SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 26, 2006
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-6081
COMFORCE Corporation
(Exact name of registrant as specified in its charter)
| | |
| Delaware | | 36-2262248 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
| | |
415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York | | 11797 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (516) 437-3300
Not Applicable
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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 May 3, 2006 |
| Common stock, $.01 par value | | 17,335,202 shares |
COMFORCE Corporation
INDEX
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
| | | | | | | |
| | | March 26, 2006 | | | December 25,
2005 | |
Assets | | | | | | | |
| | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 6,737 | | | 8,417 | |
Accounts receivable, less allowance of $352 and $354 in 2006 and 2005, respectively | | | 105,052 | | | 103,201 | |
Funding and service fees receivable, less allowance of $311 and $351 in 2006 and 2005, respectively | | | 13,638 | | | 15,715 | |
Prepaid expenses and other current assets | | | 4,747 | | | 4,997 | |
Deferred income taxes, net | | | 1,927 | | | 2,004 | |
| | | | | | | |
Total current assets | | | 132,101 | | | 134,334 | |
| | |
Deferred income taxes, net | | | 1,051 | | | 1,100 | |
Property and equipment, net | | | 5,017 | | | 5,260 | |
Intangible assets, net | | | 30 | | | 40 | |
Goodwill, net | | | 32,073 | | | 32,073 | |
Deferred financing costs, net | | | 726 | | | 851 | |
Other assets | | | 288 | | | 320 | |
| | | | | | | |
Total assets | | $ | 171,286 | | | 173,978 | |
| | | | | | | |
Liabilities and Stockholders’ Deficit | | | | | | | |
| | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 2,204 | | | 3,864 | |
Accrued expenses | | | 89,062 | | | 87,307 | |
| | | | | | | |
Total current liabilities | | | 91,266 | | | 91,171 | |
| | |
Long-term debt (including $1,405 related party debt) | | | 102,515 | | | 105,792 | |
Other liabilities | | | 43 | | | 46 | |
| | | | | | | |
Total liabilities | | | 193,824 | | | 197,009 | |
| | | | | | | |
Commitments and contingencies | | | | | | | |
| | |
Stockholders’ deficit: | | | | | | | |
Common stock, $.01 par value; 100,000,000 shares authorized; 17,335,202 and 17,079,532 shares issued and outstanding at March 26, 2006 and December 25, 2005, respectively | | | 173 | | | 171 | |
Convertible preferred stock, $.01 par value: | | | | | | | |
Series 2003A, 6,500 shares authorized; 6,148 shares issued and outstanding at March 26, 2006 and December 25, 2005, with an aggregate liquidation preference of $7,582 at March 26, 2006 and $7,466 at December 25, 2005 | | | 4,304 | | | 4,304 | |
Series 2003B, 3,500 shares authorized; 513 shares issued and outstanding at March 26, 2006 and December 25, 2005, with an aggregate liquidation preference of $609 at March 26, 2006 and $600 at December 25, 2005 | | | 513 | | | 513 | |
Series 2004A, 15,000 shares authorized; 6,737 shares issued and outstanding at March 26, 2006 and December 25, 2005, with an aggregate liquidation preference of $7,399 at March 26, 2006 and $7,273 at December 25, 2005 | | | 10,264 | | | 10,264 | |
Additional paid-in capital | | | 47,999 | | | 47,727 | |
Accumulated other comprehensive income | | | 56 | | | 147 | |
Accumulated deficit, since January 1, 1996 | | | (85,847 | ) | | (86,157 | ) |
| | | | | | | |
Total stockholders’ deficit | | | (22,538 | ) | | (23,031 | ) |
| | | | | | | |
Total liabilities and stockholders’ deficit | | $ | 171,286 | | | 173,978 | |
| | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
| | | | | | | | |
| | | Three Months Ended | |
| | | March 26, 2006 | | | March 27, 2005 | |
Net sales of services | | $ | 135,074 | | | $ | 123,694 | |
| | |
Costs and expenses: | | | | | | | | |
Cost of services | | | 114,840 | | | | 106,803 | |
Selling, general and administrative expenses | | | 16,254 | | | | 13,704 | |
Depreciation and amortization | | | 736 | | | | 846 | |
| | | | | | | | |
Total costs and expenses | | | 131,830 | | | | 121,353 | |
| | | | | | | | |
Operating income | | | 3,244 | | | | 2,341 | |
| | | | | | | | |
Other income (expense): | | | | | | | | |
Interest expense | | | (2,446 | ) | | | (2,825 | ) |
Other (expense) income, net | | | (18 | ) | | | 25 | |
| | | | | | | | |
| | | (2,464 | ) | | | (2,800 | ) |
| | | | | | | | |
Income (loss) before income taxes | | | 780 | | | | (459 | ) |
Provision (benefit) for income taxes | | | 470 | | | | (209 | ) |
| | | | | | | | |
Net income (loss) | | $ | 310 | | | $ | (250 | ) |
| | | | | | | | |
Dividends on preferred stock | | | 251 | | | | 250 | |
| | | | | | | | |
Net income (loss) available to common stockholders | | $ | 59 | | | $ | (500 | ) |
| | | | | | | | |
Basic income (loss) per common share | | $ | 0.00 | | | $ | (0.03 | ) |
| | | | | | | | |
Diluted income (loss) per common share | | $ | 0.00 | | | $ | (0.03 | ) |
| | | | | | | | |
Weighted average common shares outstanding, basic | | | 17,235 | | | | 16,759 | |
| | | | | | | | |
Weighted average common shares outstanding, diluted | | | 17,632 | | | | 16,759 | |
| | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
COMFORCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | | | | | | |
| | | Three Months Ended | |
| | | March 26, 2006 | | | March 27, 2005 | |
Cash flows from operating activities: | | | | | | | | |
Net income (loss) | | $ | 310 | | | $ | (250 | ) |
| | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization of property and equipment | | | 726 | | | | 836 | |
Amortization of intangible assets | | | 10 | | | | 10 | |
Amortization of deferred financing fees | | | 124 | | | | 136 | |
Net recoveries of bad debts | | | (42 | ) | | | (320 | ) |
Deferred income taxes | | | 77 | | | | — | |
Equity-based consulting expense | | | — | | | | 30 | |
Tax benefit from stock option exercises | | | (121 | ) | | | 156 | |
Changes in assets and liabilities | | | | | | | | |
Accounts, funding and service fees receivable | | | 212 | | | | (251 | ) |
Prepaid expenses and other current assets | | | 272 | | | | (937 | ) |
Accounts payable and accrued expenses | | | 217 | | | | 482 | |
Income tax receivable | | | 10 | | | | 156 | |
