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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the fiscal year ended December 30, 2001
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 36-2262248
- -------------------------------- -----------------------------------
(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 ____
---
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 27, 2002:
$13,317,251.
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 27, 2002
------------------ -----------------------------
Common stock, $.01 par value 16,659,193
Documents Incorporated by Reference: Portions of the Registrant's proxy
statement to be filed by April 29, 2002 are incorporated herein by reference in
Items 10, 11, 12 and 13.
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, healthcare support and
technical and engineering services. 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 53 offices (42 company-owned and 11
licensed), the Company recruits and places highly skilled contingent personnel
and provides financial and outsourcing services for a broad customer base,
including Boeing Company, Bellsouth Telecommunications, Inc., Sun Microsystems
and Los Alamos National Laboratories. The Company's labor force consists
primarily of computer programmers, systems consultants, telecommunication
engineers, analysts, engineers, technicians, scientists, researchers, healthcare
professionals 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,
healthcare professionals, telecommunication 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 reports its results through three operating segments -- Staff
Augmentation, Human Capital Management Services and Financial Outsourcing
Services (formerly known as Financial Services). The Staff Augmentation segment
provides information technology (IT), telecom, healthcare support, technical and
other staffing services. The Human Capital Management Services segment provides
contingent workforce management services. The Financial Outsourcing Services
segment provides funding and back office support services to independent
consulting and staffing companies. A description of the types of services
provided by each segment follows. See note 15 to the Company's consolidated
financial statements for a presentation of segment results.
Staff Augmentation Segment
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. These services
consist of recruiting, processing payrolls, which includes withholding taxes,
and tracking hours, vacation and sick days. The IT consultants 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 BellSouth Telecommunications, Inc.,
Boeing Information Services, Inc. and Microsoft Corporation.
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Telecom
The Company provides skilled telecom personnel to plan, design, engineer,
install and maintain wireless and wireline telecommunications systems. In
recent years, through 2000, the Company significantly increased the amount of
telecom services it provided, fueled by the race among telecom companies to
build capacity. In 2001, this work declined dramatically as the telecom sector
retrenched due to overcapacity and a weak business environment. The Company has
been seeking to rebuild its business in this sector through its Engineering,
Furnish and Installation ("EF&I") division, which became ISO-certified in 2001.
Also in 2001, the Company partnered with another ISO-certified EF&I organization
to satisfy customer demands for the broader, full service platforms.
The Company's telecom customers include Northern Telecom, Inc., ALCATEL
Network Systems, Inc. and Verizon.
Healthcare Support Services
The Company has targeted the healthcare support services as a potential
source of growth. In this sector, the Company provides nurses and credentialed
coders for medical reimbursements and other personnel to support insurance
claims processing, billing, transcription and confidential patient record
keeping.
The Company's customers in this area are medical offices, multi-physician
practices, hospitals and other middle market healthcare providers.
Technical and Engineering Services
The Company provides technical and engineering services through its
Technical Services division for national laboratory research in such areas as
environmental safety, alternative energy source development and laser
technology. It also 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 technical and engineering staffing customers include Boeing
Company, Gulfstream Aerospace, Raytheon Company and the Department of Energy
National Research Laboratories, including Los Alamos and Sandia.
Other Staffing
In addition to providing contract consulting and other staffing services in
the areas described above, the Company provides a broad range of staffing
services to its customers, including laboratory and scientific support, and
professional, clerical, telemarketing and call center staffing. The Company also
offers highly specialized chemists, biologists, engineers, laboratory
instrumentation operators, technicians and others to companies involved in
pharmaceutical, environmental, biotech and other businesses. In addition, the
Company also recruits and trains skilled billing, data entry and other clerical
personnel who provide support services for smaller businesses such as accounting
and law offices.
Human Capital Management Services Segment
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
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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 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 - provides a consolidated vendor-
neutral staffing desk solution for procuring contingent employees by
utilizing many different service providers to provide clients' hiring
managers with the most qualified candidate in the shortest period of
time at the lowest cost.
. The 1099 Management Solution - helps customers manage the tax and
benefit risks associated with the use of independent contractors to
ensure compliance with all governmental regulations.
. Consultant Consolidation Services - acts as single-source supplier by
consolidating and managing invoicing for, and negotiating and
monitoring services provided by, its customers' multiple service
providers, including small consulting firms and true independent
contractors.
. Professional Payrolling Services - provides automated payroll services
and worker benefits as a third party processor.
Software
. PrO's exclusive Workforce Alliance Network Database ("WAND") is a web-
enabled system that provides an end-to-end solution for the
engagement, management and tracking of the contingent workforce. The
software allows hiring managers and staffing vendors to communicate 24
hours a day to place job orders, check the status of job orders,
submit resumes, review resumes, schedule interviews, select candidates
and create custom reports on staffing activity. In addition, workers
can utilize WAND's e-timecarding capabilities to submit time and
expense reports online. WAND also provides extensive reporting,
consolidated billing, security check and screening services.
Financial Outsourcing Services Segment
The Company provides funding and back office support services to
approximately 134 independent consulting and staffing companies. The Company's
back office services include payroll processing, billing and funding,
preparation of various management reports and analysis, payment of all payroll-
related 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 the
firms' clients. The Company pursues the collection of all receivables; however,
the amount of any accounts receivable that are not collected within a specified
period after billing is charged back by the Company to such firm.
4
Customers
The Company provides staffing, consulting and outsourcing services to a
broad range of customers, including, computer software and hardware
manufacturers, aerospace and avionics firms, utilities, national laboratories,
pharmaceutical companies, cosmetics companies, healthcare facilities,
telecommunication equipment manufacturers, telecommunication service providers
(wireline and wireless), educational institutions and accounting firms. Services
to Fortune 500 companies represent a majority of the Company's revenues.
In certain cases, the Company's contracts with its customers provide that
the Company will have the first opportunity to supply the personnel required by
that customer. Other staffing companies not under contract with the customer are
then offered the opportunity to supply personnel only if the Company is unable
to meet the customer's requirements.
The Company generally invoices its customers weekly. IT, telecom and
professional staffing customers generally obtain the Company's services on a
purchase order basis, while technical and engineering services, healthcare
support and Human Capital Management Services customers generally enter into
long-term contracts with the Company.
During the year ended December 30, 2001, the only customer that accounted
for 10% or more of the Company's revenues was Boeing Company, which accounted
for 11.6% of revenues. The largest four customers of the Company accounted for
approximately 32.8% of the Company's revenues.
Sales and Marketing
The Company services its customers through a network of 42 company-owned
and 11 licensed offices located in 21 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) the 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 faster-growing middle-market companies.
Recruitment of Billable Employees
Within the Staff Augmentation Segment, the Company's success depends
significantly 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
5
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. 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. It provides assignments
with high-profile customers that make use of advanced technology and offers the
employees the opportunity to obtain additional experience that can enhance their
skills and overall marketability. To attract and retain qualified personnel, the
Company also offers flexible schedules and, depending on the contract or
assignment, paid holidays, vacation, and certain benefit plan opportunities.
Information Systems
The Company uses PeopleSoft(R) HRMS and Financials applications software
for its back office operations, and is currently upgrading to PeopleSoft(R) 8.0
Pure Internet Architecture version. Utilizing the PeopleSoft(R) system has
enabled the Company to consolidate its back office operations, improve business
processes and enhance customer relationships. Through this system, the Company
has also been able to substantially integrate the management information systems
of its 11 acquired companies by creating a single database repository of shared
business information.
The Company has completed the implementation of the EZAccess(R) recruiting
and sales database application, which has allowed it to consolidate the resume
databases of its acquired companies. This software has enabled the Company to
streamline the processes of identifying, recruiting and hiring on a national
basis. The Company believes that EZAccess(R) has enhanced 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 competition from 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. In the current
economic climate, management believes that attracting and retaining clients and
selling services to them in the face of heightened competition are the principal
competitive challenges. The Company competes on the basis of price, level of
service, quality of candidates and reputation, and may be in competition with
many other staffing companies seeking to fill any requisition for job openings.
In addition, particularly in stronger economic climates, the availability
and quality of candidates, the effective monitoring of job performance and the
scope of geographic service are the principal elements of competition. The
availability of quality contingent personnel is an especially important facet of
competition in many cases. The Company believes its ability to compete also
depends in part on a number of competitive factors outside its control,
including the economic climate generally and in particular industries served by
the Company, the ability of its competitors to hire, retain and motivate skilled
personnel and the extent of its competitors' responsiveness to customer needs.
6
Employees
The Company currently employs approximately 550 full-time staff employees
at its headquarters and company-owned offices. The Company issued approximately
22,000 W-2s to employees of the Company who provided services to its customers
during 2001, not including W-2s issued as part of the Financial Outsourcing
Services segment backoffice 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 services in all of its
segments.
Licensed Offices
The Company has granted a limited number of licenses to operate COMFORCE
offices. The most recent license for a new office was granted in July 1992, and
the Company does not presently expect to grant more licenses. Licensees recruit
contingent personnel and promote their services to both existing and new clients
obtained through the licensees' marketing efforts. Performance of the
contingent personnel and overall service quality is the direct responsibility of
licensees, and the licensees are ultimately responsible for the collection of
accounts receivable. The Company and the licensees share the gross profits from
each licensed office.
