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 September 29, 2002
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 (IRS Employer Identification No.)
incorporation or organization)
415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York 11797
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 437-3300
-----------------------------
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 7, 2002
---------------------------- -------------------------------
Common stock, $.01 par value 16,659,356 shares
COMFORCE Corporation
INDEX
Page
Number
PART I FINANCIAL INFORMATION...........................................3
Item 1. Financial Statements............................................3
Consolidated Balance Sheets at September 29, 2002
(unaudited) and December 30, 2001...........................3
Consolidated Statements of Operations for the three
and nine months ended September 29, 2002
and September 30, 2001 (unaudited)..........................4
Consolidated Statements of Cash Flows for the nine months
ended September 29, 2002 and September 30, 2001 (unaudited).5
Notes to Unaudited Consolidated Financial Statements............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............12
Item 3. Quantitative and Qualitative Disclosure about Market Risk......18
Item 4. Controls and Procedures........................................18
PART II OTHER INFORMATION..............................................18
Item 1. Legal Proceedings .............................................18
Item 2. Changes in Securities and Use of Proceeds (not applicable).....18
Item 3. Defaults Upon Senior Securities (not applicable)...............19
Item 4. Submission of Matters to a Vote of Security Holders
(not applicable)...........................................19
Item 5. Other Information .............................................19
Item 6. Exhibits and Reports on Form 8-K ............................19
SIGNATURES...................................................................20
CERTIFICATIONS...............................................................20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 29, 2002 December 30, 2001
------------------ -----------------
ASSETS: (unaudited)
Current assets:
Cash and cash equivalents $ 4,473 $ 4,067
Accounts receivable, net 46,740 44,091
Funding and service fees receivable, net 28,668 35,938
Prepaid expenses and other current assets 3,991 5,733
------------------ -----------------
Total current assets 83,872 89,829
Deferred income taxes, net 1,619 --
Property and equipment, net 12,274 12,590
Intangible assets, net 215 --
Goodwill, net 79,242 134,283
Deferred financing costs, net 2,846 3,307
------------------ -----------------
Total assets $ 180,068 $ 240,009
================== =================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY:
Current liabilities:
Accounts payable $ 1,998 $ 3,440
Accrued expenses 34,746 28,487
------------------ -----------------
Total current liabilities 36,744 31,927
Long-term debt 145,907 154,720
Deferred income taxes, net -- 581
Other liabilities 361 244
------------------ -----------------
Total liabilities 183,012 187,472
------------------ -----------------
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, $.01 par value; 100,000,000 shares authorized;
16,659,341 shares and 16,659,173 shares issued and outstanding
at September 29, 2002 and
December 30, 2001, respectively 167 167
Additional paid-in capital 49,589 49,581
Accumulated other comprehensive loss (278) (309)
(Accumulated deficit) retained earnings (52,422) 3,098
------------------ -----------------
Total stockholders' (deficit) equity (2,944) 52,537
------------------ -----------------
Total liabilities and stockholders' (deficit)
equity $ 180,068 $ 240,009
================== =================
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 29 September 30, September 20 September 30
2002 2001 2002 2001
-------------- ---------------- ------------- ---------------
Revenue:
Net sales of service $ 95,607 $ 107,508 $ 283,832 $ 343,067
Costs and expenses:
Cost of services 78,062 86,337 231,104 271,454
Selling, general and administrative expenses 13,599 15,103 41,279 49,598
Depreciation and amortization 1,004 2,021 2,985 5,894
------------ ---------------- ------------- ---------------
Total costs and expenses 92,665 103,461 275,368 326,946
------------ ---------------- ------------- ---------------
Operating income 2,942 4,047 8,464 16,121
------------ ---------------- ------------- ---------------
Other income (expense):
Interest expense (4,131) (4,900) (12,171) (15,722)
Gain on debt extinguishment -- 9,322 -- 15,858
Other income, net 55 11 218 40
------------ ---------------- ------------- ---------------
(4,076) 4,433 (11,953) 176
------------ ---------------- ------------- ---------------
Income (loss) before tax (1,134) 8,480 (3,489) 16,297
Provision (benefit) for income taxes (340) 4,052 (769) 8,251
------------ ---------------- ------------- ---------------
Income (loss) before a cumulative effect of a
change in accounting principle (794) 4,428 (2,720) 8,046
Cumulative effect of a change in accounting principle --
goodwill impairment, net of tax benefit of $2,200 -- -- (52,800) --
------------ ---------------- ------------- ---------------
Net income (loss) $ 4,428 $ 8,046
(794) (55,520)
============ ================ ============= ===============
Basic income (loss) per common share:
Income (loss) before a cumulative effect of a change
in accounting principle $ (0.05) $ 0.27 $ (0.16) $ 0.48
Cumulative effect of a change in accounting principle
-goodwill impairment -- -- (3.17) --
-------------- ---------------- ------------- ---------------
Net income (loss) $ (0.05) $ 0.27 $ (3.33) $ 0.48