| | | | | | | | |
Net cash provided by operating activities | | | 1,795 | | | | 48 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Purchases of property and equipment | | | (483 | ) | | | (621 | ) |
Cash proceeds from sale of niche telecom operations | | | — | | | | 58 | |
| | | | | | | | |
Net cash used in investing activities | | | (483 | ) | | | (563 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Net repayments under capital lease obligations | | | (5 | ) | | | (67 | ) |
Net repayments under line of credit agreements | | | (3,277 | ) | | | (9,051 | ) |
Tax benefit from stock option exercises | | | 121 | | | | — | |
Debt financing costs | | | — | | | | (55 | ) |
Proceeds from exercise of stock options | | | 169 | | | | 199 | |
| | | | | | | | |
Net cash used in financing activities | | | (2,992 | ) | | | (8,974 | ) |
| | | | | | | | |
Net decrease in cash and cash equivalents | | | (1,680 | ) | | | (9,489 | ) |
Cash and cash equivalents at beginning of period | | | 8,417 | | | | 15,233 | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | 6,737 | | | $ | 5,744 | |
| | | | | | | | |
Supplemental disclosures: | | | | | | | | |
Cash paid for: | | | | | | | | |
Interest | | $ | 1,007 | | | $ | 411 | |
Income taxes | | | 1,130 | | | | 274 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
COMFORCE Corporation (“COMFORCE”) is a provider of outsourced staffing management services that enable Fortune 1000 companies and other large employers to consolidate, automate and manage staffing, compliance and oversight processes for their contingent workforces. The Company also provides specialty staffing, consulting and other outsourcing services to Fortune 1000 companies and other large employers for their healthcare support services, technical and engineering, information technology, telecommunications and other staffing needs.
The accompanying unaudited interim condensed consolidated financial statements of COMFORCE and its subsidiaries, including COMFORCE Operating, Inc. (“COI”) (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. Although management believes that the disclosures made are adequate to ensure that the information presented is not misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 25, 2005. The results for the three month period ended March 26, 2006 are not necessarily indicative of the results of operations for the entire year.
2. ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 fair value of goodwill, the recoverability of long-lived assets and deferred tax assets, accrued workers compensation liabilities and the assessment of litigation and contingencies. Actual results could differ from those estimates.
3. SHARE-BASED PAYMENTS
Effective December 26, 2005, the Company adopted (using the modified-prospective method) the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards 123(R),Share-Based Payments(“SFAS No. 123(R)”), which establishes the accounting for employee stock-based awards. Under the provisions of SFAS No. 123(R), stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). The Company adopted SFAS No. 123(R) using the modified prospective method and, as a result, periods prior to December 26, 2005 have not been restated. As of March 26, 2006, no compensation expense has been recorded since all options granted were fully vested prior to December 26, 2005 and no further options were granted during the first quarter of 2006.
During the three months ended March 27, 2005 (and for periods prior to December 26, 2005), the Company recorded compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees. Since the exercise price for such options was equal to the fair market value of the Company’s stock at the date of grant, the stock options had no intrinsic value upon grant and, therefore, no expense was recorded in the Company’s condensed consolidated statements of operations.
Had the compensation cost of the Company’s employee share-based payments for the three months ended March 27, 2005 been determined in accordance with SFAS No. 123(R), the Company’s pro forma net loss and net loss per share would have been (in thousands, except per share amounts):
6
| | | | |
| | | Three Months Ended March 27, 2005 | |
Net loss available to common stockholders, as reported | | $ | (500 | ) |
Less: Total share-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | 234 | |
| | | | |
Pro forma net loss | | $ | (734 | ) |
| | | | |
Net income per share: | | | | |
As reported Basic | | $ | (0.03 | ) |
Diluted | | $ | (0.03 | ) |
Pro forma Basic | | $ | (0.04 | ) |
Diluted | | $ | (0.04 | ) |
Under the modified prospective method, SFAS No. 123(R) applies to new awards and to awards outstanding on the effective date that are subsequently modified or cancelled. The Company recognizes compensation expense for the fair values of all awards on a straight-line basis over the total requisite service period. Cumulative compensation expense recognized at any date will at least equal the grant date fair value of the vested portion of the award at that time.
The Company estimates the fair value of share-based payments using the Black-Scholes option pricing model. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards.
The per share weighted average fair value of stock options granted during the three months ended March 27, 2005 was $1.21. In addition to the exercise and grant date prices of the awards, certain weighted average assumptions that were used to estimate the fair value of stock option grants in the three month period are listed in the table below:
| | | |
| | | Three Months Ended March 27, 2005 | |
Expected dividend yield | | 0 | % |
Expected volatility | | 38.96 | % |
Risk-free interest rate | | 3.72 | % |
Expected term (years) | | 5.00 | |
The income tax benefit recorded relating to the exercise of stock option awards was $121,000 for the three months ended March 26, 2006 and is classified as a financing cash inflow in the Company’s condensed consolidated statement of cash flows. Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits related to share-based compensation as an operating cash inflow. The income tax benefit recorded relating to the exercise of stock option awards was $156,000 for the three months ended March 27, 2005.