Regulations
Contingent staffing and consulting services firms are generally subject to
one or more of the following types of government regulations: (1) registration
of the employer/employees; (2) licensing, record keeping and recording
requirements; and (3) substantive limitations on operations. 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 particular, in the heathcare support sector, the
Company is subject to extensive federal and state regulations as well as those
of public and private healthcare organizations and authorities. In addition,
the Company's licensees are considered to be franchisees, 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 660 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. Except for an
approximately 700 square foot condominium, the Company owns no real estate.
The Company believes that its facilities are adequate for its present and
reasonably anticipated future business requirements. The Company does not
anticipate difficulty locating additional facilities, if needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine contract and employment-related
litigation matters arising 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, professional medical malpractice
insurance, fiduciary 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.
7
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
---- ---
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
2001 First Quarter......................... 2.00 1.25
Second Quarter........................ 1.85 1.37
Third Quarter......................... 1.40 0.81
Fourth Quarter........................ 1.75 0.85
The last reported sale price of the Common Stock of the Company on the
American Stock Exchange on March 27, 2002 was $1.15. As of such date, there
were approximately 4,500 shareholders of record.
No dividends were declared or paid on the Common Stock during 2001. 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 its Common Stock for the foreseeable future.
Recent Sales of Unregistered Securities
The Company made no sales of unregistered securities since January 1, 2001
except for (1) options to purchase an aggregate of 555,628 shares of the
Company's common stock at an exercise price of $0.6625 per share issued as of
January 2, 2001 as part of a litigation settlement agreed to as of November 30,
2000, as previously reported under Part II, Item 5 in the Company's annual
report on Form 10-K for the year ended December 31, 2000, and (2) the Company's
8% Subordinated Convertible Note due December 2, 2009 in the original principal
amount of $8.0 million issued as of September 21, 2001, as previously reported
under Part II, Item 2 in the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 2001.
8
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 30,
2001. 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 30, 2001 from
its audited historical consolidated financial statements (in thousands, except
per share data).
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
Statement of Operations Data: (1)
Net sales of services................................. $216,521 $459,022 $436,221 $480,325 $437,699
Operating income...................................... 6,865 24,924 21,863 25,437 17,030
Income (loss) before extraordinary
gain................................................. (3,700) 805 (2,038) (397) (3,223)
Income (loss) available to common
stockholders before extraordinary
gain................................................. (4,437) 784 (2,038) (397) (3,223)
Gain on early debt extinguishment, net
of taxes (2)...................................... -- -- -- 2,784 9,263
Income (loss) available to common
stockholders......................................... (4,437) 784 (2,038) 2,387 6,040
Diluted income (loss) per share:
Income (loss) available to common
stockholders before extraordinary
gain.............................................. $ (0.33) $ 0.05 $ (0.12) $ (0.02) $ (0.19)
Extraordinary gain................................. -- -- -- 0.17 0.55
---------- ---------- ---------- ---------- ----------
Net income (loss) available to
common stockholders.............................. $ (0.33) $ 0.05 $ (0.12) $ 0.15 $ 0.36
Balance Sheet Data:
Working capital....................................... $ 59,762 $ 65,563 $ 65,808 $ 88,942 $ 57,902
Accounts receivable, net.............................. 72,865 81,680 81,834 119,067 80,029
Intangible assets, net................................ 135,516 138,847 139,010 137,655 134,283
Total assets.......................................... 235,934 246,082 249,710 283,414 240,009
Total debt, including current
maturities........................................... 171,038 178,579 182,346 197,421 154,720
Preferred stock....................................... 1 -- -- -- --
Stockholders' equity.................................. 39,402 44,334 43,163 46,374 52,537
__________
(1) 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.
(2) During 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. During
2001, the Company repurchased (i) $13.0 million principal amount of its 12%
Senior Notes due 2007 for a cash purchase price of $8.9 million and (ii)
$23.2
9
million principal amount of its 15% Senior Secured PIK Debentures due 2009
(with accrued and unpaid interest thereon of $1.2 million), of which
Debentures in the principal amount of $5.2 million (bearing accrued, unpaid
interest of $340,000) were purchased for a purchase price of $2.5 million
and Debentures in the principal amount of $18.0 million (bearing accrued,
unpaid interest of $860,000) were exchanged for the Company's 8%
Subordinated Convertible Note due December 2, 2009 in the original
principal amount of $8.0 million, plus $1.0 million in cash. The net
extraordinary gain that was realized by these repurchases was $9.3 million,
which includes the reduction of $1.1 million of deferred financing costs
associated with the repurchases, net of tax expense of $6.6 million. See
also "Financial Condition, Liquidity and Capital Resources" in 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 the 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 eligible 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 grows, these receivables will increase and there will be
greater requirements for borrowing availability under its credit facility to
fund current operations.
The Company reports its results through three operating segments -- Staff
Augmentation, Human Capital Management Services and Financial Outsourcing
Services (formerly known as Financial Services). The Staff Augmentation segment
provides information technology (IT), telecom, healthcare support, technical and
other staffing services. The Human Capital Management Services segment provides
contingent workforce management services. The Financial Outsourcing Services
segment provides payroll, funding and back office support services to
independent consulting and staffing companies.
Recent Developments
The following is a discussion of certain developments that have occurred
since the beginning of the Company's 2001 fiscal year. This discussion is not
intended to be an exhaustive discussion of all material events that have
occurred during this period.
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 previously was a calendar year.
Beginning in 2001, the fiscal year consists of the 52 or 53 weeks
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ending on the last Sunday in December. Accordingly, the Company's fiscal year
for 2001 ended on Sunday, December 30, 2001.
Amendments to Credit Facility
On January 5, 2001, the Company entered into an amendment of its revolving
credit facility agented by IBJ Whitehall Business Credit Corporation (the "IBJ
Credit Facility") to increase the Company's borrowing availability from $100.0
million to $110.0 million when additional lending institutions requested to join
the loan syndicate. On March 5, 2001, the Company entered into a second
amendment of the IBJ Credit Facility to permit borrowings thereunder to
repurchase the Company's 15% Senior Secured PIK Debentures due 2009 (the "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 its Senior Notes due 2007 (the "Senior Notes") and PIK
Debentures, including tax liabilities and other costs associated with any
repurchase, not more than $9.0 million of which may be used to pay the
repurchase price of PIK Debentures and such associated costs. As of September
21, 2001, the Company entered into a third amendment to the IBJ Credit Facility
to authorize the exchange of PIK Debentures for the Company's 8% Subordinated
Convertible Note due December 2, 2009 in the principal amount of $8.0 million,
as more fully described under "Recent Developments--Repurchase of Senior Notes
and PIK Debentures" in this Item 7. As of December 7, 2001, the Company entered
into a fourth amendment of the IBJ Credit Facility to reduce the maximum amount
of borrowing availability under the IBJ Credit Facility from $110.0 million to
$95.0 million and to liberalize the borrowing base calculation in certain
circumstances. In addition, also as of December 7, 2001, the Company entered
into a fifth amendment of the IBJ Credit Facility to create additional
flexibility for borrowings with respect to the Company's payroll funding
business. However, through the banks' imposition of limitations on the Company's
payroll fundings, the benefits realized by the Company as a result of these
amendments are insignificant.
Repurchase of Senior Notes and PIK Debentures
As part of its continuing strategy to reduce its higher interest rate debt
and improve its balance sheet, in the first quarter of 2001, the Company
completed the repurchase of $13.0 million principal amount of its Senior Notes
for $8.9 million and $5.2 million principal amount of PIK Debentures (with
accrued and unpaid interest thereon of $340,000) for $2.5 million, the
repurchase prices of which were paid from lower interest rate borrowings under
the IBJ Credit Facility.
In the third quarter of 2001, the Company completed the exchange of $18.0
million principal amount of PIK Debentures (with accrued and unpaid interest
thereon of $860,000) for the Company's 8% Subordinated Convertible Note due
December 2, 2009 in the principal amount of $8.0 million (the "Convertible
Note"), plus $1.0 million in cash. Interest on the PIK Debentures accrues at
the rate of 15% per annum and, through December 1, 2002, may, at the election of
the Company, be paid-in-kind through its issuance of additional PIK Debentures.
The Convertible Note bears interest at the rate of 8% per annum, payable semi-
annually on June 1 and December 1 in each year. Through December 1, 2003,
interest on the Convertible Note may, at the election of the Company, be paid-
in-kind through its issuance of additional Convertible Notes. The Convertible
Note is convertible into the Company's common stock based on a price of $1.70
per share of common stock, provided that if such conversion would result in a
change of control occurring under the terms of the indentures governing the PIK
Debentures or the Senior Notes, the Convertible Note will be convertible into
shares of non-voting preferred stock having a nominal liquidation preference
(but no other preferences), which in turn will be convertible into common stock
at the holder's option at any time so long as the conversion would not result in
a change of control. Notice of conversion must be given at least 61 days in
advance. See "--Related Party Transaction," below.
Related Party Transaction
As described above under "--Repurchase of Senior Notes and PIK
Debentures," in September 2001, the Company completed the exchange of $18.0
million principal amount of PIK Debentures for the Convertible Note in the
principal amount of $8.0 million, plus $1.0 million in cash. A limited
partnership in which John Fanning, the
11
Company's Chairman and Chief Executive Officer, holds the principal economic
interest, was the holder of the $18.0 million PIK Debentures that were exchanged
for the Convertible Note and cash. Rosemary Maniscalco, a director of the
Company, is the general partner of this limited partnership. By virtue of this
position, she is deemed to be a beneficial owner of the Convertible Note. Prior
to the exchange, the Company received the consent to eliminate certain of the
covenants in the indenture governing the PIK Debentures.
