| COMFORCE CORP ITEM 1A RISK FACTORS Any investment in our securities involves a high degree of risk |
| You should consider carefully the following information about these risks, together with the other information contained in this report, before you decide to buy our securities |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations |
| If any of the following risks actually occur, our business would likely suffer and our results could differ materially from those expressed in any forward-looking statements contained in this report including those contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 |
| Economic uncertainties could reduce our revenues and gross profit |
| Our results of operations are affected directly by the level of business activity of our clients, which in turn is affected by the level of economic activity in the industries and markets that they serve |
| Global, national and economic uncertainties, as well as unfavorable local and regional economic conditions in some markets in the United States and abroad, may cause our clients or prospective clients to defer hiring contingent workers or reduce spending on the human capital management services and staffing that we provide |
| As a result, we may experience a reduction in the growth of new business as well as a reduction in existing business, which may reduce our revenues and gross profit |
| In addition, reduced demand for our services could increase price competition |
| If, as a result of adverse economic conditions, one or more of our clients enter bankruptcy or liquidate their operations, our revenues and accounts receivable could be adversely affected, and we may lose those clients |
| Competition in our industry could reduce our sales or profitability |
| We face significant competition in the markets we serve and there are few barriers to entry for new competitors |
| The competition among staffing services companies is intense |
| We compete for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, temporary personnel agencies, search companies and other providers of staffing services |
| Some of our competitors may have greater marketing, financial, technology and personnel resources than we do and could offer increased competition |
| Some of our competitors may offer better pricing or superior features in their products and services |
| In addition, competitors offering different products and services could merge or form partnerships in order to provide a broader range of offerings |
| Our clients’ own human resources departments may be competitors to the extent they begin to handle, in house, the operations we perform |
| We expect that the level of competition will be greater in the future and that this competition may require us to reduce our prices and our margins, which could substantially reduce our profitability |
| Potential increase in costs related to being a public company |
| The Company may incur substantial additional costs related to compliance with the provisions of the Sarbanes-Oxley Act |
| These additional costs relate to higher documentary and administrative costs and consulting, audit and legal fees we will incur, as well as for the cost of the audit of our internal controls that will be required for the 2007 fiscal year |
| Significant increases in payroll-related costs could adversely affect our business |
| We are required to pay a number of federal, state, local and foreign payroll and related costs, including unemployment taxes, workers compensation benefits, healthcare benefits, FICA, and Medicare, among others, for our employees and personnel |
| Significant increases in the effective rates of any payroll-related costs likely would have a material adverse effect upon us |
| Costs could also increase as a result of healthcare reforms or the possible imposition of 9 ______________________________________________________________________ [10]Table of Contents additional requirements and restrictions related to the placement of personnel |
| Recent federal and state legislative proposals have included provisions extending health insurance benefits to personnel who currently do not receive such benefits |
| We generally seek to increase fees charged to our clients to cover increases in healthcare, unemployment and other direct costs of services, but our ability to pass these costs to our clients has diminished in recent years |
| There can be no assurance that we will be able to increase the fees charged to our clients in a timely manner and in a sufficient amount if these expenses continue to rise |
| Our inability to increase our fees or adapt to future regulatory changes could have a material adverse effect on our business, operating results and financial condition |
| The profitability of our engagements with clients may not meet our expectations |
| Unexpected costs or delays in client purchases of our services could make our client engagements less profitable than anticipated |
| When making proposals for engagements, we estimate the costs and potential revenue associated with those engagements when determining the pricing |
| Any increased or unexpected costs or unanticipated delays in connection with the performance of these engagements, including delays caused by factors outside our control, could reduce our profit margin |
| For example, our clients may not fully cooperate with us so as to enable us to implement our services in a cost-effective manner |
| Our agreements with our clients, as well as competition in our target markets, may prevent us from passing these increased costs on to our clients |
| We face significant employment liability risk |
| We employ and place people in the workplaces of other businesses |