============== ================ ============= ===============
Diluted income (loss) per common share:
Income (loss) before a cumulative effect of a change
in accounting principle $ (0.05) $ 0.26 $ (0.16) $ 0.48
Cumulative effect of a change in accounting principle
-goodwill impairment -- (3.17) --
-------------- ---------------- ------------- ---------------
Net income (loss) $ (0.05) $ 0.26 $ (3.33) $ 0.48
============== ================ ============= ===============
Weighted average common shares outstanding, basic 16,659 16,659 16,659 16,659
============== ================ ============= ===============
Weighted average common shares outstanding, diluted 16,659 16,804 16,659 16,862
============== ================ ============= ===============
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
---------------------------------------
September 29, September 30,
2002 2001
------------------ -----------------
Cash flows from operating activities:
Net income (loss) $ (55,520) $ 8,046
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,985 5,894
Amortization of deferred financing fees 682 592
Issuance of notes in lieu of interest 1,104 1,923
Gain on repurchase of Senior Notes -- (2,238)
Gain on repurchase of PIK Debentures -- (7,025)
Write-off of goodwill, net of tax 52,800 --
Gain on sale of fixed assets (156) --
Changes in assets and liabilities, net of effects of acquisitions
of businesses:
Accounts receivable and funding service fees receivable 4,652 22,858
Prepaid expenses and other current assets 932 (953)
Accounts payable and accrued expenses 4,783 (2,149)
Decrease in income tax receivable 810 --
--------------- ----------------
Net cash provided by operating activities 13,072 26,948
--------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (2,504) (2,900)
Disposal of fixed assets 434 --
Payments of contingent consideration (323) (773)
(Increase) in deferred costs and other assets -- (250)
--------------- ----------------
Net cash used in investing activities (2,393) (3,923)
--------------- ----------------
Cash flows from financing activities:
Net repayments under capital leases (135) (60)
Net repayments under line of credit agreement (9,917) (9,805)
Repurchase of Senior Notes and PIK Debentures -- (11,336)
Debt financing costs (221) (270)
Cash consideration paid in exchange of convertible debt -- (1,000)
--------------- ----------------
Net cash used in financing activities (10,273) (22,471)
--------------- ----------------
Net increase in cash and cash equivalents 406 554
Cash and cash equivalents at beginning of period 4,067 4,940
--------------- ----------------
Cash and cash equivalents at end of period $ 4,473 $ 5,494
=============== ================
Supplemental disclosures:
Cash paid for:
Interest $ 7,001 $ 8,976
Income taxes 362 5,591
Supplemental schedule of significant non-cash financing activities:
Issuance of 8% subordinated convertible note in exchange
for 15% PIK Debentures $ -- $ 8,000
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited interim consolidated financial statements of
COMFORCE Corporation ("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 note disclosures normally included in annual financial
statements have been condensed or omitted pursuant to those rules and
regulations. In the opinion of management, all adjustments, consisting of normal
recurring adjustments considered necessary for a fair presentation, have been
included. Although management believes that the disclosures made are adequate to
ensure that the information presented is not misleading, it is suggested that
these financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 30, 2001. The results for the three and nine months
ended September 29, 2002 are not necessarily indicative of the results of
operations for the entire year.
2. DEBT
Notes payable and long-term debt at September 29, 2002 and December 30,
2001 consisted of (in thousands):
September 29, December 30,
2002 2001
------------ ------------
12% Senior Notes, due 2007 $ 87,000 $ 87,000
15% Senior Secured PIK Debentures, due 2009 11,158 10,379
8% Subordinated Convertible Notes due 2009 8,446 8,121
Revolving line of credit, due December 14, 2003, with interest
payable monthly at LIBOR plus 3.0% with a weighted
average rate of 4.58% at September 29, 2002 and
LIBOR plus 2.25% with a weighted average rate of
4.33% at December 30, 2001 39,303 49,220
------------ ------------
Total long-term debt $145,907 $154,720
============ ============
The debt service costs associated with COMFORCE's 15% Senior Secured PIK
Debentures due 2009 (the "PIK Debentures") may be satisfied through issuance of
new PIK Debentures through December 1, 2002 and the debt service costs
associated with COMFORCE's 8% Subordinated Convertible Notes due 2009 (the
"Convertible Notes") may be satisfied through issuance of new Convertible Notes
through December 1, 2003. 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 Notes in cash. Its ability to do so is
expected to be dependent on its availability of funds for this purpose, whether
through borrowings by COI under the revolving credit facility agented by
Whitehall Business Credit Corporation (formerly IBJ Whitehall Business Credit
Corporation) (the "Whitehall Credit Facility"), funds from COI's operations or
otherwise, and on COI's ability to upstream funds in accordance with the
restricted payments test under the indenture for COI's 12% Senior Notes due 2007
(the "Senior Notes"). COMFORCE's ability to repay the PIK Debentures and the
Convertible Notes at their respective maturity dates in December 2009, or on any
earlier required repayment or repurchase dates, will also be dependent on such
conditions and availability of funds.