The purpose of this transaction was to improve the Company's balance sheet
through the exchange of higher interest rate debt (15% per annum) for lower
interest rate debt (8% per annum) and elimination of $10.0 million of debt. No
other holder of PIK Debentures accepted the Company's offer of exchange and
repurchase on these terms. The Company obtained the opinion of an independent
investment banking firm that this transaction was fair to the Company from a
financial point of view. See note 8(c) to the consolidated financial statements
for a description of the Convertible Note.
Critical Accounting Policies and Estimates
Management's discussion in this Item 7 addresses the Company's consolidated
financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
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. On an on-going basis, management evaluates its estimates and
judgments, including those related to bad debts, intangible assets, income
taxes, workers' compensation, and contingencies and litigation. Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. If the financial
condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. The Company determines a need for a valuation allowance to reduce its
deferred tax assets to the amount that it believes is more likely than not to be
realized. While the Company has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, in the event the Company were to determine that it would
not be able to realize all or a part of its net deferred tax assets in the
future, an adjustment to the deferred tax assets would be charged to income in
the period such determination was made. The Company assesses the recoverability
of long-lived assets, intangible assets and goodwill whenever events or changes
in circumstances indicate that the carrying value of the asset may not be
recoverable. When the Company determines that the carrying value of the long-
lived assets, intangible assets and goodwill may not be recoverable, it measures
any impairment based on 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.
Results of Operations
Year Ended December 30, 2001 Compared to Year Ended December 31, 2000
Net sales of services for the year ended December 30, 2001 were $437.7
million, a decrease of 8.9% from net sales of services for the year ended
December 31, 2000 of $480.3 million. The Company suffered a decrease in net
sales of services in each of its three segments. In the Staff Augmentation
segment, the decrease is principally attributable to a sharp decline in the
telecom industry resulting in lower sales to telecom customers, partially offset
12
by higher sales to information technology customers. Also, due to the
continuing effects of the economic recession, sales were lower in both the Human
Capital Management Services and Financial Outsourcing Services segments.
Cost of services for the year ended December 30, 2001 was 79.4% of net
sales of services as compared to cost of services of 79.0% for the year ended
December 31, 2000. The cost of services as a percentage of net sales for 2001
increased from 2000 levels principally as a result of lower sales (and gross
margin percentages on sales) to telecom customers and a decrease in permanent
placement fees, partially offset by the Company's continued focus on higher-
margin niche products in the Staff Augmentation segment.
Selling, general and administrative expenses as a percentage of net sales
of services were 14.9% for the year ended December 30, 2001, compared to 13.9%
for the year ended December 31, 2000. This increase is principally a result of a
$2.4 million write-off in the fourth quarter of 2001 relating to uncollectible
funding and service fees receivable, and higher payroll and recruiting costs
with respect to non-billable staff and investments to expand the infrastructure
for the Company's Human Capital Management Services segment during the first
half of 2001, offset partially by initiatives made by management during the
second half of 2001 to reduce costs. Excluding the write-off, selling, general
and administrative expenses as percentage of net sales were 14.4% for the year
ended December 30, 2001.
Operating income for the year ended December 30, 2001 was $17.0 million as
compared to operating income of $25.4 million for the year ended December 31,
2000. This 33.1% decrease in operating income for the year ended December 30,
2001 resulted principally from a decrease in sales in each of the Company's
three segments, particularly in the telecom sector, the $2.4 million write-off
referred to above and an increase in depreciation and amortization. Operating
income for 2000 included a one-time $1.1 million charge for the settlement of a
longstanding lawsuit (see note 11 to the consolidated financial statements).
The Company's interest expense for the year ended December 30, 2001 is
attributable to the IBJ Credit Facility, the Convertible Note (which was issued
in September 2001), the Senior Notes and the PIK Debentures. The Company's
interest expense for the year ended December 31, 2000 is attributable to its
former credit facility with institutional lenders which was terminated in
December 2000 (the "Retired Credit Facility"), the IBJ Credit Facility (which
was entered into in December 2000), the Senior Notes and the PIK Debentures. The
IBJ Credit Facility was entered into to repay the Retired Credit Facility and
provide the Company with additional borrowing availability. The obligations
evidenced by the Retired Credit Facility and those evidenced by the Senior Notes
and PIK Debentures were incurred in 1997, principally in connection with the
funding of business acquisitions.
During the first quarter of 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 (including accrued and unpaid interest
of $340,000), the repurchase prices of which were paid from lower interest rate
borrowings under the IBJ Credit Facility. In September 2001, the Company
completed the exchange of $18.0 million principal amount of PIK Debentures
(including accrued and unpaid interest of $860,000) for its Convertible Note in
the original principal amount of $8.0 million (bearing interest at the per annum
rate of 8%), plus $1.0 million in cash. The extraordinary gain realized by the
Company during the year ended December 30, 2001 as a result of the repurchases
(including the exchange) was $9.3 million, which includes the reduction of $1.1
million of deferred financing costs associated with these transactions, net of
tax expense of $6.6 million. See "Financial Condition, Liquidity and Capital
Resources" in this Item 7.
The interest expense was lower for the year ended December 30, 2001 as
compared to the year ended December 31, 2000 due to lower market interest rates
and lower borrowing levels under the IBJ Credit Facility as well as the
reduction of Senior Notes and PIK Debentures through the repurchases (including
the exchange) described above.
The income tax provision for the year ended December 30, 2001 was $303,000
on a loss of $2.9 million before taxes and the extraordinary gain associated
with the retirement of the Senior Notes and PIK Debentures through the
repurchases and exchange described above. The income tax provision for the year
ended December 31, 2000 was $3.1 million on income before taxes and
extraordinary gain of $2.7 million. The difference between the
13
federal statutory income tax rate and the Company's effective tax rate relates
primarily to the nondeductibility of amortization expense associated with
certain intangible assets, the nondeductibility of a portion of the interest
expense associated with the PIK Debentures and state income taxes.
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 (see note 3 to the
consolidated financial statements) and there being more business days in 2000
than in 1999, partially offset by a decrease in sales to Staff Augmentation
customers in the technical and engineering services 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 in November 2000 (see note 11 to the
consolidated financial statements).
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 Retired 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 Retired 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 Retired 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.
14
The income tax provision for the year ended December 31, 2000 was $3.1
million on income before taxes and extraordinary gain of $2.7 million, 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.
Financial Condition, Liquidity and Capital Resources
The Company generally 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.
The following table represents certain contractual commitments associated
with operating agreements, obligations to financial institutions and other long-
term debt obligations and earnout (contingent payment) agreements:
Payments due by Period (in thousands)
-------------------------------------------------
2002 2003 2004-5 Thereafter
-------------------------------------------------
Operating Leases $3,337 $ 2,846 $ 3,666 $ 4,841
IBJ Credit Facility - principal
amounts due (see note 8 (d)) -- 49,220 -- --
Senior Notes - principal amounts due
(see note 8 (a)) -- -- -- 87,000
PIK Debentures - principal amounts
due (see note 8 (b)) -- -- -- 10,379
Convertible Notes - principal amounts
due (see note 8 (c)) -- -- -- 8,121
Earnout agreements 325 -- -- --
--------- --------- --------- ----------
Total $3,662 $52,066 $ 3,666 $110,341
========= ========= ========= ==========
The Company also had standby letters of credit outstanding at December 30,
2001 in the aggregate amount of $4.0 million.
During the year ended December 30, 2001, the Company's primary sources of
funds to meet working capital needs were from borrowings under the IBJ Credit
Facility. Cash and cash equivalents decreased $873,000 during the year ended
December 30, 2001. Cash flows provided by operating activities of $33.9 million
were exceeded by cash flows used in financing activities of $30.1 million and
cash flows used in investing activities of $4.7 million.
As of December 30, 2001, the Company had outstanding $49.2 million
principal amount under the IBJ Credit Facility bearing interest at a weighted
average rate of 4.33% per annum. In addition, as of December 30, 2001, the
Company had outstanding $10.4 million principal amount of PIK Debentures bearing
interest at a rate of 15% per annum, $87.0 million principal amount of Senior
Notes bearing interest at a rate of 12% per annum and $8.1 million principal
amount of Convertible Notes bearing interest at the rate of 8% per annum. As
more fully described below, interest on the PIK Debentures and the Convertible
Notes may be satisfied through the issuance of
15
new PIK Debentures and Convertible Notes. To date, the Company has chosen to
issue new PIK Debentures and Convertible Notes to pay interest thereon.
The Company entered into the IBJ Credit Facility in December 2000 to
provide greater borrowing availability and flexibility. As described under
"Recent Developments--Amendments to Credit Facility" in this Item 7, the IBJ
Credit Facility was amended five times in 2001. The IBJ Credit Facility, as
amended, has permitted the Company to execute its strategy of reducing its
higher interest rate debt and improving its balance sheet by retiring Senior
Notes and PIK Debentures, as more fully described under "Recent Developments--
Repurchase of Senior Notes and PIK Debentures" in this Item 7.