Stock Option Plans
Long-Term Stock Investment Plan:The Company’s Long-Term Stock Investment Plan, as amended (the “1993 Plan”), provided for the granting to employees, officers, directors and consultants of non-qualified stock
7
options to purchase shares of the Company’s common stock. In addition, employees of the Company were eligible to be granted incentive stock options. The 1993 Plan also provided formula grants to non-employee members of the Board of Directors. The term of the options could be no more than 10 years. The 1993 Plan provided for the grant of options to purchase up to 5,000,000 shares of the Company’s common stock, at prices generally not less than the fair market value at the date of grant with the exception of incentive options granted to anyone who, prior to the grant, owned more than 10% of the voting power, in which case the exercise price could not be less than 110% of the fair market value. No options or other rights are issuable under the 1993 Plan after December 31, 2002.
2002 Stock Option Plan: The Company’s 2002 Stock Option Plan (the “2002 Plan”) provides for the granting to employees, officers, directors and consultants of incentive and non-qualified stock options to purchase shares of the Company’s common stock. In addition, employees of the Company are eligible to be granted incentive stock options. The Stock Option Committee of the Board of Directors, consistent with the terms of the Plan, will determine the types of awards to be granted, the terms and conditions of each award and the number of shares of common stock to be covered by each award. Grants of incentive and non-qualified stock options may not have a term exceeding 10 years, or five years in the case of an incentive stock option granted to a stockholder who owns stock representing more than 10% of the voting power. The 2002 Plan provides for the grant of options to purchase up to 1,000,000 shares of the Company’s common stock, subject to increase to 2,000,000 shares if approved by the stockholders at the Company’s 2006 annual meeting to be held June 7, 2006. Options are to be granted under the 2002 Plan at prices not less than the fair market value of the Company’s common stock at the date of grant with the exception of incentive options granted to anyone who, prior to the grant, owns more than 10% of the voting power, in which case the exercise price cannot be less than 110% of the fair market value. As of March 26, 2006, 200,000 stock options are available for future grant under the 2002 Plan.
Options are generally granted under stock option plans at an exercise price equal to the closing stock price on the date of grant, with a 10-year term, and vesting in equal increments over a three-year period (with the exception of options issued to directors, which generally vest on the first anniversary date of the date of grant).
The following table summarizes stock option activity during the three months ended March 26, 2006:
| | | | | | | | | | |
| | | Number of Shares | | | Weighted
Average
Exercise Price | | Weighted
Average
Remaining
Contractual Term
(Years) | | Aggregate
Intrinsic
Value |
Outstanding at December 25, 2005 | | 3,178,378 | | | $ | 3.40 | | | | |
Granted | | — | | | | — | | | | |
Forfeited | | — | | | | — | | | | |
Expired | | (539,950 | ) | | | 6.62 | | | | |
Exercised | | (255,628 | ) | | | 0.66 | | | | |
| | | | | | | | | | |
Outstanding at March 26, 2006 | | 2,382,800 | | | $ | 2.96 | | 5.72 | | 2,085,420 |
| | | | | | | | | | |
Options exercisable at March 26, 2006 | | 2,382,800 | | | $ | 2.96 | | 5.72 | | 2,085,420 |
| | | | | | | | | | |
The total cash received from stock option exercises for the three months ended March 26, 2006 and March 27, 2005 was $169,000 and $199,000, respectively. The Company settles employee stock option exercises with new shares. The total intrinsic value of stock options exercised during the three months ended March 26, 2006 and March 27, 2005 was $508,000 and $440,000, respectively.
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4. DEBT
Long-term debt at March 26, 2006 and December 25, 2005 consisted of (in thousands):
| | | | | | |
| | | March 26, 2006 | | December 25,
2005 |
12% Senior Notes, due December 1, 2007 | | $ | 46,310 | | $ | 46,310 |
8% Subordinated Convertible Note, due 2009 | | | 1,405 | | | 1,405 |
Revolving line of credit, due June 24, 2007, with interest payable at prime plus 0.5% and/or LIBOR plus 1.75% (2.0% prior to March 1, 2006), at a weighted average rate of 6.52% at March 26, 2006 and 6.24% at December 25, 2005 | | | 54,800 | | | 58,077 |
| | | | | | |
Total long-term debt | | $ | 102,515 | | $ | 105,792 |
| | | | | | |
Contractual maturities of long-term debt are as follows (in thousands):
| | | |
| 2007 | | $ | 101,110 |
| 2009 | | | 1,405 |
| | | |
| Total | | $ | 102,515 |
| | | |
Senior Notes: The Company issued $110 million original principal amount of its 12% Senior Notes due December 1, 2007 (the “Senior Notes”) in November 1997, principally to fund its acquisition of Uniforce Services, Inc. The Senior Notes provide for semi-annual payments of interest at the rate of 12% per annum. As of May 4, 2006, $46.3 million principal amount of the Senior Notes remained outstanding. The Senior Notes are governed by an indenture under which Wilmington Trust serves as the trustee. The indenture governing the Senior Notes contains a number of significant restrictions and covenants (with which the Company believes it was in compliance at March 26, 2006) that require the Company to ensure among other things that:
| | • | | the Company does not grant a security interest in its assets or incur indebtedness, except indebtedness incurred in accordance with the indenture, which permits indebtedness subordinated to and due later than the Senior Notes and that meets other conditions in the indenture, indebtedness on a parity with the Senior Notes meeting specified conditions in the indenture, renewals or replacements of any bank credit facility, capital lease obligations, securitization transactions, indebtedness within specified dollar limitations and other exceptions; |
| | • | | the Company does not sell or dispose of its assets except in accordance with the covenants and conditions in the indenture, or issue shares of its capital stock except in accordance with the covenants and conditions in the indenture; |
| | • | | the net proceeds from any permitted sale of the Company’s capital stock or its assets are applied to repay any bank credit facility, or, if not required by the lender or such net proceeds are not reinvested in other assets, to redeem Senior Notes or be applied for other specified proper purposes; |
| | • | | the Company does not enter into transactions with affiliates other than in accordance with the indenture; and |
| | • | | the Company does not invest in other businesses or engage in other business activities unless permitted under the indenture |
Convertible Note: The Company’s 8.0% Subordinated Convertible Notes due December 2, 2009 (the “Convertible Note”) are convertible into common stock at $1.70 per share.