Under the indenture, COI is restricted in upstreaming funds to its parent
COMFORCE. Under one interpretation of these restrictive provisions, COI
anticipates that it will have adequate funds eligible for upstreaming to
COMFORCE to pay cash interest that will be due on June 1, 2003. COI plans to
request clarification from the indenture trustee in addressing certain
interpretive issues under the indenture. If the Company's interpretation does
not receive support from the trustee or the Company is otherwise unable to pay
interest under the PIK Debentures or the Convertible Notes when due, then, in
addition to being a default under these instruments, such non-payment would
constitute a default under the Whitehall Credit Facility. Under these
circumstances, the Company's management may take steps designed to prevent a
default from occurring, such as seeking a consent from the holders of the Senior
Notes to upstream funds to pay interest on the Convertible Notes or the PIK
Debentures, or seeking to raise capital at the COMFORCE level (not subject to
upstreaming restrictions) through the issuance of additional capital or by
obtaining a loan to provide necessary funds to satisfy these obligations. No
assurance can be given that the indenture trustee will provide needed comfort to
the Company in interpreting the indenture or that any steps taken to avoid a
default will prove successful, in which case the lenders under the Whitehall
Credit Facility and the holders of the PIK Debentures and Convertible Notes may
exercise remedies available to them.
Effective as of May 10, 2002, the Company entered into an amendment to the
Whitehall Credit Facility to, among other things (i) waive the Company's
non-compliance with the fixed-charge coverage ratio for the period ended March
31, 2002, (ii) reduce the fixed-charge coverage ratio in future periods, and
(iii) increase each level of the applicable rate and LIBOR margins by 0.25%.
3. FISCAL YEAR
On March 22, 2001, the Company's Board of Directors adopted a resolution to
change the Company's fiscal year, which was previously a calendar year.
Beginning in 2001, the fiscal year consists of the 52 or 53 weeks ending on the
last Sunday in December. Accordingly, the Company's current fiscal year will end
on Sunday, December 29, 2002.
4. INCOME (LOSS) PER SHARE
Basic income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during each period. Diluted income (loss) per share is computed assuming the
conversion of stock options and warrants with a market value greater than the
exercise price to the extent such conversion assumption is dilutive. The
following represents a reconciliation of the numerators and denominators for
basic and diluted income (loss) per share for the three and nine month periods
ended September 29, 2002 and September 30, 2001 (in thousands):
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
-------------- ------------- ------------- -------------
Numerator:
Income (loss) before a cumulative
effect of a change in accounting
principle $ (794) $ 4,428 $ (2,720) $ 8,046
Cumulative effect of a change in
accounting principle --
goodwill impairment, net of
tax benefit -- -- (52,800) --
-------------- ------------ ------------- -------------
Net income (loss) $ (794) $ 4,428 $ (55,520) $ 8,046
============== ============= ============= =============
Denominator:
Weighted average shares -- basic 16,659 16,659 16,659 16,659
Effect of dilutive securities:
Warrants and Employee stock options
-- 145 -- 203
------------- ------------- ------------- -------------
Denominator for diluted income (loss)
per share - adjusted weighted
average shares and assumed
conversions 16,659 16,804 16,659 16,862
================= ============= ============= =============
Outstanding options and warrants to purchase shares of common stock,
representing approximately 3.6 million shares of common stock, were not included
in the computations of diluted net income (loss) per share for the three and
nine months ended September 29, 2002 because their effect would be
anti-dilutive.
5. STOCK OPTIONS
During the first nine months of 2002, the Company granted options to
purchase in aggregate of 60,000 shares of the Company's common stock at an
exercise price of $1.10 per share and 535,000 shares of the Company's common
stock at an exercise price of $1.45, which was equal to or greater than the fair
market value of the common stock on the date of grant. These options were
granted to 23 individuals who are officers, directors, employees or agents of
the Company. These options were granted under the Company's Long-Term Stock
Investment Plan. The options granted to directors provide for vesting on the
first anniversary of the date of grant and the remaining options provide for
vesting 6, 18 and 30 months after the date of grant in equal increments.
At the annual meeting of stockholders of the Company held June 13, 2002,
the stockholders approved the COMFORCE Corporation 2002 Stock Option Plan under
which options to purchase up to 1,000,000 shares of the Company's common stock
may be granted by the Company to officers, directors, employees and agents of
the Company at exercise prices not less than market prices at the date of grant.
To date, no options have been issued under this plan.
6. 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),
technical, telecom, healthcare support 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.
The accounting policies of the segments are the same as those described in
Note 2 to the consolidated financial statements of the Company included in the
Company's Annual Report on Form 10-K for the year ended December 30, 2001.
