25
Fourth Quarter.................................. 2.00 1.25
The last reported sale price of the Common Stock of the Company on the
American Stock Exchange on March 22, 2001 was $1.90. As of such date, there
were approximately 4,600 shareholders of record.
No dividends were declared or paid on the Common Stock during 2000.
The terms of the Company's debt obligations effectively prohibit its payment of
dividends. Accordingly, the Company does not anticipate that it will pay cash
dividends on the Common Stock for the foreseeable future.
Recent Sales of Unregistered Securities
As partial consideration under the terms of settlement of litigation
described in Item 3 of this Report, on November 30, 2000, the Company agreed to
issue to Austin Iodice and Anthony Giglio options to purchase an aggregate of
555,628 shares of the Company's common stock at an exercise price of $0.6625 per
share, which options were issued as of January 2, 2001. The options are
exercisable until March 15, 2006. The Company received no cash proceeds upon the
issuance of the options. Any proceeds received by the Company upon the exercise
of the options are expected to be used for working capital purposes. In issuing
these securities, the Company relied upon the exemption available under Section
4(2) of the Securities Act of 1933. The Company has
9
registered the shares of its common stock issuable upon the exercise of these
options under a Registration Statement on Form S-3 (Registration No. 333-52356)
that became effective on January 10, 2001.
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,
2000. 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, 2000 from its
audited historical consolidated financial statements.
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data: (1)
Net sales of services............................... $55,867 $216,521 $459,022 $436,221 $480,325
Operating income.................................... 2,413 6,865 24,924 21,863 25,437
Income (loss) before extraordinary gain............. 1,352 (3,700) 805 (2,038) (397)
Income (loss) available to common stockholders
before extraordinary gain.......................... 362 (4,437) 784 (2,038) (397)
Gain on early debt extinguishment, net
of taxes (2).................................... -- -- -- -- 2,784
Income (loss) available to common stockholders...... 362 (4,437) 784 (2,038) 2,387
Diluted income (loss) per share:
Income (loss) available to common stockholders
before extraordinary gain....................... $ 0.03 $ (0.33) $ 0.05 $ (0.12) $ (0.02)
Extraordinary gain............................... -- -- -- -- 0.17
------- -------- -------- -------- --------
Net income (loss) available to common
stockholders................................... $ 0.03 $ (0.33) $ 0.05 $ (0.12) $ 0.15
Balance Sheet Data:
Working capital..................................... $ 8,012 $ 59,762 $ 65,563 $ 65,808 $ 88,942
Accounts receivable, net............................ 12,042 72,865 81,680 81,834 119,067
Intangible assets, net.............................. 24,756 135,516 138,847 139,010 137,655
Total assets........................................ 43,366 235,934 246,082 249,710 283,414
Total debt, including current maturities............ 3,850 171,038 178,579 182,346 197,421
Preferred stock..................................... 2 1 - - ---
Stockholders' equity................................ 34,744 39,402 44,334 43,163 46,374
___________
(1) Results for the year ended December 31, 1996 include 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 acquisition date of July 31, 1996 through December 31, 1996,
results of AZATAR Computer Systems, Inc. from the acquisition date of November
1, 1996 through December 31, 1996, and results of Continental Field Services
Corporation and a related entity from the acquisition date of November 8, 1996
through December 31, 1996. Results for the year ended December 31, 1997 include
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 include results of Camelot Consulting Group Inc.,
Camelot Communications Group Inc., Camelot Control Group Inc. and Camelot Group
Inc. (collectively, "Camelot") from the acquisition date of January 27, 1998
through December 31, 1998. Results for the year ended December 31, 2000 include
results of Gerri G. Inc. from the acquisition date of February 6, 2000 through
December 31, 2000.
10
(2) During the third quarter of 2000, the Company repurchased $10.0 million
face value of its 12% Senior Notes due 2007 for a purchase price of $5.1
million. The net extraordinary gain that was realized by these repurchases was
$2.8 million, which includes the reduction of $200,000 of deferred financing
costs associated with the repurchases net of tax expense of $1.9 million. See
"Financial Condition, Liquidity and Capital Resources" in this Item 7.
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
From the time it entered the staffing business in October 1995 through
January 1998, the Company completed 10 acquisitions. In February 2000, it
completed one additional acquisition. 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 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.
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 facility to fund current operations.
The Company had been reporting its results through two operating segments -
- - Staff Augmentation and Financial Services. Principally as a result of the
development by the Company's PrO Unlimited subsidiary of a business offering
web-enabled solutions for the procurement, tracking and engagement of contingent
labor, the Company has determined to begin reporting its results through three
operating segments -- Staff Augmentation, Human Capital Management Services and
Financial Services. The Staff Augmentation segment provides information
technology (IT), telecom and other staffing services. The Human Capital
Management Services segment provides contingent workforce management services.
The Financial Services segment provides payroll, funding and back office support
services to independent consulting and staffing companies. For a detailed
discussion of the Company's business, see Item 1 of this Report.
Recent Developments
New Credit Facility
On December 14, 2000, COMFORCE, COI and various of their operating
subsidiaries entered into a Loan and Security Agreement with IBJ Whitehall
Business Credit Corporation ("IBJ"), as lender and agent for other participating
lenders, to provide for a $100.0 million revolving credit facility with
available borrowings to be based upon a specified percentage of the Company's
eligible accounts receivable (the "IBJ Credit Facility"). At closing, the
Company borrowed $72.0 million and repaid the Company's existing credit facility
with Heller Financial, Inc., as lender and agent for other participating lenders
(the "Heller Credit Facility"), which was thereupon terminated. On January 5,
2001, the IBJ Credit Facility was amended to increase the Company's borrowing
availability to
11
$110.0 million when additional lending institutions requested to join the loan
syndicate. As discussed under "Recent Developments--Repurchase of Senior Notes
and PIK Debentures," the Company further amended the IBJ Credit Facility on
March 5, 2001 to permit borrowings thereunder to repurchase its 15% Senior PIK
Debentures due 2009. See "Financial Condition, Liquidity and Capital Resources"
in this Item 7 for a discussion of the terms of the IBJ Credit Facility.
The Heller Credit Facility, which the Company entered into in November
1997, provided for borrowings of up to $75.0 million. The Company entered into
the IBJ Credit Facility to permit it to increase its borrowing availability,
which management believes will position the Company to better address its
financial needs in the future. As discussed under "Recent Developments--
Amendment of Indentures," the Company obtained consents from its public
debtholders to amend its indentures to enable the Company to increase its credit
facility borrowings.
Amendment of Indentures
In November 2000, the Company solicited the consents of its public
debtholders to amend the Indenture dated November 26, 1997 between COI and
Wilmington Trust Company, as trustee, with respect to the 12% Senior Notes due
2007 of COI (the "Senior Notes") and the Indenture dated November 26, 1997
between COMFORCE and The Bank of New York, as trustee, with respect to the 15%
Senior Secured PIK Debentures due 2009 of COMFORCE (the "PIK Debentures"). Upon
obtaining the requisite consents, the Company entered into First Supplemental
Indentures dated as of November 29, 2000 with Wilmington Trust Company and The
Bank of New York to give effect to the amendments approved.
Among other things, the amendments adopted in the First Supplemental
Indentures:
. expand the permitted maximum amount of credit facility debt to the
greater of (1) $75.0 million at any time outstanding, less the amount
repaid with the proceeds of asset dispositions, or (2) 90% of eligible
accounts receivable outstanding at any time without reduction for
repayments of principal.
. allow the Company the flexibility to use securitization financing
techniques when they are more cost effective and provide greater
flexibility than other financing vehicles.
. increase the permitted upstream of funds from COI to COMFORCE to pay
public company expenses from $1.25 million annually to $2.0 million
annually.
. to facilitate the purchase or exchange by COMFORCE of PIK Debentures at
less than par from willing sellers, permit COI to upstream up to $10.0
million to pay income tax related to deemed forgiveness of PIK
Debentures.
Shortly after adoption of these amendments, IBJ requested that further
amendments be adopted to clarify the scope of eligible accounts receivable, as
defined in the amendments of November 29, 2000, before it entered into the IBJ
Credit Facility. Accordingly, the Company entered into Second Supplemental
Indentures dated as of December 4, 2000 with Wilmington Trust Company and The
Bank of New York to adopt the clarifying amendments. These amendments did not,
in the opinion of management, substantively modify the terms of the First
Supplemental Indentures.