On December 8, 2004, the Company issued 6,737 shares of its Series 2004A Convertible Preferred Stock in exchange for $6,726,385 of its Convertible Note, plus accrued interest of $10,463, in a transaction with the Fanning
9
CPD Assets, LP (the “Fanning Partnership”). This exchange eliminated $6.7 million of long-term debt while maintaining, under the terms of the 2004A Series Preferred Stock, the same common stock conversion rights as existed for the Convertible Note. As part of the transaction, the Convertible Note was restated at the principal amount of $1,299,402, and the terms were modified to permit the Company to pay interest in cash or kind, at its election, for the balance of the term of the Convertible Note.
Under the terms of the Convertible Note prior to this amendment, interest was to be payable only in cash beginning with the interest payment due on June 1, 2005. The debt service costs associated with the Convertible Note have been satisfied through additions to principal through December 1, 2005 (the most recent semi-annual interest payment date), including additions to principal of $106,000 in 2005. Additional principal is convertible into common stock on the same basis as other amounts outstanding under the Convertible Note, which provides for conversion into common stock at the rate of $1.70 per share. As a result of its election to pay interest in kind under the Convertible Note, the Company recognized beneficial conversion features of $14,000 in 2005 that increased deferred financing costs and paid-in capital. The Convertible Note may be prepaid in whole or in part, provided that the market value of the Company’s common stock exceeds $2.13 for a specified period of time and, for any prepayment prior to December 1, 2006, upon payment of a prepayment premium of 1.0%. The holder has 10 days to convert the Convertible Notes following notice of prepayment.
The Fanning Partnership is a limited partnership in which John C. Fanning, the Company’s chairman and chief executive officer, holds the principal economic interest. Rosemary Maniscalco, a director of the Company, is the general partner of the Fanning Partnership, but has no pecuniary interest therein. Harry V. Maccarrone, a director and the executive vice president and chief financial officer of the Company is the trustee of a trust and general partner of a partnership that are limited partners in the Fanning Partnership, but he has no pecuniary interest therein other than a nominal interest. The Company obtained the opinion of an independent investment banking firm that the terms of the exchange transaction with the Fanning Partnership were fair to the Company from a financial point of view, and the Company’s independent directors approved the terms of the transaction.
PNC Credit Facility: COMFORCE, COI and various of their operating subsidiaries, as co-borrowers and guarantors, entered into an $85.0 million Revolving Credit and Security Agreement (the “PNC Credit Facility”) with PNC Bank, National Association, as a lender and administrative agent (“PNC”) and other financial institutions participating as lenders to provide for a revolving line of credit with available borrowings based, generally, on 85.0% of the Company’s accounts receivable aged 90 days or less, subject to specified limitations and exceptions. The Company entered into the PNC Credit Facility in June 2003 and it has been subject to various amendments. At March 26, 2006, the Company had remaining availability, as defined in the agreement, under the PNC Credit Facility of $22.5 million. As of March 26, 2006, the Company had outstanding $5.1 million of standby letters of credit under the PNC Credit Facility. The Company was in compliance with all financial covenants under the PNC Credit Facility at March 26, 2006.
The PNC Credit Facility matures on June 24, 2007 and the Senior Notes mature on December 1, 2007. As of the date of this report, the Company did not have sufficient capital to repay the Senior Notes when they mature. The Company does not believe that it will be able to further extend the maturity of the PNC Credit Facility unless it identifies a source of funds to repay or refinance the Senior Notes at their maturity on December 1, 2007, or the holders of the Senior Notes agree to extend the maturity of the Senior Notes. Management has been examining alternatives to refinance or extend the maturity of the Senior Notes and, in anticipation that it will be successful, has initiated discussions to refinance the PNC Credit Facility. Unless the Company identifies a source of funds to repay or refinance the Senior Notes, or they are extended, it will be unable to repay the PNC Credit Facility and the Senior Notes at their current maturity dates, which could have a material adverse effect on the Company’s financial condition.
5. INCOME (LOSS) PER SHARE
Basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted income (loss) per share is computed assuming the conversion of stock options and warrants with exercise prices less than the average market value of the Company’s common stock during the period, and the conversion of convertible
10
debt and preferred stock into common stock to the extent such conversion assumption is dilutive. The following represents a reconciliation of the numerators and denominators for basic and diluted income per share computations (in thousands):
| | | | | | | |
| | | Three Months Ended | |
| | | March 26, 2006 | | March 27, 2005 | |
Basic income (loss) per common share: | | | | | | | |
Net income (loss) available to common stockholders | | $ | 59 | | $ | (500 | ) |
| | | | | | | |
Weighted average common shares outstanding | | | 17,235 | | | 16,759 | |
Basic income (loss) per common share | | $ | 0.00 | | $ | (0.03 | ) |
| | | | | | | |
Diluted income (loss) per common share: | | | | | | | |
Income (loss) for purposes of computing diluted income (loss) per share | | $ | 59 | | $ | (500 | ) |
| | | | | | | |
Weighted average common shares outstanding | | | 17,235 | | | 16,759 | |
Dilutive stock options | | | 397 | | | — | |
| | | | | | | |
Weighted average common shares outstanding for purposes of computing diluted income (loss) per share | | | 17,632 | | | 16,759 | |
| | | | | | | |
Diluted income (loss) per common share | | $ | 0.00 | | $ | (0.03 | ) |
| | | | | | | |
The following shares of common stock were excluded from the above calculations as their effect would have been anti-dilutive: As of March 26, 2006, 827,000 shares of common stock issuable upon conversion of the Convertible Note; 7.2 million shares issuable upon conversion of the Series 2003A Preferred Stock; 1.1 million shares issuable upon conversion of the Series 2003B Preferred Stock; and 4.3 million shares issuable upon the conversion of the Series 2004A Preferred Stock. Options and warrants to purchase 1.3 million and 4.3 million shares of common stock were outstanding as of March 26, 2006 and March 27, 2005, respectively, but were not included in the computation of diluted income per share because their effect would be anti-dilutive.