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 and goodwill 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 and nine months ended September 29,
2002 and September 30, 2001, and items which reconcile segment operating
contribution to COMFORCE's reported pre-tax income (loss) (in thousands):
Three Months Ended Nine Months Ended
---------------------------------------------- -----------------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
---------------------- -------------------- --------------------- ----------------
Net sales of services:
Staff Augmentation $ 51,964 $ 73,628 $ 157,764 $ 238,777
Human Capital Management Services 41,537 31,112 119,304 95,046
Financial Outsourcing Services 2,106 2,768 6,764 9,244
---------------------- -------------------- --------------------- ----------------
$ 95,607 $ 107,508 $ 283,832 $ 343,067
---------------------- -------------------- --------------------- ----------------
Operating contribution:
Staff Augmentation $ 4,897 $ 7,055 $ 14,249 $ 25,580
Human Capital Management Services 1,089 716 3,996 1,919
Financial Services 1,510 2,134 4,290 7,202
---------------------- -------------------- --------------------- ----------------
7,496 9,905 22,535 34,701
---------------------- -------------------- --------------------- ----------------
Consolidated expenses:
Interest, net 4,076 4,889 11,953 15,682
Gain on debt extinguishment -- (9,322) -- (15,858)
Depreciation and amortization 1,004 2,021 2,985 5,894
Corporate general and
administrative expenses 3,550 3,837 11,086 12,686
---------------------- -------------------- --------------------- ----------------
8,630 1,425 26,024 18,404
====================== ==================== ===================== ================
Income (loss) from continuing
operations $ (1,134) $ 8,480 $ (3,489) $ 16,297
====================== ==================== ===================== ================
At September 29, At December 30,
2002 2001
---------------- ---------------
Total assets:
Staff Augmentation $ 97,310 $ 143,009
Human Capital Management Services
28,673 25,965
Financial Services 28,668 45,338
Corporate 25,417 25,697
--------------- --------------------
$ 180,068 $ 240,009
=============== ====================
7. ACCOUNTING FOR BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, Business Combinations ("SFAS 141"), 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 specifies criteria that intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. SFAS 142 eliminates the requirement
to amortize goodwill and intangible assets with indefinite useful lives.
Instead, they will be tested for impairment at least annually in accordance with
the provisions of SFAS 142. SFAS 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
and to their estimated residual values, and reviewed for impairment in
accordance with SFAS 144.
The Company has adopted the provisions of SFAS 141 upon issuance and the
provisions of SFAS 142 as of the beginning of fiscal year 2002. The Company has
evaluated its existing intangible assets and goodwill that were acquired in
prior purchase business combinations and has reclassified $264,000 net carrying
value of goodwill to intangible assets in order to conform to the new criteria
in SFAS 141 for recognition apart from goodwill. The Company has reassessed the
useful lives and residual values of the intangible assets acquired, and has
determined that no amortization period adjustments were necessary.
The intangible assets with definite useful lives are comprised of covenants
not to compete (being amortized over periods ranging from 8 to 10 years) with a
gross carrying amount of $558,000 and accumulated amortization of $343,000 as of
September 29, 2002. The amortization expense for the three months ended
September 29, 2002 was $17,000 and generated a tax benefit of $6,900. The
amortization expense for the nine months ended September 29, 2002 was $50,000
and generated a tax benefit of $20,000. The estimated amortization expense for
the following years is as follows (in thousands):
For year ended 12/29/02 $ 66
For year ended 12/28/03 41
For year ended 12/26/04 41
For year ended 12/25/05 41
For year ended 12/31/06 20
The Company has tested goodwill for impairment in accordance with the
provisions of SFAS 142 as of the beginning of fiscal year 2002. In connection
with the goodwill test, the Company engaged an independent firm to determine the
fair values of its reporting units (as defined by SFAS 142). Based on
management's assessment of the circumstances, considering the firm's findings,
utilizing a discounted cash flow analysis, the Company recognized an impairment
loss of $55.0 million ($43.7 million for Staff Augmentation, $9.4 million for
Financial Outsourcing Services and $1.9 million for Human Capital Management
Services) as a cumulative effect of a change in accounting principle in the
accompanying financial statements during the first quarter of 2002. These
impairment losses relate primarily to the goodwill attributable to staffing
companies acquired by the Company in 1996 and 1997, during which time (i)
staffing companies were customarily valued at higher levels than they currently
command and (ii) the market price of the Company's common stock was
substantially higher than the current market price.