Settlement of Litigation
On November 30, 2000, immediately prior to a scheduled jury trial, the
Company settled its long-standing litigation with two former executives of the
Company, Austin Iodice and Anthony Giglio. Under the terms of settlement, the
Company agreed to pay to the plaintiffs $325,000 on January 2, 2001 (which
amount was paid on this date) and $300,000 on May 1, 2001 and to issue options
to them to purchase 555,628 shares of common stock in the aggregate at an
exercise price of $0.6625 per share on January 2, 2001 (which options were
issued as of this
12
date). See Item 3 in this Report for a description of this litigation and the
terms of settlement.
Change in Fiscal Year
On March 22, 2001, the Company's Board of Directors adopted a resolution to
change the Company's fiscal year, which is currently a calendar year. Beginning
in 2001, the fiscal year will consist of the 52 or 53 weeks ending on the last
Sunday in December. Accordingly, the Company's next fiscal year will end on
Sunday, December 30, 2001.
Repurchase of Senior Notes and PIK Debentures
As part of its strategy to reduce its higher interest rate debt and improve
its balance sheet, on February 28, 2001, the Company completed the repurchase of
$11.0 million principal amount of Senior Notes for $7.5 million and on March 5,
2001, the Company completed the repurchase of an additional $2.0 million of
Senior Notes for $1.4 million, the repurchase prices of which were paid from
lower interest rate borrowings under the IBJ Credit Facility. In addition, on
March 5, 2001, the Company entered into an amendment of the IBJ Credit Facility
to permit borrowings thereunder to repurchase of PIK Debentures under certain
circumstances. As amended, the IBJ Credit Facility permits the use of up to
$16.5 million in loan proceeds to pay the aggregate repurchase prices of Senior
Notes and PIK Debentures and costs associated therewith (including related tax
expenses), not more than $9.0 million of which may be used to pay the repurchase
price of PIK Debentures and such associated costs. On March 6, 2001, the Company
completed the repurchase of $5.2 million principal amount of PIK Debentures for
$2.5 million using lower interest rate borrowings under the IBJ Credit Facility.
Prior thereto, during the third quarter of 2000, the Company repurchased $10.0
million principal amount of the Senior Notes for a purchase price of $5.1
million, the repurchase price of which was paid from lower interest rate
borrowings under the now retired Heller Credit Facility.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net sales of services for the year ended December 31, 2000 were $480.3
million, an increase of 10.1% from net sales of services for the year ended
December 31, 1999 of $436.2 million. The increase in 2000 net sales of services
is principally attributable to higher sales to customers in the Company's Human
Capital Management Services segment and to telecom customers in the Staff
Augmentation segment, the contribution of sales by Gerri G. since its
acquisition in February 2000 in the Staff Augmentation segment and there being
more business days in 2000 than in 1999, partially offset by a decrease in sales
to Staff Augmentation customers in the engineer-related and information
technologies sectors.
Cost of services for the year ended December 31, 2000 was 79.0% of net
sales of services as compared to cost of services of 80.7% for the year ended
December 31, 1999. The cost of services decreased as a percentage of net sales
for the year ended December 31, 2000 as a result of the continued strategies
undertaken by management to increase margins throughout the Company, as well as
increases in fees for direct hire placements, which generally have no related
costs of services.
Selling, general and administrative expenses as a percentage of net sales
of services were 13.9% for the year ended December 31, 2000, compared to 12.7%
for the year ended December 31, 1999. This increase resulted principally from
higher payroll and recruiting costs with respect to non-billable staff, the
expansion of the Company's corporate headquarters and investments to expand the
infrastructure for the Company's Human Capital Management Services segment.
The Company incurred a charge in the year ended December 31, 2000 of
approximately $1.1 million as a result of the settlement of its litigation with
Austin Iodice and Anthony Giglio (see Item 3, "Legal Proceedings").
13
Operating income for the year ended December 31, 2000 was $25.4 million as
compared to operating income of $21.9 million for the year ended December 31,
1999. This 16.3% increase in operating income for the year ended December 31,
2000 resulted principally from an increase in gross margin, partially offset by
higher selling, general and administrative expenses and the Iodice and Giglio
litigation settlement as well as an increase in depreciation and amortization.
The Company's interest expense for the year ended December 31, 2000 and
1999 is attributable to the interest on the Heller Credit Facility, the IBJ
Credit Facility, the Senior Notes and the PIK Debentures. The IBJ Credit
Facility was entered into in December 2000 to repay the Heller Credit Facility
and provide the Company additional borrowing availability. These other
obligations were incurred in 1997, principally in connection with the funding of
business acquisitions. The Company incurred a charge of $742,000 for the write-
off of deferred financing costs in the fourth quarter of 2000 for the early
termination of the Heller Credit Facility. The interest expense is higher in
2000 due to increased interest rates and borrowings under the credit facilities.
Included in other income is a payment for a restricted covenant release of
$1.0 million for the year ended December 31, 2000. This represents a payment
made by certain former officers of the Company to release them from certain
restrictive agreements and non-competition covenants.
During the third quarter of 2000, the Company repurchased $10.0 million
face value of the Senior Notes for a purchase price of $5.1 million. The net
extraordinary gain that was realized by these repurchases was $2.8 million,
which includes the reduction of $200,000 of deferred financing costs associated
with the repurchases net of tax expense of $1.9 million. See "Financial
Condition, Liquidity and Capital Resources" in this Item 7.
The income tax provision for the year ended December 31, 2000 was $3.1
million on income before taxes and extraordinary gain, compared to an income tax
provision for the year ended December 31, 1999 of $2.2 million on a profit
before taxes of $131,000. The difference between the Federal statutory income
tax rate of 34.0% and the Company's effective tax rate of 114.8% relates
primarily to the nondeductibility of amortization expense associated with
certain intangible assets, the nondeductibility of a portion of the interest
expense associated with the PIK Debentures and state income taxes.
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 million. The decrease in 1999 net sales of services
is principally attributable to a decrease in sales to IT customers and other
staffing customers in the Company's Staff Augmentation segment, offset partially
by higher sales to customers in the Human Capital Management Services segment
and telecom customers in the Staff Augmentation segment. 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 other staffing customers in the Staff Augmentation segment. The Company
also experienced a decline in IT sales in the second half of 1999 as a result of
the Year 2000 lockdown, which slowed contract activity, as many customers in the
Staff Augmentation segment 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 sales to telecom customers in the Staff Augmentation segment and
declines in other staffing services in this segment having lower margins.
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 12.2%
for the year ended December 31, 1998. This percentage increase was principally
attributable to the decline of net sales of services discussed above.
14
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 coupled with increased depreciation and amortization,
partially offset by increased margins.
The Company's interest expense for 1999 and 1998 is attributable to the
interest under the Heller Credit Facility, the Senior Notes and the PIK
Debentures, which obligations were incurred in 1997, principally in connection
with the funding of business acquisitions.
The income tax provision for the 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 pre-tax income
of $3.5 million. The difference between the Federal statutory income tax rate
and the Company's effective tax rate relates primarily to the nondeductibility
of amortization expense associated with certain intangible assets, the
nondeductibility of a portion of the interest expense associated with the PIK
Debentures and adjustments to prior period tax estimates.
Financial Condition, Liquidity and Capital Resources
The Company pays its billable employees weekly for their services, and
remits certain statutory payroll and related taxes as well as other fringe
benefits. Invoices are generated to reflect these costs plus the Company's
markup. These bills are typically paid within 45 days. Increases in the
Company's net sales of services, resulting from expansion of existing offices or
establishment of new offices, will require additional cash resources.
Management of the Company believes that cash flow from operations and funds
anticipated to be available under the IBJ Credit Facility will be sufficient to
service the Company's indebtedness and to meet anticipated working capital
requirements for the foreseeable future.
During the year ended December 31, 2000, the Company's primary sources of
funds to meet working capital needs were from borrowings under the Heller Credit
Facility and, later, under the IBJ Credit Facility. Cash and cash equivalents
decreased $2.9 million during the year ended December 31, 2000. Cash flows
provided by financing activities of $15.0 million were exceeded by cash flows
used in operating activities of $11.5 million and cash flows used in investing
activities of $6.4 million. The increase in cash flows used in operations over
the same period in the prior year is primarily attributable to the need to fund
growth in accounts receivable as a result of increased revenues and there being
more business days in 2000 than in 1999.