Except for special accounts, 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 margin was 0.75% at December 30, 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 was 2.25% at
December 30, 2001). Borrowings on certain special accounts bear additional
interest of 1% per annum. The IBJ Credit Facility currently provides for
borrowing availability of up to $95.0 million based upon a specified percentage
of the Company's eligible accounts receivable. At December 30, 2001, the
Company had outstanding borrowings under the IBJ Credit Facility of $49.2
million and remaining availability based upon then outstanding eligible accounts
receivable of $12.2 million. 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. The Company intends to seek to
extend the IBJ Credit Facility or to seek to obtain alternative financing.
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 tax liabilities and costs associated therewith, not more than
$9.0 million of which may be used to pay the repurchase price of PIK Debentures
and these associated costs. During 2001, the Company has reduced its higher
interest rate debt and improved its balance sheet by retiring Senior Notes and
PIK Debentures through public market and privately negotiated transactions and
exchanging PIK Debentures for the new Convertible Note with a substantially
lower interest rate. In the case of each repurchase and the exchange, the
Company has incurred tax liabilities for the forgiveness of indebtedness as a
result of its retirement of Senior Notes and PIK Debentures for consideration
that is less than par. In the first quarter of 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. In the third quarter of 2001, the Company completed the exchange of
$18.0 million principal amount of PIK Debentures (bearing interest at the rate
of 15% per annum) for its new $8.0 million Convertible Note (bearing interest at
the rate of 8% per annum), plus $1.0 million in cash. The total interest
savings from these repurchases is estimated to be $4.5 million annually based
upon current market interest rates.
Substantially all of the consolidated net assets of the Company are assets
of COI and all of the net income that has been generated by the Company through
December 30, 2001 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
16
Debentures, and (4) to upstream funds to the extent COI meets the restricted
payments test under the indenture as described under note 8 to the Company's
consolidated financial statements.
In 2001, COI upstreamed $1.8 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. During 2001, in connection with
its repurchase of Senior Notes and PIK Debentures (including through their
exchange for the Convertible Note), COMFORCE incurred tax liabilities related to
the forgiveness of indebtedness of approximately $6.6 million, payable from the
$10.0 million permitted to be upstreamed for this purpose. In 2001, COI also
made upstream payments of $3.5 million to COMFORCE to repurchase PIK Debentures.
These payments were permitted restricted payments under the indenture governing
the Senior Notes. As of December 30, 2001, COI had approximately $2.0 million
remaining available for distribution to COMFORCE as permitted restricted
payments (representing 50% of consolidated net income of COI for the period from
January 1, 1998 through December 30, 2001, less the total amount of restricted
payments through such date).
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. In addition, through December 1, 2003, interest on the
Convertible Note is payable, at the option of COMFORCE, in cash or in kind
through the issuance of additional Convertible Notes. To date, COMFORCE has
paid all interest under the PIK Debentures and Convertible Note in kind. In
2001, the Company paid $2.8 million in 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, and beginning with the interest payment due June 1,
2004, COMFORCE will be required to pay interest on the Convertible Note in cash.
Its ability to do so will be dependent on the ability of COI to borrow funds for
this purpose under the IBJ Credit Facility and to upstream funds under the
restricted payments test. In addition, COMFORCE's ability to repay the PIK
Debentures and the Convertible Note at their respective maturity dates in
December 2009, or on any earlier required repayment or repurchase dates, will
also be dependent on the ability of COI to upstream funds for these purposes
under the restricted payments test, unless COMFORCE separately obtains a loan or
sells its capital stock or other securities to provide funds therefor.
The Convertible Note is convertible into the Company's common stock based
on a price of $1.70 per share of common stock, provided that if such conversion
would result in a change of control occurring under the terms of the indentures
governing the PIK Debentures or the Senior Notes, the Convertible Note will be
convertible into shares of non-voting preferred stock having a nominal
liquidation preference (but no other preferences), which in turn will be
convertible into common stock at the holder's option at any time so long as the
conversion would not result in a change of control. Notice of conversion must
be given at least 61 days in advance. See "--Related Party Transaction," above.
As of December 30, 2001, approximately $134.3 million, or 56.0%, 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 are amortized over a 5 to 40
year period, resulting in an annual non-cash charge of approximately $4.3
million.
Effective December 31, 2001, the Company ceased recording amortization
expense relating to goodwill amounting to approximately $4.2 million upon its
required adoption of a new accounting standard (SFAS 142), as described below
under "Impact of Recently Issued Accounting Standards." However, also as
described below under "Impact of Recently Issued Accounting Standards," SFAS 142
changes the standards under which the Company must evaluate the recoverability
of goodwill on its books and may cause the Company to write-off goodwill when it
completes its evaluation, which could have a material adverse impact on its
financial condition and results of operations.
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. The maximum amount of the remaining potential earn-
out payments is approximately $325,000 in cash payable through December 31,
2002. The Company cannot currently estimate
17
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.
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.
Impact of Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, Business Combinations ("SFAS 141") and Statement No. 142,
Goodwill and Other Intangible Assets ("SFAS 142") and in August 2001 the FASB
issued statement No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS 144"). SFAS 141 requires that the purchase method of accounting
be used for all business combinations initiated or completed after June 30,
2001. The Company adopted the provisions of SFAS 141 upon issuance. SFAS 141
also specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. SFAS 142 requires, commencing December 31, 2001, that goodwill and
intangible assets with indefinite useful lives no longer be amortized. Instead,
they will be tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 will also require that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS 144. Goodwill and intangible assets acquired by the Company in its
business combinations completed before July 1, 2001 was amortized during the
period through December 30, 2001.
SFAS 141 requires that upon adoption of SFAS 142, the Company evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and make any necessary reclassifications in order to
conform with the new criteria in SFAS 141 for recognition apart from goodwill.
The Company also adopted SFAS 142 and, accordingly, will be required to reassess
the useful lives and residual values of all intangible assets acquired in
purchase business combinations, and to make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
within the first interim period in accordance with SFAS 144. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
In connection with the transitional goodwill impairment evaluation, SFAS
142 and SFAS 144 require that the Company perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To the
extent a reporting unit's carrying amount (as defined in SFAS 142) exceeds its
fair value, the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with SFAS 141, to its carrying amount, both of which would be measured as of the
date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the fiscal year of adoption. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's consolidated statement of
operations.
As of the date of adoption, the Company has unamortized goodwill and
identifiable intangible assets in the amount of $134.3 million, which are
subject to the transition provision of SFAS 141 and SFAS 142. Amortization
expense related to goodwill was $4.2 million for the year ended December 30,
2001. The Company has evaluated the remaining useful lives of its intangible
assets that will continue to be amortized and has determined that no revision to
the useful lives will be required. The Company expects to complete its initial
impairment review of intangible assets with indefinite useful lives by the end
of the first quarter of 2002 and of goodwill by the end of the second quarter
2002. The Company does not expect that its impairment review of its intangible
assets with indefinite useful lives will result in a material impact to its
consolidated financial statements. Because of the
18
extensive effort needed to comply with adopting SFAS 142, it is not practicable
to reasonably estimate whether any transitional impairment losses associated
with the Company's goodwill will be required to be recognized.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. This Statement
amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies, and it applies to all entities. The Company is required to
adopt SFAS 143, effective for calendar year 2003. The Company does not expect
the adoption of SFAS 143 to have a material impact on its future consolidated
operations or financial position, as the Company is now constituted.
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
However, SFAS 144 retains the fundamental provisions of SFAS 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale.
SFAS 144 supersedes the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
SFAS 144 retains the requirement of Opinion 30 to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment, or in
distribution to owners) or is classified as held for sale. SFAS 144 also amends
ARB No. 51, Consolidated Financial Statement, to eliminate the exception to
consolidation for a temporarily controlled subsidiary. The Company is required
to adopt SFAS 144 effective December 31, 2001. The Company does not expect the
adoption of SFAS 144 for long-lived assets held for use to have a material
impact on its consolidated financial statements because the impairment
assessment under SFAS 144 is largely unchanged from SFAS 121. The provisions of
this statement for assets held for sale or other disposal generally are required
to be applied prospectively after the adoption date to newly initiated disposal
activities and therefore, will depend on future actions initiated by management.
As a result, the Company cannot determine the potential effects that adoption of
SFAS 144 will have on its financial statements with respect to future disposal
decisions, if any.
Seasonality
The Company's quarterly operating results are affected primarily by the
number of billing days in the quarter and the seasonality of its customers'
businesses. Demand for technical and engineering services, IT and telecom
staffing services has historically been lower during the second half of the
fourth quarter through the following first quarter, and, generally, shows
gradual improvement until the second half of the fourth quarter; however, the
Company's revenues have declined since the first quarter of 2001 as a result of
the economic climate generally and in certain of the industries served by the
Company or other factors.