6. INDUSTRY SEGMENT INFORMATION
COMFORCE has determined that its reportable segments are distinguished principally by the types of services offered to the Company’s clients. The Company manages its operations and reports its results through three operating segments — Human Capital Management Services, Staff Augmentation and Financial Outsourcing Services. The Human Capital Management Services segment primarily provides contingent workforce management services. The Staff Augmentation segment provides healthcare support services, technical and engineering, information technology, telecommunications and other staffing services. The Financial Outsourcing Services segment provides funding and back office support services to independent consulting and staffing companies.
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 and share-based payment expenses. Assets of the operating segments reflect primarily net accounts receivable and goodwill associated with segment activities; all other assets are included as corporate assets. The Company does not evaluate or account for expenditures for long-lived assets on a segment basis.
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The table below presents information on the revenues and operating contribution for each segment for the three month periods ended March 26, 2006 and March 27, 2005, and items which reconcile segment operating contribution to COMFORCE’s reported income (loss) before income taxes (in thousands):
| | | | | | | |
| | | Three Months Ended | |
| | | March 26, 2006 | | March 27, 2005 | |
Net sales of services: | | | | | | | |
Human Capital Management Services | | $ | 78,819 | | $ | 71,686 | |
Staff Augmentation | | | 55,421 | | | 50,814 | |
Financial Outsourcing Services | | | 834 | | | 1,194 | |
| | | | | | | |
| | $ | 135,074 | | $ | 123,694 | |
| | | | | | | |
Operating contribution: | | | | | | | |
Human Capital Management Services | | $ | 2,893 | | $ | 2,537 | |
Staff Augmentation | | | 4,714 | | | 3,364 | |
Financial Outsourcing Services | | | 618 | | | 1,090 | |
| | | | | | | |
| | | 8,225 | | | 6,991 | |
| | | | | | | |
Consolidated expenses: | | | | | | | |
Corporate general and administrative expenses | | | 4,245 | | | 3,804 | |
Depreciation and amortization | | | 736 | | | 846 | |
Interest and other, net | | | 2,464 | | | 2,800 | |
| | | | | | | |
| | | 7,445 | | | 7,450 | |
| | | | | | | |
Income (loss) before income taxes | | $ | 780 | | $ | (459 | ) |
| | | | | | | |
| | |
| | | At March 26, 2006 | | At December 25, 2005 | |
Total assets: | | | | | | | |
Human Capital Management Services | | $ | 78,389 | | $ | 76,480 | |
Staff Augmentation | | | 58,736 | | | 58,794 | |
Financial Outsourcing Services | | | 13,638 | | | 15,715 | |
Corporate | | | 20,523 | | | 22,989 | |
| | | | | | | |
| | $ | 171,286 | | $ | 173,978 | |
| | | | | | | |
7. NEW ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123(R),Share-Based Payment (“SFAS 123(R)”). This statement replaces SFAS No. 123,Accounting for Stock Based Compensation and supercedes APB No. 25,Accounting for Stock Issued to Employees. SFAS 123 (R) requires all stock based compensation to be recognized as an expense in the financial statements and that such cost be measured according to the grant date fair value of the stock options or other equity instruments. The Company adopted, using the modified-prospective method, the provisions of SFAS 123(R) for the quarter ended March 26, 2006. The adoption had no impact on the Company’s financial position or results of operations as all share-based payments were fully vested prior to December 26, 2005.
In September 2005, the FASB issued EITF No. 05-08,Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature (“EITF 05-08”). This EITF deals with the accounting for the tax effects of beneficial conversion features associated with convertible debt. The effect of the adoption of EITF 05-08 was not material. As a result, the Company recognizes deferred tax liabilities for the difference between the book and tax basis of any beneficial conversion feature with a corresponding adjustment to the additional paid-in capital. The adoption in the first quarter of 2006 did not have a material impact on the Company’s financial position or results of operations.
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8. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
| | | | | | | | |
| | | Three Months Ended | |
| | | March 26, 2006 | | | March 27, 2005 | |
Net income (loss) | | $ | 310 | | | $ | (250 | ) |
Foreign currency translation adjustment | | | (91 | ) | | | 9 | |
| | | | | | | | |
Total comprehensive income | | $ | 219 | | | $ | (241 | ) |
| | | | | | | | |
9. LITIGATION AND CONTINGENCIES
In November 2003, the Company received a general notice letter from the United States Environmental Protection Agency (the “U.S. EPA”) that it is a potentially responsible party at Chicago’s Lake Calumet Cluster Site, which for decades beginning in the late 19th/early 20th centuries had served as a waste disposal site. In December 2004, the U.S. EPA sent the Company and numerous other companies special notice letters requiring the recipients to make an offer by a date certain to perform a remedial investigation and feasibility study (RI/FS) to select a remedy to clean up the site. The Company’s predecessor, Apeco Corporation (“Apeco”), a manufacturer of photocopiers, allegedly sent waste material to this site. The State of Illinois and the U.S. EPA have proposed that the site be designated as a Superfund site. The Company is one of over 400 potentially responsible parties (many of which may no longer be in operation or viable) to which notices were sent, and the Company has joined a working group of more than 100 members representing over 120 potentially responsible parties for the purpose of responding to the United States and Illinois environmental protection agencies.