As of December 31, 2000, the Company had outstanding $66.5 million in
principal amount under the IBJ Credit Facility bearing interest at an average
rate of 9.46% per annum. In addition, as of December 31, 2000, the Company had
outstanding $30.9 million in principal amount of PIK Debentures bearing interest
at a rate of 15%, and $100.0 million in principal amount of Senior Notes bearing
interest at a rate of 12%. 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 PIK Debentures to pay these costs. In the third
quarter of 2000, the Company repurchased $10.0 million principal amount of
Senior Notes for a purchase price of $5.1 million, principally from funds made
available for this purpose through an amendment of the now retired Heller Credit
Facility entered into in the third quarter of 2000.
As described above under "Recent Developments--New Credit Facility," in
December 2000, the Company entered into the IBJ Credit Facility to provide
greater borrowing availability. The maximum availability of $100.0 million was
increased to $110.0 million in January 2001 when additional lending institutions
requested to join the loan syndicate. The IBJ Credit Facility was further
amended in March 2001 to permit the Company to use certain borrowed funds to
repurchase PIK Debentures (in addition to Senior Notes, the repurchase of which
was previously permitted). Borrowings under the IBJ Credit Facility bear
interest, at the Company's option, at a per annum rate equal to either (1) the
base commercial lending rate of IBJ as announced from time to time (but not less
than 0.5% in excess of the weighted average of the rates on overnight Federal
funds transactions), plus a margin ranging from 0% if the Company's leverage
ratio is 4.00 or less to 1% if the Company's leverage ratio is greater than 6.00
(which
15
margin will be fixed at 0.75% through December 14, 2001), or (2) LIBOR plus a
margin ranging from 1.75% if the Company's leverage ratio is 4.00 or less to
2.75% if the Company's leverage ratio is greater than 6.00 (which margin will be
fixed at 2.50% through December 14, 2001).
The obligations evidenced by the IBJ Credit Facility are collateralized by
a pledge of the capital stock of the subsidiaries of the Company and by security
interests in substantially all of the assets of the Company. The agreements
evidencing the IBJ 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 IBJ Credit Facility is December
14, 2003.
In addition, as described under "Recent Developments--Amendment of
Indentures," during the fourth quarter of 2000, the Company solicited and
received approval from the holders of the Senior Notes to authorize amendments
of the Indentures designed to address certain of the Company's debt strategies,
including permitting the Company to increase the indebtedness under the Credit
Facility and through securitization vehicles to the greater of (i) $75.0 million
at any time outstanding, less the aggregate amount thereof repaid with the net
proceeds of asset dispositions, or (ii) 90% of eligible accounts receivable
outstanding at any time.
The Company continues to examine strategies to reduce its higher interest
rate debt and improve its balance sheet. These strategies include, but are not
limited to, repurchasing Senior Notes or PIK Debentures through public market
purchases or privately negotiated transactions or exchanging Senior Notes or PIK
Debentures for other securities of the Company. As discussed under "Recent
Developments--Repurchase of Senior Notes and PIK Debentures" in this Item 7, as
part of its strategy, in February and March 2001, the Company repurchased $13.0
million principal amount of Senior Notes for $8.9 million and $5.2 million
principal amount of PIK Debentures for $2.5 million, the repurchase prices of
which were paid from lower interest rate borrowings under the IBJ Credit
Facility. These repurchases are in addition to the Company's repurchase during
the third quarter of 2000 of $10.0 million principal amount of the Senior Notes
for a purchase price of $5.1 million, the repurchase price of which was paid
from lower interest rate borrowings under the now retired Heller Credit
Facility. The IBJ Credit Facility permits the use of up to $16.5 million in loan
proceeds to pay the aggregate repurchase prices of Senior Notes and PIK
Debentures and costs associated therewith (including related tax expenses), not
more than $9.0 million of which may be used to pay the repurchase price of PIK
Debentures and such associated costs. In the case of each repurchase to date,
the Company has incurred tax liabilities for the forgiveness of indebtedness as
a result of its repurchase of Senior Notes or PIK Debentures for consideration
that is less than par. Subsequent to these purchases, Management believes the
remaining availability under the credit facility is sufficient to service the
Company's indebtedness and to meet anticipated working capital requirements in
the foreseeable future.
Substantially all of the consolidated net assets of the Company are assets
of COI and all of the net income which has been generated by Company through
December 31, 2000 is net income attributable to the operations of COI.
Accordingly, except for permitted distributions, these assets and net income are
restricted as to their use by COMFORCE. The indenture governing the Senior Notes
imposes restrictions on COI making specified payments, which are referred to as
"restricted payments," including making distributions or paying dividends
(referred to as upstreaming funds) to COMFORCE. Under the indenture, COI is not
permitted to make cash distributions to COMFORCE other than (1) to upstream $2.0
million annually ($1.25 million annually prior to 2000) to pay public company
expenses, (2) to upstream up to $10.0 million to pay income tax related to
deemed forgiveness of PIK Debentures to facilitate the purchase or exchange by
COMFORCE of PIK Debentures at less than par, (3) under certain circumstances in
connection with a disposition of assets, to upstream proceeds therefrom to repay
the PIK Debentures, and (4) to upstream funds to the extent COI meets the
restricted payments test under the indenture, as described under Note 9(b) to
the Company's consolidated financial statements.
In 2000, COI upstreamed $1.9 million for public company expenses of
COMFORCE. Management believes that $2.0 million annually (if COI has funds
available for this purpose) will be sufficient to pay COMFORCE's annual public
company expenses for the foreseeable future. In the first quarter of 2001, in
connection with its repurchase of $5.2 million principal amount of PIK
Debentures for $2.5 million, COMFORCE incurred a tax liability related to the
forgiveness of indebtedness of approximately $1.1 million, payable from the
$10.0 million permitted to be upstreamed for this purpose. The $2.5 million
repurchase cost is deemed to be a
16
restricted payment of COI under the indenture governing the Senior Notes.
Accordingly, upon completion of the repurchase, COI had approximately $1.8
million remaining available for distribution as permitted restricted payments
(representing 50% of consolidated net income of COI for the period from January
1, 1998 through December 31, 2000, less $2.5 million).
Through December 1, 2002, interest under the PIK Debentures is payable, at
the option of COMFORCE, in cash or in kind through the issuance of additional
PIK Debentures. To date, COMFORCE has paid all interest in kind. Beginning with
the interest payment due June 1, 2003, COMFORCE will be required to pay interest
on the PIK Debentures in cash. Its ability to do so will be dependent on the
ability of COI to upstream funds for this purpose under the restricted payments
test. In addition, COMFORCE's ability to repay the PIK Debentures at their
maturity on December 1, 2009 or on any earlier required repayment or repurchase
date will also be dependent on the ability of COI to upstream funds for this
purpose under the restricted payments test, unless COMFORCE separately obtains a
loan or sells its capital stock or other securities to provide funds for this
purpose.
As of December 31, 2000, approximately $137.7 million, or 48.6%, 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. Intangible assets will be amortized over a 5 to
40 year period, resulting in an annual non-cash charge of approximately $4.2
million.
The Company is obligated under various agreements to make earn-out payments
to the sellers of companies acquired by the Company and to sellers of franchised
businesses repurchased by the Company, subject to the sellers meeting specified
contractual requirements. During the year ended December 31, 2000, contingent
payments in connection with these acquisitions and repurchases were
approximately $2.2 million in cash. The maximum amount of the remaining
potential earn-out payments is approximately $1.1 million in cash payable
through December 31, 2002. The Company cannot currently estimate whether it will
be obligated to pay the maximum amount; however, the Company anticipates that
the cash generated by the operations of the acquired companies or franchised
businesses will provide all or a substantial part of the capital required to
fund the cash portion of the earn-out payments.
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 engineer-related 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 engineer-related services, the demand for Telecom and IT
services is typically lower during the first quarter until customers' operating
budgets are finalized. The Company believes that the effects of seasonality will
be less severe in the future if sales to IT, Telecom and Financial Services
customers continue to increase as a percentage of the Company's consolidated net
sales of services.
Other Matters
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued in June 1998.
This statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, SFAS No.
138, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133" was issued, making SFAS No. 133 effective
for all quarters of fiscal years beginning after June 15, 2000, or the Company's
fiscal 2001. Based upon review of the provisions of this standard, the Company
has determined that it will not have a significant impact on its financial
position or results of operations or have a material effect on its financial
statement reporting because the Company does not enter into such transactions.