| An inherent risk of such activity includes possible claims of errors and omissions, misuse of client proprietary information, misappropriation of funds, discrimination and harassment, employment of illegal aliens, theft of client property, other criminal activity, torts or other claims |
| We have policies and guidelines in place to reduce our exposure to such risks |
| However, failure of any employee or personnel to follow these policies and guidelines may result in: negative publicity; injunctive relief; the payment by us of monetary damages or fines; or other material adverse effects upon our business |
| Moreover, we could be held responsible for the actions at a workplace of persons not under our immediate control |
| To reduce our exposure, we maintain worldwide insurance covering general liability, errors and omissions, and employee theft |
| Due to the nature of our assignments, in particular, access to client information systems and confidential information, and the potential liability with respect thereto, we may not be able to obtain insurance coverage in amounts adequate to cover any such liability on acceptable terms |
| Furthermore, we are generally self-insured with respect to workers compensation claims, but maintain excess workers compensation coverage to limit our exposure for amounts over dlra4dtta8 million |
| We maintain reserves for uninsured risks and other potential liabilities, but we may be unable to accurately estimate our exposure |
| In addition, our healthcare staffing services also exposes us to increasing litigation in this area |
| In addition, we face various other employment-related risks not covered by insurance, such as wage and hour laws and employment tax responsibility |
| Any of these liabilities could have a material adverse effect on our business, operating results and financial condition |
| We operate in a complex regulatory environment, and failure to comply with applicable laws and regulations could adversely affect our business |
| The services we provide are subject to a number of laws and regulations, including those applicable to payroll practices, benefits administration, state unemployment and workers compensation regulations, employment practices and data privacy both in the United States and abroad |
| In particular, we could also be impacted by changes in reimbursement regulations by states or the federal government which make it difficult for our healthcare clients to pay us or require us to lower our rates |
| Because our services are provided in states across the United States and in foreign countries, we must perform our services in compliance with the complex legal and regulatory requirements of multiple jurisdictions |
| Some of these laws and regulations may be difficult to ascertain or interpret and may change over time |
| The addition of new services may subject us to additional laws and regulations from time to time |
| Violation of laws and regulations could subject us to fines and penalties or to legal liability, constitute a breach of our client contracts and impair our ability to do business in various jurisdictions or according to our established processes |
| If our reputation suffers as a result of any failure to comply with applicable laws, our ability to maintain our clients and increase our client base will be weakened |
| 10 ______________________________________________________________________ [11]Table of Contents We may be subject to lawsuits and claims, which could have a material adverse effect on our financial condition and results of operations |
| Litigation involving employment practices and workplace conditions is prevalent in the United States, including class actions against employers for allegedly failing to comply with the many federal and state laws and regulations designed to protect the health and safety of workers or to properly classify workers for purposes of their entitlement to overtime or benefits |
| We are currently subject to claims and lawsuits, and we expect to be subject to additional claims and lawsuits in the future |
| Litigation is often costly, unpredictable and time consuming to resolve, and unfavorable results in any lawsuit could potentially have a material adverse effect on our financial condition and results of operations |
| We may not be able to recruit and retain qualified personnel |
| We depend upon the abilities of our staff to attract and retain personnel, particularly technical and professional personnel, who possess the skills and experience necessary to meet the staffing requirements of our clients |
| We must continually evaluate and upgrade our base of available qualified personnel to keep pace with changing client needs and emerging technologies |
| We expect continued competition for individuals with proven technical or professional skills for the foreseeable future |
| If qualified personnel are not available to us in sufficient numbers and upon economic terms acceptable to us, it could have a material adverse affect on our business |
| If we cannot obtain new clients or increase sales to our existing clients, our business will not expand and our revenues will not increase |
| Our future success not only depends on our ability to maintain our current relationships with existing clients, but also to acquire new client relationships and increase sales to our existing clients |
| Our strategies to reach new clients and to expand the range of services purchased by our existing clients may not succeed |
| In the event of bankruptcy of any of our clients, we may be unable to collect our fees, including the recovery of the amount of any wages we have paid to employees for work performed for these clients |