Until these site studies are completed (which could take two or more years) and the responsible agencies agree upon remedies, accurate estimates of clean-up costs cannot be made. Consequently, no assessment can be made as to any potential liability to the Company. Furthermore, the Company is initiating inquiries of the insurance carriers for Apeco to determine if it has coverage under old insurance policies. Although another company had agreed to indemnify the Company against environmental liabilities, this indemnitor is currently in bankruptcy and the Company does not expect to pursue its indemnity claims since obtaining any recovery against this indemnitor appears to be unlikely.
In July 2005, the Company’s subsidiary, COMFORCE Technical Services, Inc. (“CTS”) was served with an amended complaint in the suit titledReyes V. East Bay Municipal Utility District, et al, filed in the Superior Court of California, Alameda County, in connection with a gasoline pipeline explosion in November 2004 that killed five workers and injured four others. As part of a construction project to lay a water transmission line, a backhoe operator employed by a construction contractor unaffiliated with CTS allegedly struck and breached a gasoline pipeline and an explosion occurred when leaking gasoline ignited. The complaint names various persons involved in the construction project as defendants, including CTS. The complaint alleges, among other things, that CTS was negligent in failing to properly mark the location of the pipeline. The complaint does not specify monetary damages.
CTS was subsequently named as defendant in fourteen other lawsuits concerning this accident in the Superior Court of California which have been consolidated with theReyes case in a single coordinated action styled as theGas Pipeline Explosion Cases in the Superior Court of California, Contra Costa County.
CTS denies any responsibility for this accident. CTS has requested that its insurance carriers defend it in these actions, and the carriers have appointed counsel to defend CTS in the case, subject to the carriers reservation of rights. Management of CTS (and the Company) cannot estimate the amount of damages, if any, to which CTS may be liable. Following an investigation of the accident, Cal-OSHA issued citations to four unrelated contractors on the project, but declined to issue any citations against CTS. Although Cal-OSHA did not issue a citation against CTS, it will not be determinative in the pending civil cases, and no assurance can be given that CTS will not be held to be responsible for damages in excess of its policy limits.
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The Company is a party to routine contract and employment-related litigation matters and routine audits of state and local tax returns arising in the ordinary course of its business. Except as described above, there are no other 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, fidelity insurance, errors and omissions insurance, professional and medical malpractice insurance, fiduciary insurance and directors’ and officers’ liability insurance. The Company is generally self-insured with respect to workers compensation, but maintains excess workers compensation coverage to limit its maximum exposure to such claims.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion set forth below supplements the information found in the audited consolidated financial statements and related notes of COMFORCE Corporation (“COMFORCE”) and its wholly-owned subsidiaries, including COMFORCE Operating, Inc. (“COI”) (collectively, the “Company”).
Overview and Recent Developments
Staffing personnel placed by the Company are employees of the Company. The Company is responsible for employment 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, 401(k), 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 need for borrowing availability under a credit facility to fund current operations. We do not believe that we will be able to further extend the maturity of the PNC Credit Facility unless we identify a source of funds to repay or refinance our Senior Notes at their maturity on December 1, 2007, or the holders of the Senior Notes agree to extend the maturity of the Senior Notes. Management has been examining alternatives to refinance or extend the maturity of the Senior Notes and, in anticipation that it will be successful, has initiated discussions to refinance the PNC Credit Facility. See “—Financial Condition, Liquidity and Capital Resources,” below.
The Company reports its results through three operating segments — Human Capital Management Services, Staff Augmentation and Financial Outsourcing Services. The Human Capital Management Services segment primarily provides staffing management services that enable Fortune 1000 companies and other larger employers to consolidate, automate and manage staffing, compliance and oversight processes for their contingent workforces. The Staff Augmentation segment provides healthcare support services, technical and engineering, information technology, telecommunications and other staffing needs. The Financial Outsourcing Services segment provides funding and back office support services to independent consulting and staffing companies.
Critical Accounting Policies and Estimates
As disclosed in the annual report on Form 10-K for the fiscal year ended December 25, 2005, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently actual results could differ from those estimates. Our most critical accounting policies relate to allowance for doubtful accounts, accrued workers compensation liability, goodwill impairment, and income taxes. Since December 25, 2005, there have been no changes in our critical accounting policies and no other significant changes to the methods used in the assumptions and estimates related to them.
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Results of Operations
Three Months Ended March 26, 2006 compared to Three Months Ended March 27, 2005
Net sales of services for the three months ended March 26, 2006 were $135.1 million, which represents a 9.2% increase from the $123.7 million in net sales of services realized for the three months ended March 27, 2005. Net sales of services in the Human Capital Management Services segment increased by $7.1 million, or 10.0%, due to an increase in services provided to existing and new clients. Management believes such increase is reflective of a trend for companies to rely increasingly on providers of human capital management services, such as those provided by the Company’s PrO Unlimited subsidiary. In the Staff Augmentation segment, the increase of $4.6 million, or 9.1%, is principally attributable to services provided to information technology and telecom customers, partially offset by a reduction in services provided to technical services customers. Sales of services were lower by $360,000, or 30.2%, in the Financial Outsourcing Services segment, principally due to a reduction in the number of customers we service.
Cost of services for the three months ended March 26, 2006 was 85.0% of net sales of services as compared to cost of services of 86.3% of net sales of services for the three months ended March 27, 2005. The cost of services as a percentage of net sales for the first quarter of 2006 decreased from the year ago period principally due to higher gross margins as a result of increased consultant consolidation services provided by the Human Capital Management Services segment, higher margins for telecom and healthcare support services in the Staff Augmentation segment, and a reduction in accrued workers compensation based upon favorable claims experience, partially offset by a reduction in the number of clients serviced under the Financial Outsourcing Services segment.
Selling, general and administrative expenses as a percentage of net sales of services were 12.0% for the three months ended March 26, 2006, compared to 11.1% for the three months ended March 27, 2005. The $2.6 million increase in selling, general and administrative expenses is primarily due to an increase in support personnel costs associated with the increase of net sales discussed above.