17
Forward Looking Statements
Various statements made in this Report concerning the manner in which the
Company intends to conduct its future operations, and potential trends that may
impact future results of operations, are forward looking statements. The Company
may be unable to realize its plans and objectives due to various important
factors, including, but not limited to, heightened competition for customers as
well as for contingent personnel which could potentially require the Company to
reduce its current fee scales without being able to reduce the personnel costs
of its billable employees; due to the Company's significant leverage, its
greater vulnerability to economic downturns and its potentially diminished
ability to obtain additional financing for capital expenditures or for other
purposes; 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; or, if COI does not generate sufficient consolidated net income or
have other funds available to upstream to COMFORCE under the restricted payments
test of the Senior Notes indenture in order for it to pay cash interest on the
PIK Debentures (which is required beginning June 1, 2003) or to repay the PIK
Debentures at their maturity on December 1, 2009 or on any earlier required
repayment or repurchase date, then, unless COMFORCE obtains a loan or sells its
capital stock or other securities to provide funds for this purpose, the Company
will default under the indentures governing the PIK Debentures and the Senior
Notes and under the IBJ Credit Facility. 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 December 21, 2000
(Registration No. 333-52356). The disclosure under "Risk Factors" in the
Registration Statement may be accessed through the Web site maintained by the
Securities and Exchange Commission at "www.sec.gov." In addition, the Company
will provide, without charge, a copy of such "Risk Factors" disclosure to each
stockholder of the Company who requests such information. Requests for copies
should be directed to the attention of Linda Annicelli, Vice President of
Administration at COMFORCE Corporation, 415 Crossways Park Drive, P.O. Box 9006,
Woodbury, New York 11797, telephone 516-437-3300.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of the Company's borrowings are fixed rate obligations. During 2000,
approximately 21.6% of the Company's interest expense was attributable to
variable rate loans, all of which were under the Heller Credit Facility (which
was repaid and terminated in December 2000) and IBJ Credit Facility (which was
entered into in December 2000). The IBJ Credit Facility provides for borrowing
availability of up to $110.0 million based upon a specified percentage of the
Company's eligible accounts receivable. Since the interest rates on borrowings
under the IBJ Credit Facility are variable, they will be impacted by changes in
interest rates generally prevailing in the United States and internationally.
However, management of the Company does not believe that any adjustments to the
rate under the IBJ 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 IBJ Credit Facility, the impact to
the Company in annualized interest payable would be approximately $600,000.
Since management does not believe that any adjustments to the rate under the IBJ
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.
18
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 30, 2001 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 30, 2001 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 30, 2001 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 30, 2001 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.
On December 19, 2000, the Company filed a Current Report on Form 8-K to
(1) announce that it had entered into the IBJ Credit Facility and describe
the terms thereof, (2) announce that it had amended the Indentures for the
Senior Notes and PIK Debentures and describe the terms thereof, and (3)
announce that it had settled its litigation with Austin Iodice and Anthony
Giglio and describe the terms of settlement. Each of these disclosures was
made under Item 5 of Form 8-K.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the 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 22, 2001
COMFORCE Operating, Inc.
By: /s/ John C. Fanning
-------------------
John C. Fanning, Chairman and Chief Executive Officer
Date: March 22, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ -------------------------- ------------------
/s/ John C. Fanning Chairman, Chief Executive
- ------------------------------------
John C. Fanning Officer and Director
(Principal Executive Officer) March 22, 2001
/s/ Harry Maccarrone Executive Vice President
- ------------------------------------
Harry Maccarrone and Director (Principal
Financial and Accounting Officer) March 22, 2001
/s/ Daniel Raynor Director March 22, 2001
- ------------------------------------
Daniel Raynor
/s/ Gordon Robinett Director March 22, 2001
- ------------------------------------
Gordon Robinett
/s/ Keith Goldberg Director March 22, 2001
- ------------------------------------
Keith Goldberg
/s/ Kenneth J. Daley Director March 22, 2001
- ------------------------------------
Kenneth J. Daley
20
COMFORCE CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Reports F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-4
Consolidated Statements of Operations for the
years ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-9
SCHEDULE
Schedule II -- Valuation and Qualifying Accounts F-25
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
COMFORCE Corporation:
We have audited the accompanying consolidated balance sheets of COMFORCE
Corporation and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period ended December 31, 2000. In connection
with our audit of the consolidated financial statements, we have also audited
the financial statement schedule for each of the years in the two-year period
ended December 31, 2000 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
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule for each of the years in the two-year period ended
December 31, 2000 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.
/s/ KPMG LLP
Melville, New York
February 27, 2001,
except as to note 18,
which is as of March 6, 2001
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 results of
operations and cash flows of COMFORCE Corporation and Subsidiaries for the year
ended December 31,1998, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule for 1998, listed in the index appearing on page
F-1, presents 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 schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 audit provides a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 25, 1999
F-3
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
(in thousands, except share and per share amounts)
Assets 2000 1999
----------- ----------
Current assets:
Cash and cash equivalents $ 4,940 7,818
Accounts receivable, less allowance of
$785 and $767 in 2000 and 1999, respectively 69,675 45,973
Funding and service fees receivable, less allowance of
$240 and $101 in 2000 and 1999, respectively 49,392 35,861
Prepaid expenses and other current assets 3,467 2,786
Deferred income taxes, net 1,076 1,373
----------- ----------
Total current assets 128,550 93,811
Deferred income taxes, net 404 181
Property and equipment, net 12,050 11,490
Intangible assets, net 137,655 139,010
Deferred financing costs, net 4,755 5,218
----------- ----------
Total assets $ 283,414 249,710
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings under revolving line of credit $ - 4,000
Accounts payable 5,373 3,015
Accrued expenses 34,235 20,988
----------- ----------
Total current liabilities 39,608 28,003
Long-term debt 197,421 178,346
Other liabilities 11 198
----------- ----------
Total liabilities 237,040 206,547
----------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized,
16,659,027 and 16,395,549 shares issued and
outstanding in 2000 and 1999, respectively 167 164
Additional paid-in capital 49,149 48,328
Accumulated deficit, since January 1, 1996 (note 1) (2,942) (5,329)
----------- ----------
Total stockholders' equity 46,374 43,163
----------- ----------
Total liabilities and stockholders' equity $ 283,414 249,710
=========== ==========
See accompanying notes to consolidated financial statements.
F-4
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2000, 1999 and 1998
(in thousands, except per share amounts)
2000 1999 1998
----------- --------- ---------
Revenue:
Net sales of services $ 480,325 436,221 459,022
----------- --------- ---------
Costs and expenses:
Cost of services 379,602 352,101 372,877
Selling, general and administrative expenses 66,806 55,596 55,827
Restructuring charge (credit) - (163) (211)
Litigation settlement 1,056 - -
Depreciation and amortization 7,424 6,824 5,605
--------- --------- ---------
Total costs and expenses 454,888 414,358 434,098
--------- --------- ---------
Operating income 25,437 21,863 24,924
--------- --------- ---------
Other income (expense):
Interest expense (23,266) (21,825) (21,490)
Write off of deferred financing costs (742) - -
Restricted convenant release 1,000 - -
Other income, net 247 93 35
--------- --------- ---------
(22,761) (21,732) (21,455)
Income (loss) before income tax and extraordinary gain 2,676 131 3,469
Provision for income taxes 3,073 2,169 2,664
--------- --------- ---------
Income (loss) before extraordinary gain $ (397) (2,038) 805
--------- --------- ---------
Gain on early debt extinguishment, net of taxes of $1,883 2,784 - -
--------- --------- ---------
Net Income (loss) $ 2,387 (2,038) 805
--------- --------- ---------
Dividends on preferred stock - - 21
--------- --------- ---------
Income (loss) available to common
stockholders $ 2,387 (2,038) 784
========= ========= ========
Basic income (loss) per common share:
Income (loss) before extraordinary gain $ (0.02) (0.12) 0.05
Extraordinary gain 0.17 - -
--------- --------- ---------
Net income (loss) $ 0.15 (0.12) 0.05
========= ========= ========
Diluted income (loss) per common share
Income (loss) before extraordinary gain $ (0.02) (0.12) 0.05
Extraordinary gain 0.17 - -
--------- --------- --------
Net income (loss) $ 0.15 (0.12) 0.05
========= ========= ========
Weighted average common shares outstanding, basic 16,471 16,315 15,971
========= ========= ========
Weighted average common shares outstanding, diluted 16,471 16,315 16,648
========= ========= ========
See accompanying notes to consolidated financial statements.