| Because the amount of business we do with large clients each month can be substantial, clients may owe us a significant portion of our total receivables at any one time |
| In the event one of those clients would enter bankruptcy or becomes unable to pay its obligations, we may be unable to collect from that client and our revenues could be adversely affected |
| In addition, with respect to our professional payrolling and staffing services, we pay for the services rendered by those personnel prior to collecting those amounts from our clients |
| Therefore, we are at risk for the entire amount of those wages in addition to our fees |
| If we fail to develop new services, or enhance our existing services, to meet the needs of our existing and future clients, our sales may decline |
| To satisfy increasingly sophisticated client requirements and achieve market acceptance, we must enhance and improve our existing services, and we must also continue to introduce new services |
| Any new services that we offer may not be introduced in a timely manner, and they may not achieve sufficient market acceptance necessary to generate significant revenue |
| If we are unable to successfully develop new services, or enhance our existing services, our sales may decline, and our profitability will decrease |
| Our business will be negatively affected if we are not able to keep pace with rapid changes in technology or if growth in the use of technology in business is not as rapid as in the past |
| Our future success depends, in part, on our ability to develop and implement technology services that anticipate and keep pace with rapid and continuing changes in technology, industry standards and client preferences |
| We have developed and must continually improve our proprietary web-enabled WAND system, which provides an end-to-end solution for the engagement, management and tracking of the contingent workforce |
| We are reliant on third party 11 ______________________________________________________________________ [12]Table of Contents vendors in updating and improving other technologies on which our business is dependent, particularly in our RightSourcing Vendor Management Services program |
| We may not be successful in anticipating or responding to the continuing developments in technology, industry standards and client preferences on a timely and cost-effective basis, and our ideas, or those of our software vendors, may not be accepted in the marketplace |
| In addition, technologies developed by our competitors may make our service offerings noncompetitive or obsolete |
| Any one of these circumstances could significantly reduce our ability to obtain new client engagements or to retain existing client engagements |
| Our business is also dependent, in part, upon continued growth in the use of technology in business by our clients and prospective clients and their employees, and our ability to deliver the efficiencies and convenience afforded by technology |
| If growth in the use of technology does not continue, demand for our services may decrease |
| Use of new technology for commerce generally requires understanding and acceptance of a new way of conducting business and exchanging information |
| Companies that have already invested substantial resources in traditional means of conducting commerce and exchanging information may be particularly reluctant or slow to adopt a new approach that would not utilize their existing personnel and infrastructure |
| The effort to gain technological expertise and develop new technologies in our business requires us to incur significant expenses |
| If we cannot offer new technologies as quickly as our competitors, we could lose market share |
| We also could lose market share if our competitors develop more cost-effective technologies than we offer or develop |
| If our clients or third parties are not satisfied with our services, we may face damage to our professional reputation or legal liability |
| We depend to a large extent on our relationships with our clients and our reputation for high-quality services |
| As a result, if a client is not satisfied with our services, it may be more damaging in our business than in other businesses |
| Our services may contain defects or errors, which could hurt our reputation, result in significant costs to us and impair our ability to sell our services in the future |
| The costs incurred in correcting any defects or errors may be substantial, and would reduce our profitability |
| Moreover, if we fail to meet our contractual obligations, we could be subject to legal liability or loss of client relationships |
| Clients are increasingly filing legal claims against professional service providers, including those in the human resources outsourcing and consulting industries |
| Clients and third parties who are dissatisfied with our consulting services or who claim to suffer damages caused by our services may bring lawsuits against us |
| Defending lawsuits arising out of any of our services could require substantial amounts of management attention, which could adversely affect our financial performance |
| In addition to client liability, governmental authorities may impose penalties with respect to our errors or omissions and may preclude us from doing business in some jurisdictions |
| In addition to the risks of liability exposure and increased costs of defense and insurance premiums, claims arising from our professional services may produce publicity that could hurt our reputation and business |
| Our financial results could be harmed if we are required to expend significant financial and other resources to protect our intellectual property from infringement by third parties |