The changes in the carrying amount of goodwill for the nine months ended
September 29, 2002 is as follows (in thousands):
Human
Staff Capital Financial
Augmentation Management Outsourcing Total
------------ ---------- ----------- -----------
Balance as of December 30, 2001 $ 113,783 $ 11,100 $ 9,400 $ 134,283
Goodwill acquired during year 223 -- -- 223
Impairment losses (43,700) (1,900) (9,400) (55,000)
Amounts reclassified to
intangible assets, net (264) -- -- (264)
------------ ---------- ----------- -----------
Balance as of September 29, 2002 $ 70,042 $ 9,200 $ -- $ 79,242
============ ========== =========== ===========
Goodwill amortization for the three and nine months ended September 30,
2001 was $1.1 million and $3.2, respectively, and generated tax benefits of
$65,000 and $204,000, respectively. The following table shows the results of
operations as if SFAS 142 was applied to prior periods (in thousands, except per
share amounts):
Three Months Ended Nine Months Ended
------------------------------------ -- ------------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
---------------- --- --------------- -- ---------------- -- ----------------
Income (loss) before a cumulative effect of a
change in accounting principle, as reported $ (794) $ 4,428 $ (2,720) $ 8,046
Plus:
Goodwill amortization, net of tax -- 984 -- 2,945
---------------- --------------- ---------------- ----------------
Adjusted income (loss) before a cumulative
effect of a change in accounting
principle $ (794) $ 5,412 $ (2,720) $ 10,991
================ =============== ================ ================
Basic income (loss) per common share:
Income (loss) before a cumulative effect
of a change in accounting principle, as
reported $ (0.05) $ 0.27 $ (0.16) $ 0.48
Goodwill amortization, net of tax -- 0.06 -- 0.18
---------------- --------------- ---------------- ----------------
Adjusted income (loss) before a cumulative
effect of a change in accounting
principle $ (0.05) $ 0.33 $ (0.16) $ 0.66
================ =============== ================ ================
Diluted income (loss) per common share:
Income (loss) before a cumulative effect
of a change in accounting principle, as
reported $ (0.05) $ 0.26 $ (0.16) $ 0.48
Goodwill amortization, net of tax -- 0.06 -- 0.17
---------------- --------------- ---------------- ----------------
Adjusted income (loss) before a
cumulative effect of a change in
accounting principle $ (0.05) $ 0.32 $ (0.16) $ 0.65
================ =============== ================ ================
8. ACCOUNTING FOR EXTINGUISHMENT OF DEBT
The Financial Accounting Standard Board ("FASB") issued Statement No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections ("SFAS 145"). SFAS 145 rescinds Statement 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Opinion 30 will now be used to classify
those gains and losses both on a prospective and retrospective basis. The
provisions of SFAS 145 are effective for fiscal years beginning after May 15,
2002, with early adoption of the provisions related to the rescission of
Statement 4 encouraged. As a result, the Company adopted SFAS 145 during the
second fiscal quarter of 2002.
The adoption of SFAS 145 had no impact upon the Company's consolidated
balance sheet or net income in its consolidated statement of operations for any
period, but required a reclassification of the gain on the extinguishment of
debt, net of related income tax effect, for fiscal 2000 and 2001 and the
quarterly periods during such years in which the Company repurchased its debt at
a discount. For these periods, the gain, before any tax effect, has been
recorded as other income and the income (loss) before tax and the provision for
income taxes line items have been adjusted accordingly. The Company's
consolidated statement of operations for the three and nine months ended
September 30, 2001 has been reclassified as described, and the reclassifications
for other periods will be reflected in future quarterly and annual reports of
the Company in which statements for the relevant periods are required to be
included.
9. NEW ACCOUNTING STANDARDS
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). 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 adopted SFAS 144 effective
for calendar year 2002. The impact of the adoption did not have a material
impact on its consolidated financial statements since 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 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 the adoption of SFAS 144 will have
on its financial statements with respect to future disposal decisions, if any.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS 146 will be applied to exit or disposal activities after December 31,
2002 and is not expected to have a material effect on the Company.
10. RECLASSIFICATIONS
Certain reclassifications have been made to conform prior period amounts to the
current period presentation. See notes 7 and 8.
11. CONTINGENCIES
The Company is currently undergoing a payroll tax audit by the Internal
Revenue Service for the fiscal year 1999. The results of this audit are not yet
known.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth below supplements the information found in the
unaudited consolidated financial statements and related notes of COMFORCE
Corporation ("COMFORCE") and its subsidiaries, including COMFORCE Operating,
Inc. ("COI") (collectively, the "Company").
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
provided 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. All such contingent payment obligations have been
satisfied by the Company. 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 generally 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), technical, telecom, healthcare support 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.
Results of Operations
Three Months Ended September 29, 2002 Compared to Three Months Ended September
30, 2001
Net sales of services for the three months ended September 29, 2002 were
$95.6 million, a decrease of 11.1% from net sales of services for the three
months ended September 30, 2001 of $107.5 million. The Company suffered a
decrease in net sales of services in Staff Augmentation and Financial
Outsourcing Services segments, partially offset by an increase in the Human
Capital Management Services segment. Net sales of services in the Human Capital
Management Services segment increased by $10.4 million or 33.5% due to an
increase in its client base. In the Staff Augmentation segment, the decrease of
$21.7 million or 29.4% is principally attributable to the ongoing softness in
corporate spending, particularly in sales to IT, telecom, technical and other
staffing services. Also, as a result of the current economic condition, net
sales of services decreased $662,000 or 23.9% in the Financial Outsourcing
Services segment.