F-5
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2000, 1999 and 1998
(in thousands, except share amounts)
Series F Retained Total
Common stock preferred stock Additional earnings stock-
------------------------ ------------------- paid-in (Accumulated holders'
Shares Amount Shares Amount capital Deficit) equity
------------ --------- --------- ------- -------- ---------- -------
Balance at December 31, 1997 15,344,247 $ 153 500 $ 1 43,323 (4,075) 39,402
Exercise of stock options 80,500 1 - - 137 - 138
Exercise of stock warrants 108,132 1 - - 459 - 460
Conversion of Series F preferred stock 57,143 1 (500) (1) (298) - (298)
SEC registration fees - - - - (46) - (46)
Issuance of common stock in connection
with the acquisition of Camelot 203,307 2 - - 1,498 - 1,500
Issuance of common stock in connection with
acquisitions 335,993 3 - - 2,005 - 2,008
Tax benefit from exercise of stock options - - - - 386 - 386
Net income - - - - - 805 805
Dividends on Series F preferred stock - - - - - (21) (21)
------------ --------- --------- ------- -------- ---------- -------
Balance at December 31, 1998 16,129,322 161 - - 47,464 (3,291) 44,334
------------ --------- --------- ------- -------- ---------- -------
Issuance of common stock 17,549 - - - - - -
Issuance of common stock in connection with
acquisitions 248,678 3 - - 864 - 867
Net loss - - - - - (2,038) (2,038)
------------ --------- --------- ------- -------- ---------- -------
Balance at December 31, 1999 16,395,549 164 - - 48,328 (5,329) 43,163
------------ --------- --------- ------- -------- ---------- -------
Exercise of stock options 35,000 1 - - 39 - 40
Exercise of stock warrants 225,000 2 - - 756 - 758
Issuance of common stock 3,478 - - - - - -
Stock compensation expense - - - - 26 - 26
Net income - - - - - 2,387 2,387
---------------------------------------------------------------------------------
Balance at December 31, 2000 16,659,027 $ 167 - $ - 49,149 (2,942) 46,374
============ ========= ========= ======= ======== ======= =======
See accompanying notes to consolidated financial statements.
F-6
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
------------ ---------- -----------
Cash flows from operating activities:
Net income (loss) $ 2,387 (2,038) 805
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation and amortization of property and equipment 3,008 2,342 1,255
Amortization of intangible assets 4,416 4,482 4,326
Amortization of deferred financing costs 865 835 836
Write-off of deferred financing costs 742 - -
Allowance for doubtful accounts 157 78 (17)
Deferred income taxes 20 529 1,747
Issuance of notes in lieu of interest 4,166 3,604 3,162
Gain on repurchase of senior notes (2,784) - -
Expense relating to issuance of stock options 457 - -
Changes in assets and liabilities, net of the effects
of acquisitions of businesses:
Accounts receivables (37,362) (233) (3,848)
Prepaid expenses and other current assets (274) (323) (746)
Income taxes receivable (401) 879 2,896
Accounts payable and accrued expenses 13,139 875 (5,966)
--------- ---------- ---------
Net cash provided by (used in)
operating activities (11,464) 11,030 4,450
--------- ---------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired (788) - (3,574)
Purchase of property and equipment (3,496) (4,576) (6,182)
Payments of contingent consideration (2,153) (2,689) (1,912)
Decrease in restricted cash - - 1,036
--------- ---------- ---------
Net cash used in investing activities (6,437) (7,265) (10,632)
--------- ---------- ---------
Cash flows from financing activities:
Net borrowings under line of credit agreements 20,909 162 4,170
Proceeds from issuance of equity securities 798 - 639
Dividends paid - - (21)
Repayment of senior notes (5,080) - -
Debt financing costs (1,397) (471) (309)
Reduction of capital lease obligations (207) (237) (210)
--------- ---------- ---------
Net cash provided by (used in) financing activities 15,023 (546) 4,269
--------- ---------- ---------
Increase (decrease) in cash and cash equivalents (2,878) 3,219 (1,913)
Cash and cash equivalents, beginning of year 7,818 4,599 6,512
--------- ---------- ---------
Cash and cash equivalents, end of year $ 4,940 7,818 4,599
========= ========== =========
(Continued)
F-7
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
--------- --------- ---------
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 18,495 16,712 17,068
Income taxes 5,468 669 1,585
Details of acquisition (note 3):
Fair value of assets acquired 917 - 9,071
Liabilities assumed (87) - (3,855)
Less stock issued - - (1,500)
--------- --------- ---------
Cash paid 830 - 3,716
Less cash acquired 42 - 142
--------- --------- ---------
Net cash paid $ 788 - 3,574
========= ========= =========
Supplemental schedule of significant noncash
investing and financing activities:
Common stock issued in connection with acquisitions - 867 3,508
Tax benefit from exercise of stock options - - 386
Guaranteed contingent payment related
to the Gerri G acquisition 200 - -
See accompanying notes to consolidated financial statements.
F-8
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(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
Fiscal Year
Through December 31, 2000, the Company's fiscal years have ended on
December 31 in each year. Beginning in 2001, the Company's fiscal year will
consist of the 52 or 53 weeks ending on the last Sunday in December.
Accordingly, the Company's next fiscal year will end on Sunday, December
30, 2001.
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, 2000, 1999 and 1998 was approximately $5,102,000, $5,374,000
and $6,946,000, 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 at the time such
services are rendered.
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.
F-9
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
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 and amortization 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.
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 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 12% Senior Notes of
COI and the 15% PIK Debentures of COMFORCE are $68.0 million and $14.8
million, respectively, at December 31, 2000.
F-10
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 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 amortized on a
straight-line basis over the life of each financing source, which ranges
from 3 to 12 years, and unamortized costs are fully recognized upon
discharge of any financing. Upon the repayment and termination in December
2000 of the Company's revolving credit facility agented by Heller
Financial, Inc. entered into in November 1997 (the "Heller Credit
Facility"), $742,000 in unamortized financing costs related thereto were
expensed (see note 9).
Income (Loss) Per Share
Basic income (loss) per common share is computed by dividing net income
(loss) available for common shareholders by the weighted average number of
shares of common stock outstanding during each period. Diluted income
(loss) per share is computed assuming the conversion of stock options,
warrants and contingent shares with a market value greater than the
exercise price.
Reclassification
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
Impact of New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998.
This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. In June 1999, SFAS No. 138, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of SFAS No. 133"
was issued, making SFAS No. 133 effective for all quarters of fiscal years
beginning after June 15, 2000, or the Company's fiscal 2001. Based upon
review of the provisions of this standard, the Company has determined that
it will not have a significant impact on its financial position or results
of operations or have a material effect on its financial statement
reporting because the Company does not enter into such transactions.
(3) Acquisitions
In February 2000, the Company purchased all of the issued and outstanding
stock of Gerri G. Inc. for $800,000 in cash paid at closing, plus a
contingent payment of up to $600,000 payable in cash over a two-year period
based upon the future operating results of this business. 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. Pro forma results have not been provided as their
effect is not material to the financial statements of the Company.
In 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.
For the year ended December 31, 1997, the Company completed the
acquisitions of the following businesses which have been accounted for
under the purchase method of accounting: Uniforce Services, Inc. and
subsidiaries (Uniforce) and RHO Company, Inc. (Rhotech). The aggregate
purchase price of the acquisitions
F-11
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
for the year ended December 31, 1997 was approximately $120,600,000,
comprised of $108,400,000 in cash and approximately $12,200,000 in common
stock (1,585,208 shares). In addition, certain of the acquisitions
contained contingent payout provisions based on the attainment of specified
earnings.
For 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 for 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
contained contingent payout provisions based on the attainment of specified
earnings.
During 2000, contingent payments in connection with recently completed
acquisitions were approximately $2.2 million in cash. At December 31, 2000,
maximum future contingent payments in connection with all acquisitions
approximate $1.1 million 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 and 2000,
there were no remaining restructuring liabilities.