| Our proprietary technology is an important part of our success, particularly in the Human Capital Management Services segment |
| We rely on a combination of copyrights, trademarks and trade secrets, confidentiality provisions and contractual and licensing provisions to establish and protect our proprietary rights |
| We have registered trademarks for some of our products and services and will continue to evaluate the registration of additional trademarks as appropriate |
| We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to software, documentation, client data and other proprietary information |
| Despite these efforts, it may be possible for unauthorized third parties to copy portions of our products or to reverse engineer or otherwise obtain and use our proprietary information |
| We do not have any patents or patent pending with respect to any of our products or services, including our WAND technology |
| Existing copyright laws afford only limited protection |
| In addition, others may design around our technology or develop substantially equivalent or superior 12 ______________________________________________________________________ [13]Table of Contents proprietary technology, or equivalent products may be marketed in competition with our products, which would substantially reduce the value of our proprietary rights |
| Furthermore, confidentiality agreements between us and our employees or any license agreements with our clients may not provide meaningful protection of our proprietary information in the event of any unauthorized use or disclosure of it |
| Accordingly, the steps we have taken to protect our intellectual property rights may not be adequate and we may not be able to protect our proprietary software in the United States or abroad against unauthorized third party copying or use, which could significantly harm our business |
| If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could reduce our revenues |
| Any significant failure or disruption in our computing, software and communications infrastructure could harm our reputation, result in a loss of clients, and disrupt our business |
| Our computing, software and communications infrastructure is a critical part of our business operations |
| Many of our clients, particularly those in the Human Capital Management Services segment, typically access our services through a standard web browser |
| Our clients depend on us for fast and reliable access to our applications |
| We rely on the expertise of our software development teams for the continued performance of our applications |
| We may experience serious disruptions in our computing, software and communications infrastructure |
| Factors that may cause these types of disruptions include: • human error; • physical or electronic security breaches; • telecommunications outages from third-party providers; • computer viruses; • acts of terrorism or sabotage; • fire, earthquake, flood and other natural disasters; and • power loss |
| Although we back up data stored on our systems at least daily, our infrastructure does not currently include mirroring of data storage and production capacity in more than one geographically distinct location |
| As a result, in the event of a physical disaster, or a significant failure of our computing infrastructure, client data from recent transactions may be permanently lost |
| If our clients experience service interruptions or the loss or theft of client data, we may be subject to financial penalties, financial liability or client losses |
| Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems |
| Security breaches that result in the release of proprietary data of clients could impair our reputation and our revenue |
| Our business involves the use, storage and transmission of clients’ proprietary information |
| Any security breaches could expose us to a risk of loss of this information, litigation and possible liability |
| If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and as a result, someone obtains unauthorized access to client data, our reputation will be damaged, our business may suffer and we could incur significant liability |
| Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target |
| As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures |
| If an actual or perceived breach of our security occurs, the market perception of our security measures could be harmed and we could lose sales and clients |
| 13 ______________________________________________________________________ [14]Table of Contents Restrictions and covenants in our indenture and other financing agreements limit our ability to take actions and impose consequences in the event of a compliance failure |
| The indenture governing our 12prca Senior Notes due December 1, 2007 (the “Senior Notes”) contains a number of significant restrictions and covenants that require, among other things, that: • we do not incur indebtedness or grant a security interest in our assets except in accordance with the covenants and conditions in the indenture; • we do not sell or dispose of our assets except in accordance with the covenants and conditions in the indenture; • the net proceeds from any permitted sale of our assets or our capital stock are applied in accordance with the terms of the indenture to retire indebtedness or for other permitted purposes; and • we do not enter into transactions with affiliates other than in accordance with the indenture |
| These covenants and conditions will affect our operating flexibility by, among other things, substantially restricting our ability to incur expenses and indebtedness, or make acquisitions, that could be used to grow our business |
| Our ability to issue shares of our capital stock will also be limited |