Operating income for the three months ended March 26, 2006 was $3.2 million as compared to operating income of $2.3 million for the three months ended March 27, 2005. The Company’s higher operating income for the first quarter of 2006 is principally due to an increase in net sales of services and a reduction in cost of services, which was partially offset by an increase in selling, general and administrative expenses discussed above.
The Company’s interest expense for the three months ended March 26, 2006 was principally attributable to interest recorded on the PNC Credit Facility, the Convertible Note and the Senior Notes. The interest expense of $2.4 million for the first quarter of 2006 was lower as compared to the interest expense of $2.8 million for the first quarter of 2005. This reduction was principally due to the repurchase of $18.1 million of Senior Notes in fiscal 2005. These decreases were partially offset by increased interest expense on the Company’s revolving line of credit due to higher average outstanding balances and interest rates in the first quarter of 2006. See “Financial Condition, Liquidity and Capital Resources” in this Item 2.
The income tax provision for the three months ended March 26, 2006 was $470,000 (a rate of 60.3%) on income before income taxes of $780,000. The income tax benefit for the first quarter of 2005 was $209,000 (a rate of 45.5%) on a loss before income taxes of $459,000. The difference between income taxes at the federal statutory income tax rate and the Company’s tax provision for the respective periods relates primarily to state income taxes and a disallowance for non-deductible expenses and adjustments to tax contingencies.
Financial Condition, Liquidity and Capital Resources
The Company generally pays its billable employees weekly or bi-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 invoices 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.
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Off-Balance Sheet and Contractual Obligations: During three months ended March 26, 2006, the Company had no off-balance sheet arrangements other than operating leases entered into in the normal course of business, as indicated in the table below. The following table represents contractual commitments associated with operating lease agreements and principal repayments on debt obligations (excluding interest):
| | | | | | | | | | | | | | | |
| | | Payments due by fiscal year (in thousands) |
| | | 2006 | | 2007 | | 2008 | | 2009 | | Thereafter |
Operating Leases | | $ | 1,963 | | $ | 2,112 | | $ | 1,726 | | $ | 1,556 | | $ | 1,323 |
PNC Credit Facility - principal repayments | | | — | | | 54,800 | | | — | | | — | | | — |
Senior Notes - principal repayments | | | — | | | 46,310 | | | — | | | — | | | — |
Convertible Note - principal repayments | | | — | | | — | | | — | | | 1,405 | | | — |
| | | | | | | | | | | | | | | |
Total | | $ | 1,963 | | $ | 103,222 | | $ | 1,726 | | $ | 2,961 | | $ | 1,323 |
| | | | | | | | | | | | | | | |
The Company also had standby letters of credit outstanding at March 26, 2006 in the aggregate amount of $5.1 million.
COMFORCE, COI and various of their operating subsidiaries, as co-borrowers and guarantors, entered into an $85.0 million PNC Credit Facility with PNC, as a lender and administrative agent and other financial institutions participating as lenders to provide for a revolving line of credit with available borrowings based, generally, on 85.0% of the Company’s accounts receivable aged 90 days or less, subject to specified limitations and exceptions. The Company entered into the PNC Credit Facility in June 2003 and it has been subject to five amendments.
The obligations under the PNC Credit Facility are collateralized by a pledge of the capital stock of certain key operating subsidiaries of the Company and by security interests in substantially all of the assets of the Company. The PNC Credit Facility contains various financial and other covenants and conditions, including, but not limited to, a prohibition on paying cash dividends and limitations on engaging in affiliate transactions, making acquisitions and incurring additional indebtedness. The maturity date of the PNC Credit Facility is June 24, 2007. The Company was in compliance with all financial covenants under the PNC Credit Facility at March 26, 2006.
During three months ended March 26, 2006, the Company’s primary sources of funds were $1.8 million of cash provided by operating activities. Cash and cash equivalents decreased $1.7 million during the first quarter 2006.
At March 26, 2006, the Company had outstanding $54.8 million principal amount under the PNC Credit Facility bearing interest at a weighted average rate of 6.52% per annum. At such date, the Company had remaining availability of $22.5 million, as defined in the agreement, under the PNC Credit Facility.
At March 26, 2006, the Company also had outstanding (i) $46.3 million principal amount of Senior Notes bearing interest at 12% per annum and (ii) $1.4 million principal amount of Convertible Notes bearing interest at 8% per annum. As described below in this “Financial Condition, Liquidity and Capital Resources” discussion, the Senior Notes mature on December 1, 2007.
Substantially all of the consolidated net assets of the Company are assets of COI and all of the net income that had been generated by the Company was attributable to the operations of COI. Except for permitted distributions, these assets and any cumulated 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 to upstream $2.0 million annually to pay public company expenses, and to upstream funds to the extent COI meets the restricted payments test under the indenture, the most significant component of which is based upon 50% of net income generated by COI since January 1, 1998 on a cumulative basis, less prior distributions made in reliance on
16
this provision. In calculating net income for this purpose, under the terms of the indenture, the Company must apply generally accepted accounting principles as in effect at the time the indenture was entered into in 1997. Principally as a result of distributions made, and losses incurred by COI in prior years, COI can make no distributions to COMFORCE based upon the cumulative net income provisions of the indenture until COI generates additional net income of approximately $11.0 million. However, COMFORCE has approximately $1.9 million available at March 26, 2006 from proceeds it has generated from the sale of stock, principally upon the exercise of options and warrants. This $1.9 million may be used by COMFORCE to pay interest and principal on the Convertible Notes or for other business purposes.
The Company has made significant progress in improving its capital structure through the elimination of long-term debt through the purchase or exchange of Senior Notes, Convertible Notes and other instruments. Since June 2000, the Company has reduced its public debt from $138.8 million to $46.3 million. As a result, COMFORCE has reduced its annualized interest expense by borrowing at the lower rates available under the PNC Credit Facility to effectuate repurchases of long-term debt and by exchanging preferred stock and lower interest rate Convertible Notes for public debt.