(5) Property and Equipment
Property and equipment as of December 31, 2000 and 1999 consisted of (in
thousands):
Estimated
Useful lives
in years 2000 1999
-------- ------ -------
Computer equipment and related software 3-7 $16,390 $13,243
Furniture, fixtures and vehicles 3-7 2,244 1,921
Leasehold improvements 3-7 676 578
------- -------
19,310 15,742
Less accumulated depreciation and amortization (7,260) (4,252)
------- -------
$12,050 11,490
======= =======
Depreciation and amortization expense was $3,008,000, $2,342,000 and
$1,255,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
F-12
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(6) Intangibles
Intangibles as of December 31, 2000 and 1999 consisted of (in thousands):
Estimated
useful lives
in years 2000 1999
-------- --------- --------
Goodwill 20-40 $ 150,512 147,491
Non-compete covenants 5 660 1,190
Other 5 587 716
-------- --------
151,759 149,397
Less accumulated amortization (14,104) (10,387)
-------- --------
$ 137,655 139,010
======== ========
Amortization expense was $4,416,000, $4,482,000 and $4,326,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
(7) Accrued Expenses
Accrued expenses as of December 31, 2000 and 1999 consisted of (in
thousands):
2000 1999
------- ------
Payroll and payroll taxes $20,249 9,729
Vacation/pension plan 2,318 1,742
Income taxes payable 973 1,048
Commissions 2,288 1,424
Medical insurance --- 1,100
Interest 1,485 1,867
Litigation settlement 1,056 --
Other 5,866 4,078
------- ------
$34,235 20,988
======= ======
(8) Income Taxes
The provision for income taxes as of December 31, 2000, 1999 and 1998
consisted of (in thousands):
2000 1999 1998
------ ----- -----
Current:
Federal $2,056 1,338 621
State 996 303 296
Deferred 21 528 1,747
------ ----- -----
$3,073 2,169 2,664
====== ===== =====
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):
F-13
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
2000 1999 1998
------ ----- -----
Statutory Federal tax rate provision
at 34.0% $ 910 45 1,181
State and local taxes, net of Federal benefit 657 5 133
Change in deferred tax rates and estimates used (71) 157 --
Effect of non-deductible items 1,577 1,820 1,350
Change in estimates used for prior years -- 142 --
------ ----- -----
$3,073 2,169 2,664
====== ===== =====
The components of deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 (in thousands) are as follows:
2000 1999
------ -----
Deferred tax assets:
Reserves and allowances $ 586 637
Accrued severance --- 19
Accrued liabilities and other 4,327 3,110
------ ------
Total deferred tax assets 4,913 3,766
------ ------
Deferred tax liability:
Intangibles 1,255 896
Excess depreciation 2,178 1,316
------- ------
Total deferred tax liabilities 3,433 2,212
------- ------
Net deferred tax asset $ 1,480 1,554
======= ======
The net deferred income tax assets are reflected in the accompanying balance
sheets as follows (in thousands):
2000 1999
------ ------
Net deferred income tax assets - current $ 1,076 1,373
Net deferred income tax assets - noncurrent 404 181
----- -----
$ 1,480 1,554
===== =====
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, 2000. The amount of the deferred tax asset
considered realizable, however, could be reduced if estimates of future
taxable income change.
F-14
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(9) Debt
Notes payable and long-term debt at December 31, 2000 and 1999 consisted of
(in thousands):
2000 1999
-------- -------
12% Senior Notes, due 2007 (a) $100,000 110,000
15% Senior Secured PIK Debentures,
due 2009 (b) 30,932 26,766
Revolving line of credit, due November 26, 2002
with interest payable monthly at LIBOR plus
2.0%. At December 31, 1999, the
weighted average rate was 8.17% (c) -- 45,580
Revolving line of credit, due December 14, 2003,
with interest payable monthly at LIBOR plus
2.50%. At December 31, 2000, the
weighted average rate was 9.46% (d) 66,489 --
-------- -------
197,421 182,346
Less current portion -- 4,000
-------- -------
Total long-term debt $197,421 178,346
======== =======
(a) The 12% Senior Notes (the Senior 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 Senior
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 Senior 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. During the third quarter of 2000, COI
repurchased $10.0 million face value of the Senior Notes for a purchase
price of $5.1 million. The net extraordinary gain that was realized by
these repurchases was approximately $2.8 million, which includes the
reduction of $200,000 of deferred financing costs associated with the
repurchases net of tax expense of $1.9 million.
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 Senior 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 Senior 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. See note 18
for a description of certain subsequent events with respect to the
repurchase of Senior Notes.
(b) The 15% Senior Secured PIK Debentures (the PIK 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 PIK Debentures must at all times rank at least equal in
priority of payment with all existing and future indebtedness of the
Company. The PIK Debentures are structurally subordinated to all
indebtedness of the Company's direct and indirect subsidiaries.
F-15
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The PIK 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 PIK Debentures paid in kind (PIK) on each interest
payment date, at the option of the Company. Thereafter, interest is
payable only in cash. During 2000, the Company issued approximately $4.2
million of additional PIK Debentures in lieu
of interest.
Subject to certain requirements, the Company may at any time redeem any
or all of the PIK 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 PIK 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 PIK 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. See
note 18 for a description of a subsequent event respecting the repurchase
of PIK Debentures.
Substantially all of the consolidated net assets of the Company are
assets of COI and all of the net income which has been generated by
Company through December 31, 2000 is net income attributable to the
operations of COI. Accordingly, except for permitted distributions as
described below, these assets and net income are restricted as to their
use by COMFORCE.
The indenture governing the Senior Notes imposes restrictions on COI
making specified payments, which are referred to as "restricted
payments," including making distributions or paying dividends (referred
to as upstreaming funds) to COMFORCE. Under the indenture, COI is not
permitted to make cash distributions to COMFORCE other than (1) to
upstream $2.0 million annually to pay public company expenses, (2) to
upstream up to $10.0 million to pay income tax related to deemed
forgiveness of PIK Debentures to facilitate the purchase or exchange by
COMFORCE of PIK Debentures at less than par, (3) under certain
circumstances in connection with a disposition of assets, to upstream
proceeds therefrom to repay the PIK Debentures, and (4) to upstream funds
to the extent COI meets the restricted payments test described below.
In November 2000, COI obtained approval of the holders of the Senior
Notes to amend the indenture governing the Senior Notes to increase the
permitted upstream of funds to pay public company expenses of COMFORCE
from $1.25 million annually to $2.0 million annually. COI upstreamed
$1.25 million in 1999 and $1.9 million in 2000 for public company
expenses of COMFORCE.
Under the restricted payments test, COI is permitted to upstream funds to
COMFORCE if (1) a default under the indenture does not then exist or
would result therefrom, (2) COI has a consolidated coverage ratio (as
defined in the indenture) of at least 1.50 to 1.00 and (3) the aggregate
amount of the upstream and all other restricted payments previously made
does not exceed 50% of COI's consolidated net income (as defined in the
indenture) accrued from January 1, 1998 through the most recent fiscal
quarter ending prior to the date of the restricted payment, plus 100% of
other amounts upon the occurrence of certain events (none of which have
occurred to date). At December 31, 2000, COI had approximately $4.3
million available for distribution as permitted restricted payments.
This amount represents 50% of consolidated net income of COI for the
period from January 1, 1998 through December 31, 2000.
As described above, through December 1, 2002, interest under the PIK
Debentures is payable, at the option of COMFORCE, in cash or in kind
through the issuance of additional PIK Debentures. To date,
F-16
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
COMFORCE has paid all interest in kind. Beginning with the interest
payment due June 1, 2003, COMFORCE will be required to pay interest on
the PIK Debentures in cash. Its ability to do so will be dependent on the
ability of COI to upstream funds for this purpose under the restricted
payments test. In addition, COMFORCE's ability to repay the PIK
Debentures at their maturity on December 1, 2009 or on any earlier
required repayment or repurchase date will also be dependent on the
ability of COI to upstream funds for this purpose under the restricted
payments test, unless COMFORCE separately obtains a loan or sells its
capital stock or other securities to provide funds for this purpose.
(c) Throughout 1999 and until repaid and terminated in December 2000, the
Company maintained a revolving credit facility (the Heller Credit
Facility) providing for borrowings of up to $75.0 million based on a
specified percentage of the Company's eligible accounts receivable. The
Company pledged substantially all of its assets as collateral for the
Heller Credit Facility.
Borrowings under the Heller Credit Facility bore interest, at the
Company's option, at a rate based on a margin over either prime rate or
LIBOR. The terms of the agreement included a commitment fee based on
unutilized amounts.
(d) In December 2000, the Company repaid and terminated the Heller Credit
Facility with the proceeds of a new revolving credit facility agented by
IBJ Whitehall Business Credit Corporation (the IBJ Credit Facility)
providing for borrowings of up to $100.0 million at December 31, 2000,
and subsequently increased to $110.0 million by an amendment entered into
in January 2001. Permitted borrowings under the IBJ Credit Facility are
based upon a specified percentage of the Company's eligible accounts
receivable. The Company has pledged substantially all of its assets as
collateral for the IBJ Credit Facility.