Cost of services for the three months ended September 29, 2002 was 81.6% of
net sales of services as compared to cost of services of 80.3% for the three
months ended September 30, 2001. The cost of services as a percentage of net
sales for the third quarter of 2002 increased from the comparable period in 2001
principally as a result of a decrease in permanent placement fees and a higher
growth in the Human Capital Management Services segment which has a higher cost
of services as a percentage of net sales of services.
Selling, general and administrative expenses as a percentage of net sales
of services were 14.2% for the three months ended September 29, 2002, compared
to 14.0% for the three months ended September 30, 2001. Due to lower sales, as
discussed above, management continued to undertake initiatives to reduce
selling, general and administrative costs, and has been successful in
controlling costs as sales decreased.
Operating income for the three months ended September 29, 2002 was $2.9
million as compared to operating income of $4.0 million for the three months
ended September 30, 2001. This 27.3% decrease in operating income for the three
months ended September 29, 2002 resulted principally from a decrease in sales in
Staff Augmentation and Financial Outsourcing Services segments, partially offset
by a reduction of $1.1 million in goodwill amortization.
The Company's interest expense for the three months ended September 29,
2002 and September 30, 2001 is attributable to the Whitehall Credit Facility,
the Convertible Notes, the 12% Senior Notes due 2007 (the "Senior Notes") and
the PIK Debentures. 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 Whitehall Credit Facility. In September
2001, the Company completed the exchange of $18.0 million principal amount of
PIK Debentures 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 interest expense was lower for the three months ended September 29,
2002 as compared to the three months ended September 30, 2001 due to lower
market interest rates and lower borrowing levels under the Whitehall Credit
Facility as well as the reduction of Senior Notes and PIK Debentures through the
transactions described above.
The income tax benefit for the three months ended September 29, 2002 was
$340,000 on a loss before tax of $1.1 million. The income tax provision for the
three months ended September 30, 2001 was $4.1 million on income before tax of
$8.5 million. Applying SFAS 145 (in accordance with the criteria in APB Opinion
30), the gain on the extinguishment of debt, net of related income tax effect,
for the three months ended September 30, 2001 was recorded as other income
(before any tax effect), which in turn required that the income before tax and
the provision for income taxes line items be adjusted accordingly. The Company
provides for income taxes based upon the estimated effective rate for the
respective fiscal year. The difference between the federal statutory income tax
rate and the Company's effective tax rate relates primarily to the
nondeductibility of a portion of the interest expense associated with the PIK
Debentures and state income taxes, disallowance for travel and entertainment and
2001 amortization expense associated with goodwill that was not deductible.
Nine Months Ended September 29, 2002 Compared to Nine Months Ended September 30,
2001
Net sales of services for the nine months ended September 29, 2002 were
$283.8 million, a decrease of 17.3% from net sales of services for the nine
months ended September 30, 2001 of $343.1 million. The Company suffered a
decrease in net sales of services in Staff Augmentation and Financial
Outsourcing Services segments, partially offset by an increase in the Human
Capital Management Services segment. Net sales of services in the Human Capital
Management Services segment increased by $24.3 million or 25.5% due to an
increase in its client base. In the Staff Augmentation segment, the decrease of
$81.0 million (33.9%) is principally attributable to reduced sales to IT,
telecom, technical and other staffing services customers as a result of the
continuing effects of the soft economy. Also, as a result of the current
economic conditions, net sales of services were lower by $2.5 million (26.8%) in
the Financial Outsourcing Services segment.
Cost of services for the nine months ended September 29, 2002 was 81.4% of
net sales of services as compared to cost of services of 79.1% for the nine
months ended September 30, 2001. The cost of services as a percentage of net
sales for the nine months ended September 29, 2002 increased from the comparable
period in 2001 principally as a result of lower sales (and gross margin
percentages on sales) to telecom and technical customers, a decrease in
permanent placement fees and a higher growth in Human Capital Management
Services which has a higher cost of services as a percentage of net sales of
services.
Selling, general and administrative expenses as a percentage of net sales
of services were 14.5% for the nine months ended September 29, 2002, compared to
14.5% for the nine months ended September 30, 2001. Due to lower sales, as
discussed above, management continued to undertake initiatives to reduce
selling, general and administrative costs and has been successful in controlling
costs as sales decreased. These costs were further reduced by lower commissions
as a result of the decrease of sales discussed above.
Operating income for the nine months ended September 29, 2002 was $8.5
million as compared to operating income of $16.1 million for the nine months
ended September 30, 2001. This 47.5% decrease in operating income for the nine
months ended September 29, 2002 resulted principally from a decrease in sales
and gross margins in Staff Augmentation and Financial Outsourcing Services
segments, partially offset by a reduction of $3.2 million in goodwill
amortization.