The Company’s Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of 7.5% per annum and, at March 26, 2006 there were cumulated, unpaid and undeclared dividends of $1.4 million on the Series 2003A Preferred Stock, $96,000 on the Series 2003B Preferred Stock and $662,000 on the Series 2004A Preferred Stock.
Management of the Company believes that cash flow from operations and funds anticipated to be available under the PNC Credit Facility will be sufficient to service the Company’s indebtedness and to meet currently anticipated working capital requirements for the next twelve months. The Company was in compliance with all financial covenants under the PNC Credit Facility at March 26, 2006 and expects to remain in compliance for the next 12 months.
The PNC Credit Facility matures on June 24, 2007 and the Senior Notes mature on December 1, 2007. As of the date of this report, the Company did not have sufficient capital to repay the Senior Notes when they mature. The Company does not believe that it will be able to further extend the maturity of the PNC Credit Facility unless it identifies a source of funds to repay or refinance the Senior Notes at their maturity on December 1, 2007. Management has been examining alternatives to refinance or extend the maturity of the Senior Notes and, in anticipation that it will be successful, has initiated discussions to refinance the PNC Credit Facility. Unless the Company identifies a source of funds to repay or refinance the Senior Notes, or they are extended, it will be unable to repay the PNC Credit Facility and the Senior Notes at their current maturity dates, which could have a material adverse effect on the Company’s financial condition.
The Company is currently undergoing audits for certain state and local tax returns. The results of these audits are not expected to have a material effect upon the results of operations.
Impact of Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (R),Share-Based Payment (“SFAS 123(R)”). This statement replaces SFAS No. 123,Accounting for Stock Based Compensation and supercedes APB No. 25,Accounting for Stock Issued to Employees. SFAS 123 (R) requires all stock based compensation to be recognized as an expense in the financial statements and that such cost be measured according to the grant date fair value of the stock options or other equity instruments. The Company adopted, using the modified-prospective method, the provisions of SFAS 123(R) for the quarter ended March 26, 2006. The adoption had no impact on the Company’s financial position or results of operations as all share-based payments were fully-vested prior to December 26, 2005.
In September 2005, the FASB issued EITF No. 05-08,Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature (“EITF 05-08”). This EITF deals with the accounting for the tax effects of beneficial conversion features associated with convertible debt. The effect of the adoption of EITF 05-08 was not material. As a result, the Company recognizes deferred tax liabilities for the difference between the book and tax basis of any beneficial conversion feature with a corresponding adjustment to the additional paid-in capital. The adoption in the first quarter of 2006 did not have a material impact on the Company’s financial position or results of operations.
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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.
Forward Looking Statements
We have made statements under the captions “Business” in Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under this Item 7, as well as in other sections of this report that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “forecasts,” “projects,” “predicts,” “intends,” “potential,” “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business and industry. These statements are only predictions based on our current expectations and projections about future events.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We undertake no obligation to update any of these forward-looking statements after the date of this report to conform our prior statements to actual results or revised expectations.
Factors which may cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements include the following:
| | • | | unfavorable global, national or local economic conditions that cause our customers to defer hiring contingent workers or reduce spending on the human capital management services and staffing that we provide; |
| | • | | significant increases in the effective rates of any payroll-related costs that we are unable to pass on to our customers; |
| | • | | increases in the costs of complying with the complex federal, state and foreign laws and regulations in which we operate, or our inability to comply with these laws and regulations; |
| | • | | our inability to collect fees due to the bankruptcy of our customers, including the amount of any wages we have paid to our employees for work performed for these customers; |
| | • | | our inability to keep pace with rapid changes in technology in our industry; |
| | • | | in that we place our employees in other workplaces, losses incurred by reason of our employees’ misuse of customer proprietary information, misappropriation of funds, discrimination, harassment, theft of property, accidents, torts or other claims; |
| | • | | our inability to successfully develop new services or enhance our existing services as the markets in which we compete grow more competitive; |
| | • | | the necessity of writing off goodwill in future periods; |
| | • | | our inability to refinance or repay our Senior Notes or the PNC Credit Facility, both of which mature in 2007; |
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| | • | | as a result of covenants and restrictions in the documents governing the Senior Notes, the PNC Credit Facility or any future debt instruments, our inability to use available cash in the manner management believes will maximize shareholder value; or |
| | • | | any of the other factors described under “Risk Factors” in Item 1A of the Company’s annual report on Form 10-K for the year ended December 25, 2005. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 has been disclosed in Item 7A of the Company’s annual report on Form 10-K for the year ended December 25, 2005. There has been no material change in the disclosure regarding market risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management evaluated, with the participation of the chief executive officer and chief financial officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Report. There has been no change in the Company’s internal controls over financial reporting that occurred during the quarter covered by this Report that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Since the date of the filing of the Company’s annual report on Form 10-K for the year ended December 25, 2005, there have been no material new legal proceedings involving the Company or any material developments to the proceedings described in such Form 10-K.
ITEM 1A. RISK FACTORS.
Since the date of the filing of the Company’s annual report on Form 10-K for the year ended December 25, 2005, there have been no material changes to the risk factors described under Item 1A in such Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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ITEM 6. EXHIBITS.
| | |
| 3.1 | | Amendment to Bylaws of COMFORCE Corporation, as adopted and effective as of May 3, 2006 (included as an exhibit to COMFORCE Corporation’s Current Report on Form 8-K filed May 4, 2006 and incorporated herein by reference). |
| |
| 31.1 | | Rule 13a-14(a) certification of chief executive officer in accordance with section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 31.2 | | Rule 13a-14(a) certification of chief financial officer in accordance with section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.1 | | Section 1350 certification of chief executive officer in accordance with section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.2 | | Section 1350 certification of chief financial officer in accordance with section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements 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 |
|
/s/ Harry V. Maccarrone |
| Harry V. Maccarrone |
| Executive Vice President and Chief Financial Officer |
|
| Date: May 5, 2006 |
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