| Our inability to repay or refinance our Senior Notes or the PNC Credit Facility, both of which mature in 2007, could have a material adverse effect on our financial condition |
| Our Senior Notes become due and payable on December 1, 2007 |
| At February 26, 2006, there was dlra46dtta3 million principal amount of Senior Notes outstanding |
| As of the date of this report, we do not have sufficient capital to repay the Senior Notes when they mature and our bank lenders will not be able to increase availability under the PNC Credit Facility to provide the funds needed to repay the Senior Notes at maturity |
| Moreover, the PNC Credit Facility, under which we had dlra48dtta7 million in borrowings outstanding at February 26, 2006, matures on June 24, 2007 |
| 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 |
| Unless we find a source of capital to repay or refinance the Senior Notes, we will be unable to repay either the Senior Notes or the PNC Credit Facility at maturity, which could have a material adverse effect on our financial condition |
| Our credit facility imposes significant expenses and restrictive covenants upon us |
| The PNC Credit Facility imposes various restrictions on our activities without the consent of the lenders, including a prohibition on fundamental changes to us or our subsidiaries, including certain consolidations, mergers and sales and transfer of assets, and limitations on our ability or any of our direct or indirect subsidiaries to grant liens upon our property or assets |
| In addition, under the PNC Credit Facility we must meet certain net worth, debt service coverage and other requirements |
| The PNC Credit Facility includes events of default and provides that, upon the occurrence of certain events of default, payment of all amounts payable under the PNC Credit Facility, including the principal amount of, and accrued interest on, the PNC Credit Facility may be accelerated |
| We could be required to write-off goodwill in future periods if our future operating results suffer |
| In accordance with generally accepted accounting principles, we are required to review our goodwill for impairment at least annually |
| Our goodwill was dlra32dtta1 million at December 25, 2005 |
| Significant assumptions used in this analysis include expected future revenue growth rates and working capital levels, which are based on management’s expectation of future results |
| An unfavorable annual evaluation could cause us to write-off goodwill in future periods |
| We had write-offs of goodwill of dlra96dtta1 million, excluding dlra5dtta9 million relating to discontinued operations, in 2002 and 2003 |
| Any future write-offs could have a material adverse impact on our financial condition and results of operations |
| 14 ______________________________________________________________________ [15]Table of Contents Adverse results in tax audits could result in significant cash expenditures or exposure to unforeseen liabilities |
| We are subject to periodic federal, state, local and foreign income tax audits for various tax years |
| Although we attempt to comply with all taxing authority regulations, adverse findings or assessments made by the taxing authorities as the result of an audit could have a material adverse affect on us |
| Significant foreign currency fluctuations could affect our operating results |
| We conduct our operations in a number of foreign countries and the results of our local operations are reported in the applicable foreign currencies and then translated into US dollars at the applicable foreign currency exchange rates for inclusion in our consolidated financial statements |
| We are subject to exposure for devaluations and fluctuations in currency exchange rates, which, if we are successful in further growing and developing our foreign operations or these devaluations or fluctuations are significant, could potentially affect our investment in these foreign countries as well as on our cash flow and results of operations |
| Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business |
| For example, during 2005, hurricanes Katrina and Rita caused extensive flooding and destruction along the coastal areas of the Gulf of Mexico |
| While we were not significantly and adversely affected by the impact of these specific disasters, other severe weather or natural disasters, acts of war or terrorism or other adverse external events may occur in the future that could have an effect on our business |
| We depend on key personnel, and the loss of the services of one or more of our senior management or a significant portion of our local management personnel could weaken our management team and our ability to deliver quality services and could adversely affect our business |
| Our operations historically have been, and continue to be, dependent on the efforts of our executive officers and senior management, including John C Fanning, our chairman and chief executive officer |
| In addition, we are dependent on the performance and productivity of our respective regional operations executives, local managing directors and field personnel |
| The loss of one or more of these employees could have an adverse effect on our operations, including our ability to maintain existing client relationships and attract new clients in the context of changing economic or competitive conditions |
| Our ability to attract and retain business is significantly affected by local relationships and the quality of service rendered by branch managerial personnel |
| If we are unable to attract and retain key employees to perform these services, our business, financial condition and results of operations could be materially adversely affected |