The Company's interest expense for the nine months ended September 29, 2002
and September 30, 2001 is attributable to the Whitehall Credit Facility, the
Convertible Notes, the Senior Notes and the PIK Debentures. 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 Whitehall Credit Facility. In September 2001, the Company completed
the exchange of $18.0 million principal amount of PIK Debentures 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 interest
expense was lower for the nine months ended September 29, 2002 as compared to
the nine months ended September 30, 2001 due to lower market interest rates and
lower borrowing levels under the Whitehall Credit Facility as well as the
reduction of Senior Notes and PIK Debentures through the transactions described
above.
The income tax benefit for the nine months ended September 29, 2002 was
$769,000 on a loss before tax of $3.5 million. The income tax provision for the
nine months ended September 30, 2001 was $8.3 million on income before tax of
$16.3 million. Applying SFAS 145 (in accordance with the criteria in APB Opinion
30), the gain on the extinguishment of debt, net of related income tax effect,
for the nine months ended September 30, 2001 was recorded as other income
(before any tax effect), which in turn required that the income before tax and
the provision for income taxes line items be adjusted accordingly. The Company
provides for income taxes based upon the estimated effective rate. As a result
of the Company's revised forecasts in the third quarter of 2002, the expected
tax rate was adjusted to 22.0%. The difference between the federal statutory
income tax rate and the Company's effective tax rate relates primarily to the
nondeductibility of a portion of the interest expense associated with the PIK
Debentures and state income taxes, disallowance for travel and entertainment and
2001 amortization expense associated with goodwill that was not deductible.
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 40 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 contractual commitments associated with
operating agreements and earnout (contingent payment) agreements:
Payments Due By Period (in thousands)
2002 2003 2004-5 Thereafter
------ ------ ------ ----------
Operating Leases (1) $3,337 $2,846 $3,666 $ 4,841
Whitehall Credit Facility -
principal repayments -- 39,303 -- --
Senior Notes - principal
repayments -- -- -- 87,000
PIK Debentures - principal
repayments -- -- -- 11,158
Convertible Notes -
principal repayments -- -- -- 8,446
Earnout agreements 323 -- -- --
------ ------ ------ ---------
Total $3,660 $42,149 $3,666 $111,445
====== ======= ====== ==========
- -----------------------------
(1) Calculated as of December 30, 2001 but not substantially changed since such
time.
The Company also had standby letters of credit outstanding at September 29,
2002 in the aggregate amount of $5.2 million.
During the nine months ended September 29, 2002, the Company's primary
sources of funds to meet working capital needs were from borrowings under the
Whitehall Credit Facility. Cash and cash equivalents increased $406,000 during
the nine months ended September 29, 2002. Cash flows provided by operating
activities of $13.1 million exceeded cash flows used in financing activities of
$10.3 million and cash flows used in investing activities of $2.4 million.
As of September 29, 2002, the Company had outstanding $39.3 million
principal amount under the Whitehall Credit Facility bearing interest at a
weighted average rate of 4.58% per annum. In addition, as of September 29, 2002,
the Company had outstanding $11.2 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 $8.5 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 new PIK Debentures
and Convertible Notes through December 1, 2002 and December 1, 2003,
respectively. To date, the Company has chosen to issue new PIK Debentures and
Convertible Notes to pay interest thereon.
The Company entered into the Whitehall Credit Facility in December 2000 to
provide greater borrowing availability and flexibility. The Whitehall Credit
Facility has been amended several times since it was entered into, most recently
to ensure the Company's compliance with financial covenants at March 31, 2002,
described below and to lessen the requirements through December, 2003. The
Whitehall 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. The Whitehall 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
September 29, 2002, the Company had remaining availability based upon then
outstanding eligible accounts receivable of $17.4 million.
Effective as of May 10, 2002, the Company has entered into an amendment to
the Whitehall Credit Facility to, among other things (i) waive the Company's
non-compliance with the fixed-charge coverage ratio for the period ended March
31, 2002, (ii) reduce the fixed-charge coverage ratio in future periods, and
(iii) increase each level of the applicable rate and LIBOR margins by 0.25%. As
of September 29, 2002, the incremental rate was 3.0%.
The scheduled maturity date of the Whitehall Credit Facility is December
14, 2003. The Company intends to seek to extend the Whitehall Credit Facility or
to seek to obtain alternative financing.
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
September 29, 2002 is net income attributable to the operations of COI.
Accordingly, except for permitted distributions, these assets and net income are
restricted as to their use by COMFORCE. The indenture governing the Senior Notes
imposes restrictions on COI making specified payments, which are referred to as
"restricted payments," including making distributions or paying dividends
(referred to as upstreaming funds) to COMFORCE. Under the indenture, COI is not
permitted to make cash distributions to COMFORCE other than (1) to upstream $2.0
million annually ($1.25 million annually prior to 2000) to pay public company
expenses, (2) to upstream up to $10.0 million to pay income tax related to
deemed forgiveness of PIK Debentures to facilitate the purchase or exchange by
COMFORCE of PIK Debentures at less than par, (3) under certain circumstances in
connection with a disposition of assets, to upstream proceeds therefrom to repay
the PIK Debentures, and (4) to upstream funds to the extent COI meets the
restricted payments test under the indenture.