Borrowings under the IBJ Credit Facility bear interest, at the Company's
option, at a rate based on a margin over either the base commercial
lending rate of IBJ or LIBOR. The terms of the agreement include a
commitment fee based on unutilized amounts.
The agreements evidencing the IBJ 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 IBJ Credit Facility is December 14, 2003.
Required principal payments of long-term debt are as follows (in
thousands):
2003 $ 66,489
Thereafter 130,932
---------
$ 197,421
=========
See note 18 for a description of a subsequent amendment to the IBJ Credit
Facility.
F-17
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(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):
2000 1999 1998
------- ------ ------
Numerator:
Net income (loss) $ 2,387 (2,038) 805
Preferred stock dividends --- --- (21)
------- ------ ------
Numerator for basic and diluted income
(loss) per share - income (loss)
available to common stockholders $ 2,387 (2,038) 784
======= ====== ======
Denominator:
Denominator for basic income (loss)
per share - weighted-average shares 16,471 16,315 15,971
------- ------ ------
Effect of dilutive securities:
Employee stock options -- -- 280
Warrants -- -- 397
------- ------ ------
-- -- 677
------- ------ ------
Dilutive potential common shares:
Denominator for diluted income (loss)
per share - adjusted weighted-
average shares and assumed
conversions 16,471 16,315 16,648
======= ====== ======
Options and warrants to purchase 3,264,490, 4,781,487 and 2,043,370 shares
of common stock were outstanding for the years ended 2000, 1999 and 1998,
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. In June 2000, the 1993 Plan was further amended to
allow for the issuance of an additional 1,000,000 options under the plan
for a total of 5,000,000 shares.
F-18
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
A summary of stock option transactions for the years ended December 31, 2000,
1999 and 1998 is as follows:
2000 1999 1998
---------------------------- -------------------------- --------------------------
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding, beginning
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
Granted 702,000 1.75 to 2.00 440,000 2.00 to 5.25 580,700 5.50 to 12.90
Exercised (35,000) 1.125 -- -- (95,500) 1.125 to 6.00
Forfeited/expired (483,335) 2.00 to 18.50 (243,800) 1.125 to 18.50 (55,350) 6.00 to 18.50
--------- --------- ---------
Options outstanding
end of year 2,945,490 $1.125 to 18.38 2,761,825 $1.125 to 18.50 2,565,625 $1.125 to 18.50
========= ========= =========
Options exercisable,
end of year 2,283,088 2,026,131 1,964,475
========= ========= =========
Options available for
grant, end of year 1,636,994 855,659 1,051,859
========= ========= =========
Weighted-average fair
value of options
granted during
the year $ 1.99 4.53 9.35
========== ========= =========
The following table summarizes information about stock options outstanding at
December 31, 2000:
Weighted-
average Weighted- Weighted-
remaining average average
Range of Shares contractual exercise Shares exercisable
exercise prices outstanding life (years) price exercisable price
--------------- ----------- ------------ ----- ----------- -----
$1 - $4.99 831,500 8.16 2.00 407,665 2.03
$5 - $7.99 1,899,500 5.35 6.53 1,733,083 6.63
$8 - $13.99 198,550 6.58 10.23 126,400 10.32
$14 - $17.99 5,940 5.85 15.04 5,940 15.04
$18 - $19 10,000 5.38 18.38 10,000 18.38
--------- ---- ----- --------- -----
$1 - $19 2,945,490 6.23 5.56 2,283,088 6.09
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 2000, 1999 and 1998, respectively: no
dividend yield; expected volatility of 45.6%; risk-free interest rate (ranging
from 6.21% - 6.88%); 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 for any
employees, officers or directors. 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 income (loss)
per share would have been reduced (increased) to the pro forma amounts indicated
below:
F-19
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
2000 1999 1998
------ ------ ------
(in thousands, except per share amounts)
Net income (loss) attributable to
common shareholders as reported $ 2,387 (2,038) 784
Pro forma income (loss) 2,115 (2,445) 538
Basic income (loss) per share as reported .15 (.12) .05
Pro forma basic income (loss)
per share .13 (.15) .03
Diluted income (loss) per share as reported .15 (.12) .05
Pro forma diluted income (loss) per share .13 (.15) .03
Warrants
At December 31, 2000 and 1999, the Company had outstanding warrants to
purchase a total of 319,000 and 2,019,662 shares of common stock at prices
ranging from $7.43 to $7.63 and $2.00 to $24.00 per share, respectively.
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 from 1993 to 1995 while the
Company was engaged in the jewelry business, and Anthony Giglio, who
performed the functions of the Company's chief operating officer during
this same period, 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
awarded to them in 1993. Mr. Iodice had received options to purchase
370,419 shares of the Company's common stock and Mr. Giglio had received
options to purchase 185,209 shares of common stock, each at an exercise
price of $1.125 per share. The Company maintained that these options had
expired in 1996, three months after the plaintiffs ceased to be employed by
the Company, as provided in the Company's Long-Term Stock Investment Plan.
The plaintiffs maintained that they were agents and not employees of the
Company and that, therefore, these options had not expired.
The plaintiffs alleged that they were entitled to an unspecified amount of
damages based upon the difference between the exercise price and highest
market price of the Company's common stock following the date of the
purported exercise of all options, plus costs and expenses. They also
claimed entitlement to treble these damages under Connecticut law. They
filed offers of judgment with the court for $6.0 million in the aggregate
based upon the significantly higher prices of the Company's common stock in
1996 and 1997, but this offer did not limit the amount of damages they
could claim at trial.
On November 30, 2000, immediately prior to the scheduled jury trial, the
parties reached settlement of these suits, the terms of which were entered
with the court. Under the terms of settlement, the Company agreed to pay to
the plaintiffs $325,000 on January 2, 2001 (which amount was paid on that
date) and $300,000 on May 1, 2001, and to issue to them options on January
2, 2001 to purchase 555,628 shares of common stock in the aggregate at an
exercise price of $0.6625 per share. While management of the Company
believes that the options originally issued to the plaintiff's had expired,
it believes that settlement was advisable given the exposure faced by the
Company in the event of an adverse judgment in the jury trial. The Company
incurred a charge of approximately $1.1 million as a result of this
litigation.
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.
F-20
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(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 2000 and 1999.
Certain employees who work for governmental agencies are required to be
covered under a separate pension plan. During 2000, 1999 and 1998, the
Company recorded approximately $1,714,000, $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 2000, 1999 and 1998 approximated $3,406,000, $2,952,000
and $2,286,000, respectively.
As of December 31, 2000, 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):
2001 $ 2,985
2002 2,408
2003 2,126
2004 1,465
2005 1,185
Thereafter 4,702
------
$ 14,871
======
(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.
At December 31, 2000, the Company had four customers with accounts
receivable balances that aggregated 24.6% of the Company's total accounts
receivable. 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 were less than 10% for each of the years ended
December 31, 2000 and 1999 and were 10.1% for the year ended December 31,
1998.
(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.
The Company had been reporting its results through two operating segments
-- Staff Augmentation and Financial Services. Principally as a result of
the development by the Company's PrO Unlimited subsidiary of a business
offering web-enabled solutions for the procurement, tracking and engagement
of contingent labor, the Company has determined to begin reporting its
results through three operating segments -- Staff Augmentation, Human
Capital Management Services and Financial Services. The Staff Augmentation
F-21
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
segment provides information technology (IT), telecom and other staffing
services. The Human Capital Management Services segment provides contingent
workforce management services. The Financial Services segment provides payroll,
funding and back office support services to independent consulting and staffing
companies.
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 account for expenditures for long-lived assets on a segment
basis.
The table below presents information on the revenues and operating contribution
for each segment for the three years ended December 31, 2000, and items which
reconcile segment operating contribution to COMFORCE's reported pre-tax income.