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 the following: a continuation
of the current recessionary environment, particularly in the aircraft
manufacturing, telecom and other sectors served by the Company (which may
reflect cyclical conditions or fundamental changes in these industries), could
further reduce demand for contingent personnel and further heighten the
competition for customers, resulting in lower revenues and margins and affecting
the Company's ability to continue to meet the financial covenants under the IBJ
Credit Facility; the Company's significant leverage may leave it with a
diminished ability to obtain additional financing for working capital or other
capital expenditures, for retiring higher interest rate debt or for otherwise
improving the Company's competitiveness and capital structure or expanding its
operations; the recent effectiveness of SFAS 142 changes the standards under
19
which the Company must evaluate the recoverability of goodwill on its books and
may cause the Company to write-off goodwill, which could have a material adverse
impact on its financial condition and results of operations; or, if COI fails
to 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 the Convertible Note (which is required
beginning June 1, 2004) or to repay the PIK Debentures or the Convertible Note
at their maturity in December 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 2001,
approximately 21.9% of the Company's interest expense was attributable to
variable rate loans, all of which were under IBJ Credit Facility. The IBJ
Credit Facility currently provides for borrowing availability of up to $95.0
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 weighted average interest rate as of December 30, 2001, the
impact to the Company in annualized interest payable would be approximately
$225,000. 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.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this section will be included in the Company's
Proxy Statement, which will be filed with the Securities and Exchange Commission
on or before April 29, 2002 and is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section will be included in the Company's
Proxy Statement, which will be filed with the Securities and Exchange Commission
on or before April 29, 2002 and is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this section will be included in the Company's
Proxy Statement, which will be filed with the Securities and Exchange Commission
on or before April 29, 2002 and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section will be included in the Company's
Proxy Statement, which will be filed with the Securities and Exchange Commission
on or before April 29, 2002 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.
The Company did not file any current reports on Form 8-K during the fourth
quarter of 2001.
21
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 28, 2002
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
- ------------------------
John C. Fanning Chairman, Chief Executive Officer and March 28, 2002
Director (Principal Executive Officer)
/s/ Harry Maccarrone
- ------------------------
Harry Maccarrone Executive Vice President and Director March 28, 2002
(Principal Financial and Accounting
Officer)
/s/ Rosemary Maniscalco
- ------------------------
Rosemary Maniscalco Vice Chairman and Director March 28, 2002
/s/ Daniel Raynor
- ------------------------
Daniel Raynor Director March 28, 2002
/s/ Gordon Robinett
- ------------------------
Gordon Robinett Director March 28, 2002
/s/ Kenneth J. Daley
- ------------------------
Kenneth J. Daley Director March 28, 2002
22
COMFORCE CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 30, 2001 and December 31, 2000 F-3
Consolidated Statements of Operations for the years ended December 30, 2001
and December 31, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the years ended December 30, 2001 and December 31, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended December 30, 2001
and December 31, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
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 30, 2001 and December 31, 2000, and
the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 30, 2001. 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 three-year period ended December 30, 2001 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 30, 2001 and December 31, 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 30, 2001, 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 three-year
period ended December 30, 2001 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
KPMG LLP
Melville, New York
March 1, 2002
F-2
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 30, 2001 and December 31, 2000
(in thousands, except share and per share amounts)
December 30, December 31,
Assets 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 4,067 4,940
Accounts receivable, less allowance of $829 and $785 in 2001 and
2000, respectively 44,091 69,675
Funding and service fees receivable, less allowance of $590 and
$240 in 2001 and 2000, respectively 35,938 49,392
Prepaid expenses and other current assets 5,733 3,467
Deferred income taxes, net - 1,076
------------ -----------
Total current assets 89,829 128,550
Deferred income taxes, net - 404
Property and equipment, net 12,590 12,050
Intangible assets, net 134,283 137,655
Deferred financing costs, net 3,307 4,755
------------ -----------
Total assets $ 240,009 283,414
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,440 5,373
Accrued expenses 28,487 34,235
------------ -----------
Total current liabilities 31,927 39,608
Long-term debt 154,720 197,421
Deferred income taxes, net 581 -
Other liabilities 244 11
------------ -----------
Total liabilities 187,472 237,040
------------ -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized, 16,659,173
and 16,659,027 shares issued and outstanding in 2001 and 2000,
respectively 167 167
Additional paid-in capital 49,581 49,149
Accumulated other comprehensive loss (309) -
Retained earnings (accumulated deficit), since January 1, 1996 (note 1) 3,098 (2,942)
------------ -----------
Total stockholders' equity 52,537 46,374
------------ -----------
Total liabilities and stockholders' equity $ 240,009 283,414
============ ===========
See accompanying notes to consolidated financial statements.
F-3
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 30, 2001, December 31, 2000 and 1999
(in thousands, except per share amounts)
December 30, December 31, December 31,
2001 2000 1999
-------------- -------------- --------------
Revenue:
Net sales of services $ 437,699 480,325 436,221
-------------- -------------- --------------
Costs and expenses:
Cost of services 347,446 379,602 352,101
Selling, general and administrative expenses 65,388 66,806 55,596
Restructuring credit - - (163)
Litigation settlement - 1,056 -
Depreciation and amortization 7,835 7,424 6,824
-------------- -------------- --------------
Total costs and expenses 420,669 454,888 414,358
-------------- -------------- --------------
Operating income 17,030 25,437 21,863
-------------- -------------- --------------
Other income (expense):
Interest expense (19,990) (23,266) (21,825)
Write-off of deferred financing costs - (742) -
Restricted covenant release - 1,000 -
Other income, net 40 247 93
-------------- -------------- --------------
(19,950) (22,761) (21,732)
(Loss) income before income tax and extraordinary gain (2,920) 2,676 131
Provision for income taxes 303 3,073 2,169
-------------- -------------- --------------
Loss before extraordinary gain (3,223) (397) (2,038)
-------------- -------------- --------------
Gain on early debt extinguishment, net of taxes of $6,595
and $1,883 in 2001 and 2000, respectively 9,263 2,784 -
-------------- -------------- --------------
Net Income (loss) $ 6,040 2,387 (2,038)
-------------- -------------- --------------
Basic income (loss) per common share:
Income (loss) before extraordinary gain $ (0.19) (0.02) (0.12)
Extraordinary gain 0.55 0.17 -
-------------- -------------- --------------
Net income (loss) $ 0.36 0.15 (0.12)
============== ============== ==============
Diluted income (loss) per common share:
Income (loss) before extraordinary gain $ (0.19) (0.02) (0.12)
Extraordinary gain 0.55 0.17 -
-------------- -------------- --------------
Net income (loss) $ 0.36 0.15 (0.12)
============== ============== ==============
Weighted average common shares outstanding, basic 16,659 16,471 16,315
============== ============== ==============
Weighted average common shares outstanding, diluted 16,659 16,471 16,315
============== ============== ==============
See accompanying notes to consolidated financial statements.
F-4
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 30, 2001 and December 31, 2000 and 1999
(in thousands, except share amounts)
Accumulated Retained Total
Common stock Additional Other earnings stock-
-------------------- paid-in Comprehensive (Accumulated holders'
Shares Amount capital Loss Deficit) equity
---------- -------- ---------- ------------- ------------ ----------
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
---------- ------- --------- --------- -------- ---------
Comprehensive income (loss):
Net income - - - - 6,040 6,040
Other comprehensive loss:
Foreign currency translation adjustment - - - (309) - (309)
---------
Total other comprehensive income 5,731
Issuance of common stock 146 - - - - -
Issuance of options in connection with litigation settlement - - 432 - - 432
---------- ------- --------- --------- -------- ---------
Balance at December 30, 2001 16,659,173 $ 167 $ 49,581 $ (309) $ 3,098 $ 52,537
========== ======= ========= ========= ======== =========
See accompanying notes to consolidated financial statements.
F-5
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 30, 2001 and December 31, 2000 and 1999
(in thousands)
December 30, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 6,040 2,387 (2,038)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation and amortization of property and equipment 3,542 3,008 2,342
Amortization of intangible assets 4,293 4,416 4,482
Amortization of deferred financing costs 789 865 835
Write-off of deferred financing costs - 742 -
Provision for bad debts 3,013 484 78
Deferred income taxes 2,061 20 529
Issuance of notes in lieu of interest 2,768 4,166 3,604
Extraordinary gain on debt repurchases and exchange (15,858) (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 35,716 (37,689) (233)
Prepaid expenses and other current assets (1,652) (274) (323)
Income taxes receivable (614) (401) 879
Accounts payable and accrued expenses (6,173) 13,139 875
------------ ------------ ------------
Net cash provided by (used in)
operating activities 33,925 (11,464) 11,030
------------ ------------ ------------
Cash flows from investing activities:
Acquisitions, net of cash acquired - (788) -
Purchase of property and equipment (3,680) (3,496) (4,576)
Payments of contingent consideration (746) (2,153) (2,689)
Increase in deferred costs and other assets (274) - -
------------ ------------ ------------
Net cash used in investing activities (4,700) (6,437) (7,265)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements (17,269) 20,909 162
Proceeds from issuance of equity securities - 798 -
Repayment of senior notes and PIK debentures (11,336) (5,080) -
Debt financing costs (399) (1,397) (471)
Cash consideration paid in exchange of convertible debt (1,000) - -
Repayments under capital leases (94) (207) (237)
------------ ------------ ------------
Net cash provided by (used in) financing activities (30,098) 15,023 (546)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (873) (2,878) 3,219
Cash and cash equivalents, beginning of year 4,940 7,818 4,599
------------ ------------ ------------
Cash and cash equivalents, end of year $ 4,067 4,940 7,818
============ ============ ============
(Continued)
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 15,257 18,495 16,712
Income taxes 5,550 5,468 669
Details of acquisition (note 3):
Fair value of assets acquired - 917 -
Liabilities assumed - (87) -
------------ ------------ ------------
Cash paid - 830 -
Less cash acquired - 42 -
------------ ------------ ------------
Net cash paid $ - 788 -
============ ============ ============
Supplemental schedule of significant noncash
investing and financing activities:
Common stock issued in connection with acquisitions - - 867
Future guaranteed payment of contingent payment
due from Gerri G acquisition - 200 -
Capital lease obligations incurred for the
purchase of new equipment 402 - -
Issuance of 8% Subordinated Convertible Note in exchange
for 15% PIK Debentures 8,000 - -
See accompanying notes to consolidated financial statements.