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.
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 Notes 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 Notes 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
Notes in cash. Its ability to do so is expected to be dependent on its
availability of funds for this purpose, whether through borrowings by COI under
the Whitehall Credit Facility, funds from COI's operations or otherwise, and on
COI's ability to upstream funds in accordance with the restricted payments test
under the indenture for the Senior Notes. COMFORCE's ability to repay the PIK
Debentures and the Convertible Notes at their respective maturity dates in
December 2009, or on any earlier required repayment or repurchase dates, will
also be dependent on such conditions and availability of funds.
Under the indenture, COI is restricted in upstreaming funds to its parent
COMFORCE. Under one interpretation of these restrictive provisions, COI
anticipates that it will have adequate funds eligible for upstreaming to
COMFORCE to pay cash interest that will be due on June 1, 2003. COI plans to
request clarification from the indenture trustee in addressing certain
interpretive issues under the indenture. If the Company's interpretation does
not receive support from the trustee or the Company is otherwise unable to pay
interest under the PIK Debentures or the Convertible Notes when due, then, in
addition to being a default under these instruments, such non-payment would
constitute a default under the Whitehall Credit Facility. Under these
circumstances, the Company's management may take steps designed to prevent a
default from occurring, such as seeking a consent from the holders of the Senior
Notes to upstream funds to pay interest on the Convertible Notes or the PIK
Debentures, or seeking to raise capital at the COMFORCE level (not subject to
upstreaming restrictions) through the issuance of additional capital or by
obtaining a loan to provide necessary funds to satisfy these obligations. No
assurance can be given that the indenture trustee will provide needed comfort to
the Company in interpreting the indenture or that any steps taken to avoid a
default will prove successful, in which case the lenders under the Whitehall
Credit Facility and the holders of the PIK Debentures and Convertible Notes may
exercise remedies available to them.
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.
As of September 29, 2002, approximately $79.2 million, or 44.0%, of the
Company's total assets were goodwill recorded in connection with the Company's
acquisitions. Effective December 31, 2001, the Company ceased recording
amortization expense relating to goodwill amounting to approximately $4.2
million annually upon its required adoption of a new accounting standard (SFAS
142), as described under note 7 to the consolidated financial statements. As
also described under note 7, the Company evaluated the recoverability of
goodwill on its books under the new standards under SFAS 142, resulting in its
write-off of $55.0 million of goodwill in the first quarter of 2002.
The Company was obligated under various agreements to make earn-out
payments to the sellers of companies acquired by the Company and to sellers of
franchised businesses repurchased by the Company, subject to the sellers meeting
specified contractual requirements. During fiscal 2002, the Company made
earn-out payments totaling $323,000. It has no remaining obligation to make
earn-out payments to any person in future periods.
Subject to possible restrictions on COI's ability to distribute sufficient
funds to pay cash interest due on the PIK Debentures in June 2003, as discussed
above and in note 2, management of the Company believes that cash flow from
operations and funds anticipated to be available under the Whitehall Credit
Facility will be sufficient to service the Company's indebtedness and to meet
currently anticipated working capital requirements.
The Company is currently undergoing a payroll tax audit by the Internal
Revenue Service for the fiscal year 1999. The results under this audit are not
yet known.
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
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, information technology 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
Whitehall 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; recently adopted SFAS 142, which requires the Company to evaluate
annually the recoverability of goodwill on its books, could cause the Company to
write-off goodwill in future periods (in addition to the write-off of $55.0
million in the first quarter of 2002), which could have a material adverse
impact on the Company's 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 Whitehall 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, Administration at COMFORCE Corporation, 415
Crossways Park Drive, P.O. Box 9006, Woodbury, New York 11797, telephone
516-437-3300.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 has been disclosed in Item 7A of the
Company's Annual Report on Form 10-K for the year ended December 30, 2001. There
has been no material change in the disclosure regarding market risk.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's chief executive officer and chief
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 adopted
under the Securities Exchange Act of 1934. Based upon that evaluation, the chief
executive officer and chief financial officer concluded that the Company's
disclosure controls and procedures are effective. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
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 30, 2001, there have been no material new legal
proceedings involving the Company or any material developments to the
proceedings described in such 10-K.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 Certification of chief executive officer and chief financial
officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunder duly authorized.
COMFORCE Corporation
By: /s/ Harry V. Maccarrone
------------------------
Harry V. Maccarrone,
Executive Vice President and
Chief Financial Officer
Date: November 13, 2002
CERTIFICATIONS
I, John C. Fanning, Chairman and Chief Executive Officer of COMFORCE
Corporation, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of COMFORCE
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ John C. Fanning
- -------------------------------------
John C. Fanning,
Chairman and Chief Executive Officer
I, Harry V. Maccarrone, Executive Vice President and Chief Financial Officer of
COMFORCE Corporation, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of COMFORCE
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Harry V. Maccarrone
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Harry V. Maccarrone,
Executive Vice President and Chief Financial Officer