Year Ended December 31,
(in thousands)
2000 1999 1998
---- ---- ----
Net sales of services:
Staff Augmentation $ 336,740 321,291 367,996
Human Capital Management Services 131,525 103,864 80,340
Financial Services 12,060 11,066 10,686
------- ------- -------
$ 480,325 436,221 459,022
======= ======= =======
Operating contribution:
Staff Augmentation $ 36,791 28,989 32,374
Human Capital Management Services 4,724 6,147 4,501
Financial Services 9,249 8,432 7,892
------- ------- -------
50,764 43,568 44,767
======= ======= =======
Consolidated expenses:
Interest, net 23,019 21,732 21,455
Restricted covenant release (1,000) -- --
Write-off of deferred financing costs 742 -- --
Restructuring credit -- (163) (211)
Depreciation and amortization 7,424 6,824 5,605
Corporate general and administrative expenses 16,847 15,044 14,449
Litigation settlement 1,056 -- --
------- ------- -------
48,088 43,437 41,298
------- ------- -------
Income before income tax and extraordinary gain $ 2,676 131 3,469
Total assets:
Staff Augmentation $ 51,849 39,022 41,714
Human Capital Management Services 17,826 6,850 6,014
Financial Services 49,392 35,861 33,953
Corporate 164,347 167,977 164,401
------- ------- -------
$ 283,414 249,710 246,082
======= ======= =======
F-22
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(17) Selected Quarterly Financial Data (Unaudited)
(in thousands, except per share data and footnotes)
2000 Quarter Year End
First Second Third Fourth December 31
Net sales of services $106,845 $117,718 $120,441 $135,321 $480,325
Gross profit 21,050 24,424 25,663 29,586 100,723
Income (loss) before
extraordinary gain (1,542) 61 529 555 (397)
Net income (loss)/(1)/ $ (1,542) $ 61 $ 3,189 $ 679 $ 2,387
======== ======== ======== ======== ========
Income (loss) per share before
extraordinary gain
Basic (0.09) -- 0.03 0.03 (0.02)
Diluted (0.09) -- 0.03 0.03 (0.02)
1999 Quarter Year End
First Second Third Fourth December 31
Net sales of services $107,075 $111,119 $109,394 $108,633 $436,221
Gross profit 19,679 21,590 21,437 21,414 84,120
Income (loss) before
extraordinary gain (1,190) (344) 16 (520) (2,038)
Net income (loss) $ (1,190) $ (344) $ 16 $ (520) $ (2,038)
======== ======== ======== ======== ========
Income (loss) per share before
extraordinary gain
Basic (0.07) (0.02) -- (0.03) (0.12)
Diluted (0.07) (0.02) -- (0.03) (0.12)
________________________
/(1)/ Includes $2.8 million ($0.17 per basic and diluted share) for the year
end December 31, 2000; $2.7 million ($0.16 per basic and diluted share) during
quarter ended September 30, 2000 and $100,000 ($0.01 per basic and diluted
share) during quarter ended December 31, 2000 relating to the extraordinary gain
on the extinguishment of debt.
Since per share information is computed independently for each quarter and the
full year, based on the respective average number of common shares outstanding,
the sum of the quarterly per share amounts does not necessarily equal the per
share amounts for the year.
(18) Subsequent Events
On February 28, 2001, the Company completed the repurchase of $11.0 million
principal amount of Senior Notes for $7.5 million and on March 5, 2001, the
Company completed the repurchase of an additional $2.0 million of Senior Notes
for $1.4 million, the repurchase prices of which were paid from lower interest
rate borrowings under the IBJ Credit Facility. The Company anticipates an
extraordinary gain on the extinguishment, net of taxes, of the Senior Notes of
approximately $2.2 million.
On March 5, 2001, the Company also entered into an amendment of the IBJ Credit
Facility to permit borrowings thereunder to repurchase of PIK Debentures under
certain circumstances. As amended, the IBJ Credit Facility permits the use of up
to $16.5 million in loan proceeds to pay the aggregate repurchase prices of
Senior Notes and PIK Debentures and costs associated therewith (including
related tax expenses), not more than $9.0 million of which may be used to pay
the repurchase price of PIK Debentures and such associated costs. See Note 9.
On March 6, 2001, the Company completed the repurchase of $5.2 million principal
amount of PIK Debentures for $2.5 million using lower interest rate borrowings
under the IBJ Credit Facility. The $2.5 million repurchase cost is
F-23
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
deemed to be a restricted payment of COI under the indenture governing the
Senior Notes. Accordingly, upon completion of the repurchase, COI had
approximately $1.8 million remaining available for distribution as permitted
restricted payments (representing 50% of consolidated net income of COI for the
period from January 1, 1998 through December 31, 2000, less $2.5 million). The
Company anticipates an extraordinary gain, net of taxes, on the extinguishment
of the PIK Debentures of approximately $1.6 million. See Note 9(b).
F-24
Schedule
COMFORCE CORPORATION AND SUBSIDIARIES
Schedule II Valuation and Qualifying Accounts
Years ended December 31, 2000, 1999 and 1998
(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, 2000:
Deducted from assets to which they apply:
Allowance for doubtful accounts $ 868 157 - - 1,025
========= ========= ======== ========== =========
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
========= ========= ======== ========== =========
F-25
EXHIBIT INDEX
Unless otherwise indicated, for documents incorporated herein by reference
to exhibits included in SEC filings of COMFORCE Corporation, the registration
number for COMFORCE Corporation is 001-06801.
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 (Registration No. 333-35451) 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 (Registration No.
033-6043) 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 Certificate of Amendment of Certificate of Incorporation of COMFORCE
Corporation filed with the Secretary of State of Delaware on October 28,
1996 (included as an exhibit to COMFORCE Corporation's Registration
Statement on Form S-8 of COMFORCE Operating, Inc. filed with the
Commission on March 13, 2000 (Registration No. 333-56962) 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 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).
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).
E-1
4.3 First Supplemental Indenture dated as of November 29, 2000 between
COMFORCE Corporation and The Bank of New York, as trustee, to Indenture
dated as of November 26, 1997 (included as an exhibit to COMFORCE
Corporation's Current Report on Form 8-K dated December 19, 2000 and
incorporated herein by reference).
4.4 First Supplemental Indenture dated as of November 29, 2000 between
COMFORCE Corporation and Wilmington Trust Company, as trustee, to
Indenture dated as of November 26, 1997 (included as an exhibit to
COMFORCE Corporation's Current Report on Form 8-K dated December 19,
2000 and incorporated herein by reference).
4.5 Second Supplemental Indenture dated as of December 4, 2000 between
COMFORCE Corporation and The Bank of New York, as trustee, to Indenture
dated as of November 26, 1997 (included as an exhibit to COMFORCE
Corporation's Current Report on Form 8-K dated December 19, 2000 and
incorporated herein by reference).
4.6 Second Supplemental Indenture dated as of December 4, 2000 between
COMFORCE Corporation and Wilmington Trust Company, as trustee, to
Indenture dated as of November 26, 1997 (included as an exhibit to
COMFORCE Corporation's Current Report on Form 8-K dated December 19,
2000 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
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 (Registration No. 333-43327) and incorporated herein by reference).
10.3 Purchase Agreement, dated as of November 19, 1997, dated as of November
26, 1997, by and between COMFORCE Corporation 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 (Registration No. 333-43327) 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 (Registration
No. 333-43327) 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 (Registration
No. 333-43327) 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 as of March 28, 2000 amending
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, 1999 and incorporated herein by reference).
E-2
10.8* Second Amendment to Employment Agreement dated as of January 23, 2001
amending Employment Agreement dated as of January 1, 1999 between
COMFORCE Corporation, COMFORCE Operating, Inc. and John C. Fanning, as
previously amended by Amendment dated as of March 28, 2000.
10.9 Employment Agreement dated as of January 1, 1999 among 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).
10.10* Amendment to Employment Agreement dated as of January 23, 2001 amending
Employment Agreement dated as of January 1, 1999 between COMFORCE
Corporation, COMFORCE Operating, Inc. and Harry Maccarrone.
10.11 Loan and Security Agreement dated as of December 14, 2000 among COMFORCE
Corporation, COMFORCE Operating, Inc. and other named subsidiaries, and
IBJ Whitehall Business Credit Corporation, as lender and agent, and
other named participating lenders (included as an exhibit to COMFORCE
Corporation's Current Report on Form 8-K dated December 19, 2000 and
incorporated herein by reference).
10.12* Amendment No. 1 dated as of January 5, 2001 to Loan and Security
Agreement dated as of December 14, 2000 among COMFORCE Corporation,
COMFORCE Operating, Inc. and other named subsidiaries, and IBJ Whitehall
Business Credit Corporation, as lender and agent, and other named
participating lenders.
10.13* Amendment No. 2 dated as of March 5, 2001 to Loan and Security Agreement
dated as of December 14, 2000, as amended, among COMFORCE Corporation,
COMFORCE Operating, Inc. and other named subsidiaries, and IBJ Whitehall
Business Credit Corporation, as lender and agent, and other named
participating lenders.
21.1* List of Subsidiaries.
23.1* Consent of KPMG LLP.
23.2* Consent of PricewaterhouseCoopers, LLP
____________________________
* Filed herewith.
E-3