F-6
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
(1) Basis of Presentation
COMFORCE Corporation (COMFORCE) is a leading provider of specialty
staffing, consulting and outsourcing services primarily to Fortune 500
companies for their information technology, telecommunications, healthcare
support and technical and engineering services. COMFORCE Operating, Inc.
(COI), a wholly-owned subsidiary of COMFORCE, was formed for the purpose of
facilitating certain financing transactions in November 1997. 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
Beginning with 2001, the Company's fiscal year consists of the 52 or 53
weeks ending on the last Sunday in December. Accordingly, the Company's
most recently completed fiscal year ended on December 30, 2001. Prior to
2001, the Company's fiscal years have ended on December 31 in each year.
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 net distributions to the franchisee
included in operating expenses at December 30, 2001 and December 31, 2000
and 1999 was approximately $3,799,000, $5,102,000 and $5,374,000,
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 the firm from which such receivables were acquired. The Company
receives a fee for providing these fundings and other services, which is
included in net sales of services in the accompanying consolidated
statements of operations at the time the 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-7
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
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 5).
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. For fiscal 2001,
impairment was 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.
See "Impact of Recently Issued Accounting Standards" in this note 2 for a
discussion of a new evaluation method effective beginning in fiscal 2002.
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 accounting
principles generally accepted in the United States of America 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. Some of the
significant estimates involved are the collectibility of receivables, the
recoverability of long-lived assets and deferred tax assets and the
assessment of litigation and contingencies. Actual results could differ
from those estimates.
F-8
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
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 values of its outstanding debt
instruments at December 30, 2001 were as follows: (i) $52.2 million for
COI's 12% Senior Notes due 2007 in the outstanding principal amount of
$87.0 million, (ii) $4.2 million for COMFORCE's 15% PIK Debentures due 2009
in the outstanding principal amount of $10.4 million, and (iii) $8.1
million for COMFORCE's 8% Convertible Subordinated Note due December 2,
2009 in the outstanding principal amount of $8.1 million.
Deferred Financing Costs
Deferred financing costs consist of costs associated with the issuance of
the Company's long-term debt (see note 8). 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 prior revolving credit with other institutional
lenders, $742,000 in unamortized financing costs related thereto were
expensed (see note 8). In addition, $1.1 million was expensed in the
fiscal year ended December 30, 2001 relating to the early extinguishment of
debt (see note 8).
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.
Foreign Currency
The functional currency of the Company's foreign subsidiary is the
applicable local currency. Assets and liabilities of the foreign
subsidiary is translated into U.S. dollars using the exchange rate in
effect at the balance sheet date. Results of operations are translated
using the average exchange rates during the year. As a result, the
translation adjustments are accumulated in a separate component of
stockholders' equity.
Reserves for Claims
Workers' compensation benefits are provided under a self-insured plan for
employees of the Company. The Company records its estimate of the ultimate
cost of, and reserves for, workers' compensation based on actuarial
computations using the Company's loss history as well as industry
statistics. Furthermore, in determining its reserves, the Company includes
reserves for estimated claims incurred but not reported.
The ultimate cost of workers' compensation will depend on actual costs
incurred to settle the claims and may differ from the amounts reserved by
the Company for those claims. Accruals for workers' compensation claims
are included in accrued expenses in the consolidated balance sheets.
F-9
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
Accounting for Derivative Instruments and Hedging Activities
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133). 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. Since the Company does not have any derivatives and does not engage
in hedging activities, the adoption of SFAS 133 had no impact on the
Company's consolidated financial statements.
Impact of Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, Business Combinations (SFAS 141) and Statement No. 142,
Goodwill and Other Intangible Assets (SFAS 142) and in August 2001 the FASB
issued statement No. 144 Accounting for the Impairment or Disposal of Long-
Lived Assets (SFAS 144). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated or completed
after June 30 2001. The Company adopted the provisions of SFAS 141 upon
issuance. SFAS 141 also specifies criteria that intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported apart from goodwill. SFAS 142 requires, commencing December 31,
2001, that goodwill and intangible assets with indefinite useful lives no
longer be amortized. Instead, they will be tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS 144. Goodwill and
intangible assets acquired by the Company in its business combinations
completed before July 1, 2001 was amortized during the period through
December 30, 2001.
SFAS 141 requires that upon adoption of SFAS 142, the Company evaluate its
existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and make any necessary reclassifications in
order to conform with the new criteria in SFAS 141 for recognition apart
from goodwill. The Company also adopted SFAS 142 and, accordingly, will be
required to reassess the useful lives and residual values of all intangible
assets acquired in purchase business combinations, and to make any
necessary amortization period adjustments by the end of the first interim
period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be
required to test the intangible asset for impairment within the first
interim period in accordance with SFAS 144. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation, SFAS
142 and SFAS 144 require that the Company perform an assessment of whether
there is an indication that goodwill is impaired as of the date of
adoption. To the extent a reporting unit's carrying amount (as defined in
SFAS 142) exceeds its fair value, the Company must perform the second step
of the transitional impairment test. In the second step, the Company must
compare the implied fair value of the reporting unit's goodwill, determined
by allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation in accordance with SFAS 141, to its carrying
amount, both of which would be measured as of the date of adoption. This
second step is required to be completed as soon as possible, but no later
than the end of the fiscal year of adoption. Any transitional impairment
loss will be recognized as the cumulative effect of a change in accounting
principle in the Company's consolidated statement of operations.
As of the date of adoption, the Company has unamortized goodwill and
identifiable intangible assets in the amount of $134.3 million, which are
subject to the transition provision of SFAS 141 and SFAS 142. Amortization
expense related to goodwill was $4.2 million for the year ended December
30, 2001. The Company has evaluated the remaining useful lives of its
intangible assets that will continue to be amortized
F-10
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
and has determined that no revision to the useful lives will be required.
The Company expects to complete its initial impairment review of intangible
assets with indefinite useful lives by the end of the first quarter of 2002
and of goodwill by the end of the second quarter 2002. The Company does not
expect that its impairment review of its intangible assets with indefinite
useful lives will result in a material impact to its consolidated financial
statements. Because of the extensive effort needed to comply with adopting
SFAS 142, it is not practicable to reasonably estimate whether any
transitional impairment losses associated with the Company's goodwill will
be required to be recognized.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees.
This Statement amends FASB Statement No. 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies, and it applies to all
entities. The Company is required to adopt SFAS 143, effective for
calendar year 2003. The Company does not expect the adoption of SFAS 143
to have a material impact on its future consolidated operations or
financial position, as the Company is now constituted.
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. However, SFAS 144 retains the fundamental provisions of SFAS 121 for
(a) recognition and measurement of the impairment of long-lived assets to
be held and used and (b) measurement of long-lived assets to be disposed of
by sale. SFAS 144 supersedes the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. However, SFAS 144 retains the requirement of
Opinion 30 to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity that
either has been disposed of (by sale, by abandonment, or in distribution to
owners) or is classified as held for sale. SFAS 144 also amends ARB No.
51, Consolidated Financial Statement, to eliminate the exception to
consolidation for a temporarily controlled subsidiary. The Company is
required to adopt SFAS 144 effective December 31, 2001. The Company does
not expect the adoption of SFAS 144 for long-lived assets held for sale to
have a material impact on its consolidated financial statements because the
impairment assessment under SFAS 144 is largely unchanged from SFAS 121.
The provisions of this statement for assets held for use or other disposal
generally are required to be applied prospectively after the adoption date
to newly initiated disposal activities and therefore, will depend on future
actions initiated by management. As a result, the Company cannot determine
the potential effects that adoption of SFAS 144 will have on its financial
statements with respect to future disposal decisions, if any.
Reclassification
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
(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.
During 2001, contingent payments in connection with recently completed
acquisitions were approximately $746,000 in cash, which has been included
in intangible assets on the accompanying balance sheet. At
F-11
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
December 30, 2001, maximum future contingent payments in connection with
all acquisitions approximate $325,000 in cash.
(4) Property and Equipment
Property and equipment as of December 30, 2001 and December 31, 2000
consisted of (in thousands):
Estimated useful
lives in years 2001 2000
-------------- -------- ------
Computer equipment and related software 3-7 $ 20,089 16,390
Furniture, fixtures and vehicles 3-7 2,546 2,244
Leasehold improvements 3-7 757 676
-------- ------
23,392 19,310
Less accumulated depreciation and amortization (10,802) (7,260)
-------- ------
$ 12,590 12,050
======== ======
Depreciation and amortization expense was $3,542,000, $3,008,000 and
$2,342,000 for the years ended December 30, 2001 and December 31, 2000 and
1999, respectively.
(5) Intangibles
Intangibles as of December 30, 2001 and December 31, 2000 consisted of (in
thousands):
Estimated
useful lives
in years 2001 2000
-------- -------- -------
Goodwill 20-40 $151,163 150,512
Non-compete covenants 5 508 660
Other 5 685 587
-------- -------
152,356 151,759
Less accumulated amortization (18,073) (14,104)
-------- -------
$134,283 137,655
======== =======
Amortization expense was $4,293,000, $4,416,000 and $4,482,000 for the
years ended December 30, 2001 and December 31, 2000 and 1999, respectively.
(6) Accrued Expenses
Accrued expenses as of December 30, 2001 and December 31, 2000 consisted of
(in thousands):
2001 2000
------- -------
Payroll and payroll taxes $16,796 20,249
Vacation/pension plan 1,982 2,318
Income taxes payable 973 973
Commissions 1,769 2,288
Interest 1,205 1,485
Litigation settlement -- 1,056
Other 5,762 5,866
------- -------
$28,487 34,235
======= =======
F-12
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
(7) Income Taxes
Total income tax expense as of December 30, 2001 and December 31, 2000 and
1999 was allocated as follows (in thousands):
2001 2000 1999
------ ------ ------
Income from continuing
operations $ 303 3,073 2,169
Extraordinary items 6,595 1,883 --
------ ------ ------
$6,898 4,956 2,169
====== ====== ======
The provision for (recovery of) income taxes as of December 30, 2001 and
December 31, 2000 and 1999 consisted of (in thousands):
2001 2000 1999
------- ------ ------
Current:
Federal $(1,603) 2,057 1,337
State (155) 996 303
------- ------ ------
Total current (1,758) 3,053 1,640
------- ------ ------
Deferred:
Federal 1,574 145 445
State 487 (125) 84
------- ------ ------
Total deferred 2,061 20 529
------- ------ ------
Total tax expense $ 303 3,073 2,169
======= ====== ======
Total income tax expense differed from the statutory federal income tax
rate of 34% before income taxes as a result of the following items (in
thousands):
2001 2000 1999
------ ----- -----
Statutory federal tax rate at 34.0% $ (993) 910 45
State and local taxes, net of federal tax 219 575 255
Change in deferred tax rates and estimates used (345) 11 49
Effect of non-deductible items 1,422 1,577 1,820
------ ----- -----
$ 303 3,073 2,169
====== ===== =====
The components of deferred tax assets and deferred tax liabilities at
December 30, 2001 and December 31, 2000 (in thousands) are as follows:
F-13
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
2001 2000
--------- ---------
Deferred tax assets:
Reserves and allowances $ 697 586
Accrued liabilities and other 2,198 4,327
--------- ---------
Total deferred tax assets 2,895 4,913
--------- ---------
Deferred tax liability:
Intangibles 1,438 1,255
Excess depreciation 2,008 2,178
Other 30 --
--------- ---------
Total deferred tax liabilities 3,476 3,433
--------- ---------
Net deferred tax (liability) asset $ (581) 1,480
========= =========
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 30, 2001. The amount of the deferred tax
asset considered realizable, however, could be reduced if estimates of
future taxable income change.
(8) Debt
Notes payable and long-term debt at December 30, 2001 and December 31, 2000
consisted of (in thousands):
2001 2000
-------- --------
12% Senior Notes, due 2007 (a) $ 87,000 100,000
15% Senior Secured PIK Debentures, due 2009 (b) 10,379 30,932
8% Subordinated Convertible Notes due 2009 (c) 8,121 --
Revolving line of credit, due December 14, 2003, with interest payable monthly at
LIBOR plus 2.25% with a weighted average rate of 4.33% at December 30, 2001 and LIBOR
plus 2.50% with a weighted average rate of a rate of 9.46% at December 31, 2000 (d) 49,220 66,489
-------- --------
Total long-term debt $154,720 197,421
======== ========
(a) The 12% Senior Notes due 2007 (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.
F-14
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
During 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. During 2001, the Company repurchased $13.0 million face
value of the Senior Notes for a purchase price of $8.9 million. The
net extraordinary gain that was realized by these repurchases was $2.3
million, which includes the reduction of $369,000 of deferred
financing costs associated with the repurchases, net of tax expense of
$1.6 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.
(b) The 15% Senior Secured PIK Debentures due 2009 (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.
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 2001, the Company issued
approximately $2.7 million of additional PIK Debentures in lieu of
interest.
In 2001, the Company completed (i) the repurchase of $5.2 million
principal amount of PIK Debentures (with accrued, unpaid interest
thereon of $340,000) for $2.5 million, the repurchase price of which
was paid from lower interest rate borrowings under the IBJ Credit
Facility, and (ii) the exchange of $18.0 million principal amount of
PIK Debentures (bearing interest at the rate of 15% per annum, with
accrued, unpaid interest thereon of $860,000) for its new $8.0 million
Convertible Subordinated Note due December 2, 2009 (bearing interest
at the rate of 8% per annum), plus $1.0 million in cash. The net
extraordinary gain that was realized by the repurchase and exchange
described above was $7.0 million, which includes the reduction of
$689,000 of deferred financing costs associated with the repurchases,
net of tax expense of $5.0 million.
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 requirements,
the Company may at any time redeem any or all of the PIK Debentures at
the price of 107.5%.
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
F-15
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
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.
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 30, 2001 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 ($1.25 million 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 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 $1.9 million in 2000 and $1.8 million in 2001 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 30, 2001,
COI had approximately $2.0 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 30, 2001, less restricted payments made to date.
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, COMFORCE
has paid all interest in kind. In 2001, the Company paid $2.7 million
in 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 borrow funds for this purpose under the IBJ Credit Facility and to
upstream funds 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
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) The Company's 8% Subordinated Convertible Note due December 2, 2009
(the "Convertible Note") bears interest at the rate of 8% per annum,
payable semi-annually on June 1 and December 1 in each year. Through
December 1, 2003, interest on the Convertible Note may, at the
election of the Company, be paid-in-kind through its issuance of
additional Convertible Notes. The Convertible Note is convertible into
the Company's common stock based on a price of $1.70 per
F-16
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
share of common stock, provided that if such conversion would result
in a change of control occurring under the terms of the indentures
governing the PIK Debentures or the Senior Notes, the Convertible Note
will be convertible into shares of non-voting preferred stock having a
nominal liquidation preference (but no other preferences), which in
turn will be convertible into common stock at the holder's option at
any time so long as the conversion would not result in a change of
control. Notice of conversion must be given at least 61 days in
advance. During 2001, the Company issued approximately $100,000 of
additional Convertible Notes in lieu of interest. See note 16.
(d) In December 2000, the Company repaid its prior 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. The maximum
borrowing availability under the IBJ Credit Facility was increased to
$110.0 million in January 2001 when additional lending institutions
requested to join the loan syndicate and subsequently reduced to $95.0
million in December 2001 at the request of the Company. Permitted
borrowings under the IBJ Credit Facility are based upon a specified
percentage of the Company's eligible accounts receivable. At December
30, 2001, the Company had outstanding borrowings of $49.2 million and
remaining availability based upon eligible accounts receivable of
$12.2 million. The Company has pledged substantially all of its assets
as collateral for the IBJ Credit Facility. The Company also had
standby letters of credit outstanding at December 30, 2001 in the
aggregate amount of $4.0 million.
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 of 0.3% 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. As of December 30, 2001, the Company was in compliance
with such covenants. 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 $ 49,220
Thereafter 105,500
--------
$154,720
========
(9) Income (Loss) Per Share
Options and warrants to purchase 3,733,968, 3,264,490 and 4,781,487 shares
of common stock were outstanding for the years ended 2001, 2000 and 1999,
respectively, but were not included in the computation of diluted income
(loss) per share because their effect would be anti-dilutive.
(10) 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
F-17
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
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 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. A summary of stock option transactions for the years ended December
30, 2001 and December 31, 2000 and 1999 is as follows:
2001 2000 1999
----------------------- ---------------------- ----------------------
Average Average Average
weighted weighted weighted
exercise exercise exercise
Shares price Shares price Shares price
------ ----- ------ ----- ------ -----
Outstanding
beginning of year 2,945,490 $ 5.55 2,761,825 $6.69 2,565,625 $ 7.52
Granted 615,628 0.74 702,000 1.99 440,000 4.53
Exercised -- -- (35,000) 1.13 -- --
Forfeited/expired (96,150) 8.12 (483,335) 7.15 (243,800) 11.56
---------- ---------- ----------
Options outstanding
end of year 3,464,968 4.63 2,945,490 5.55 2,761,825 6.69
========== ========== ==========
Options exercisable,
end of year 3,194,540 $ 4.78 2,283,088 $6.09 2,026,131 $ 6.77
========== ========== ==========
Option available for
grant, end of year 1,117,516 1,636,994 855,659
========== ========== =========
F-18
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
The following table summarizes information about stock options
outstanding at December 30, 2001:
Weighted- Weighted-
average average
Range of Shares remaining Weighted- Shares exercisable
exercise prices outstanding contractual average exercise exercisable price
--------------- ----------- life (years) price ----------- -----
------------ -----
$0.6225 - $ 4.99 1,437,128 6.10 $ 1.46 1,198,125 $ 1.38
$ 5.00 - $ 7.99 1,851,500 4.42 6.51 1,851,500 6.51
$ 8.00 - $13.99 162,700 5.29 10.20 131,275 10.22
$ 14.00 - $17.99 5,140 4.85 14.97 5,140 14.97
$ 18.00 - $19.00 8,500 4.38 18.38 8,500 18.38
---------- -------- ------- --------- -------
$0.6225 - $19.00 3,464,968 5.16 $ 4.63 3,194,540 $ 4.78
The per share weighted-average fair value of each option granted during
fiscal 2001, 2000 and 1999 was $0.31, $0.30 and $0.88, respectively, on
the date of grant using the Black-Scholes options pricing model with
the following weighted-average assumptions used for grants: no dividend
yield; expected volatility of 45.6% for fiscal 2001 and 2000 and 45.8%
for 1999; risk free interest rate (ranging from 4.58% to 6.88%); and
expected lives of approximately three 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:
2001 2000 1999
---- ---- ----
(in thousands, except per share amounts)
Net income (loss) as reported $6,040 2,387 (2,038)
Pro forma income (loss) 5,807 2,115 (2,445)
Basic income (loss) per share as reported 0.36 0.15 (0.12)
Pro forma basic income (loss)
per share 0.35 0.13 (0.15)
Diluted income (loss) per share as reported 0.36 0.15 (0.12)
Pro forma diluted income (loss) per share 0.35 0.13 (0.15)
F-19
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
Warrants
At December 30, 2001 and December 31, 2000, the Company had outstanding
warrants to purchase a total of 269,000 and 319,000 shares of common
stock at prices ranging from $7.55 to $7.63 and $7.43 to $7.63 per
share, respectively. These warrants expire at various dates through
2009.
(11) 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. 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. 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 paid to the plaintiffs $325,000 on January 2,
2001 and $300,000 on May 1, 2001, and issued options to them 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 Company recorded a charge
of approximately $1.1 million as a result of this litigation during
fiscal year 2000.
The Company is also a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such
pending matters, individually or in the aggregate, if adversely
determined, are believed by management to be material to the business
or financial condition of the Company.
(12) 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 contributions were
made by the Company in 2001, 2000 or 1999.
Certain employees who work for governmental agencies are required to be
covered under a separate pension plan. During 2001, 2000 and 1999, the
Company recorded approximately $1,596,000, $1,714,000 and $1,492,000,
respectively, of expense related to these benefits.
(13) Lease Commitments
The Company leases certain office space and equipment. Rent expense for
all operating leases in 2001, 2000 and 1999 approximated $3,719,000,
$3,406,000 and $2,952,000, respectively.
As of December 30, 2001, 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):
2002 $ 3,337
2003 2,846
2004 2,092
2005 1,574
2006 1,168
Thereafter 3,673
--------
$ 14,690
========
F-20
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
(14) 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 30, 2001, the Company had one customer with accounts
receivable balances that aggregated 5.7% of the Company's total
accounts receivable. At December 31, 2000, the Company had four
customers with accounts receivable balances that aggregated 24.6% of
the Company's total accounts receivable. One customer accounted for
11.6% of the Company's total revenues for the year ended December 30,
2001. Percentages of total revenues from significant customers were
less than 10% for each of the years ended December 31, 2000 and 1999.
(15) 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 reports its results through three operating segments --
Staff Augmentation, Human Capital Management Services and Financial
Outsourcing Services. The Staff Augmentation segment provides
information technology (IT), telecom, healthcare support, and technical
and engineering services. The Human Capital Management Services segment
provides contingent workforce management services. The Financial
Outsourcing Services segment provides 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 30,
2001, and items which reconcile segment operating contribution to
COMFORCE's reported pre-tax income (loss) (in thousands):
F-21
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
December 30, December 31, December 31,
2001 2000 1999
----------- ----------- ------------
Net sales of services:
Staff Augmentation $301,167 336,740 321,291
Human Capital Management Services 124,596 131,525 103,864
Financial Outsourcing Services 11,936 12,060 11,066
-------- ------- -------
$437,699 480,325 436,221
======== ======= =======
Operating contribution:
Staff Augmentation $ 31,237 36,791 28,989
Human Capital Management Services 2,622 4,724 6,147
Financial Outsourcing Services 6,437 9,249 8,432
-------- ------- -------
40,296 50,764 43,568
-------- ------- -------
Consolidated expenses:
Interest, net 19,950 23,019 21,732
Restricted covenant release -- (1,000) --
Write-off of deferred financing costs -- 742 --
Restructuring credit -- -- (163)
Depreciation and amortization 7,835 7,424 6,824
Corporate general and administrative
expenses 15,431 16,847 15,044
Litigation Settlement -- 1,056 --
-------- -------- --------
43,216 48,088 43,437
-------- -------- --------
Income (loss) before income tax and
extraordinary gain $ (2,920) 2,676 131
======== ======= =======
Total assets:
Staff Augmentation $ 29,226 51,849 39,022
Human Capital Management Services 14,865 17,826 6,850
Financial Outsourcing Services 35,938 49,392 35,861
Corporate 159,980 164,347 167,977
-------- -------- --------
$240,009 283,414 249,710
======== ======== ========
F-22
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
(16) Related Party Transaction
In September 2001, the Company completed the exchange of $18.0 million
principal amount of PIK Debentures for the Company's 8% Convertible Note
in the principal amount of $8.0 million, plus $1.0 million in cash. A
limited partnership in which John Fanning, the Company's Chairman and
Chief Executive Officer, holds the principal economic interest, was the
holder of the $18.0 million PIK Debentures that were exchanged for the
Convertible Note and cash. Rosemary Maniscalaco, a director of the
Company, is the general partner of this limited partnership. By virtue
of this position, she is deemed to be a beneficial owner of the
Convertible Note. Prior to the exchange, the Company received the
consent to eliminate certain of the covenants in the indenture governing
the PIK Debentures.
The purpose of this transaction was to improve the Company's balance
sheet through the exchange of higher interest rate debt (15% per annum)
for lower interest rate debt (8% per annum) and the elimination of $10.0
million of debt. No other holder of PIK Debentures accepted the
Company's offer of exchange and repurchase on these terms. The Company
obtained the opinion of an independent investment banking firm that this
transaction was fair to the Company from a financial point of view. See
note 8(c).
(17) Selected Quarterly Financial Data (unaudited)
(in thousands, except per share data and footnotes)
2001 Quarter Year End
-------------------------------------------------------------------
First Second Third Fourth December 30
Net sales of services $123,352 $112,207 $107,508 $ 94,632 $437,699
Gross profit 26,472 23,970 21,171 18,640 90,253
Income (loss) before
extraordinary gain 162 (401) (978) (2,006) (3,223)
Net income (loss)/(1)/ $ 4,019 $ (401) $ 4,428 $ (2,006) $ 6,040
======== ======== ======== ======== ========
Income (loss) per share before
extraordinary gain
Basic 0.01 (0.02) (0.06) (0.12) (0.19)
Diluted 0.01 (0.02) (0.06) (0.12) (0.19)
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)/(2)/ $ (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)
/(1)/ Includes $9.3 million ($0.55 per basic and diluted share) for the year
end December 30, 2001; $3.9 million ($0.23 per basic and diluted share) during
quarter ended April 1, 2001 and $5.4 million ($0.33 per basic and diluted share)
during quarter ended September 30, 2001 relating to the extraordinary gain on
the extinguishment of debt.
F-23
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 30, 2001 and December 31, 2000 and 1999
/(2)/ 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 the
quarter ended September 30; 2000 and $100,000 ($0.01 per basic and diluted
share) during the 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.
F-24
Schedule
COMFORCE CORPORATION AND SUBSIDIARIES
Schedule II Valuation and Qualifying Accounts
Years ended December 30, 2001, December 31, 2000 and 1999
(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 30, 2001:
Deducted from assets to which they apply:
Allowance for doubtful accounts $ 1,025 3,013 - (2,619) 1,419
========== ========== ======== ========== =========
For the year ended December 31, 2000:
Deducted from assets to which they apply:
Allowance for doubtful accounts $ 868 484 - (327) 1,025
========== ========== ======== ========== =========
For the year ended December 31, 1999:
Deducted from assets to which they apply:
Allowance for doubtful accounts $ 790 78 - - 868
========== ========== ======== ========== =========
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).
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 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).
10.2 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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 (included as an exhibit to
COMFORCE Corporation's Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference).
10.8* Third Amendment to Employment Agreement dated as of September 27, 2001
amending Employment Agreement dated as of January 1, 1999 between COMFORCE
Corporation, COMFORCE Operating, Inc. and John C. Fanning, as previously
amended by Amendments dated as of March 28, 2000 and January 23, 2001.
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 (included as
an exhibit to COMFORCE Corporation's Annual Report on Form 10-K for the
year ended December 31, 2000 and incorporated herein by reference).
10.11* Second Amendment to Employment Agreement dated as of September 27, 2001
amending Employment Agreement dated as of January 1, 1999 between
COMFORCE Corporation, COMFORCE Operating, Inc. and Harry Maccarrone, as
previously amended by Amendment dated as of January 23, 2001.
10.12 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).
10.13 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 (included as an exhibit to COMFORCE Corporation's
Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference).
10.14 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 (included as an exhibit to COMFORCE Corporation's
Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference).
10.15* Amendment No. 3 dated as of September 21, 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.
10.16* Amendment No. 4 dated as of December 7, 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.
10.17* Amendment No. 5 dated as of December 7, 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.
10.18 8% Subordinated Convertible Note due December 2, 2009 of COMFORCE
Corporation (included as an exhibit to COMFORCE Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001 and
incorporated herein by reference).
21.1* List of Subsidiaries.
23.1* Consent of KPMG LLP.
___________________________
* Filed herewith.