SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 |
| | For the fiscal year ended December 27, 2009 |
| | OR |
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the transition period from _______ to _______ |
| | |
Commission file number 1-6081
(Exact name of registrant as specified in its charter)
| Delaware | 36-2262248 |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| | |
| 415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York | 11797 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (516) 437-3300
Securities registered pursuant to Section 12(b) of the Act: None
| Title of Each Class | Name of Each Exchange on Which Registered |
| Common stock, $0.01 par value | NYSE Amex |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months or (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $15,562,507.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. At March 19, 2010, there were 17,387,663 shares of common stock, par value $0.01 per share, outstanding.
Documents Incorporated by Reference: Portions of the Registrant’s proxy statement to be filed by April 26, 2010 are incorporated herein by reference in Items 10, 11, 12, 13 and 14.
PART I
ITEM 1. BUSINESS
Overview
COMFORCE Corporation (“COMFORCE”) is a leading provider of outsourced staffing management services that enable Fortune 1000 companies and other large employers to consolidate, automate and manage staffing, compliance and oversight processes for their contingent workforces. We also provide specialty staffing, consulting and other outsourcing services to Fortune 1000 companies and other large employers for their healthcare support, technical and engineering, information technology, telecommunications and other staffing needs. In addition, the Company provides funding and back office support services to independent consulting and staffing companies. COMFORCE Operating, Inc. (“COI”), a wholly-owned subsidiary of COMFORCE®, was formed for the purpose of facilitating certain of the Company’s financing transactions in November 1997. Unless the context otherwise requires, the term the “Company” refers to COMFORCE, COI and all of their direct and indirect subsidiaries, all of which are wholly-owned.
Through a national network of 27 offices (19 company-owned and 8 licensed), the Company provides human capital management and outsourcing services, and recruits and places highly skilled contingent personnel and financing services for a broad customer base. The Company’s labor force consists primarily of financial industry professionals and support personnel, computer programmers, systems consultants, analysts, engineers, technicians, scientists, researchers, healthcare professionals and skilled office support personnel.
Services
We provide outsourcing services, including web-enabled solutions, for the effective procurement, tracking and engagement of contingent or non-employee labor, as well as a wide range of staffing, consulting and financial services. The extensive proprietary database used by the Company coupled with its national reach enable it to draw from a wealth of resources to link highly trained healthcare professionals, computer technicians, engineers and other professionals, as well as clerical personnel, with businesses that need highly skilled labor. Management has designed the Company’s services to give its customers maximum flexibility and maximum choice, including by making its professionals available for engagement on a short-term or long-term basis. The Company’s services permit businesses to increase the volume of their work without increasing fixed overhead costs.
Results are reported by the Company through three operating segments -- Human Capital Management Services, Staff Augmentation and Financial Outsourcing Services. The Human Capital Management Services segment provides consulting services for managing the contingent workforce through its PrO UnlimitedSM subsidiary. The Staff Augmentation segment provides healthcare support, including RightSourcing® Services, technical and engineering, information technology (IT), telecommunications and other staffing services. The Financial Outsourcing Services segment provides funding and back office support services to independent consulting and staffing companies. A description of the types of services provided by each segment follows. See note 17 to our consolidated financial statements for a presentation of segment results.
Human Capital Management Services Segment
We provide Human Capital Management Services through our PrO Unlimited subsidiary. PrO is a leading provider of outsourced staffing management services that enable Fortune 1000 companies and other large employers to consolidate, automate and manage staffing, compliance and oversight processes for their contingent workforces, including independent contractors, temporary workers, consultants, freelancers and, in some cases, returning retirees. PrO’s vendor-neutral business strategy provides comprehensive services for the selection, procurement, management and tracking of the contingent workforce, much of which is provided through its web-enabled proprietary software system.
Rather than competing with traditional staffing firms, PrO acts as a vendor-neutral facilitator, enabling clients to draw on a larger pool of vendors to fill job orders and allowing them to negotiate with multiple staffing suppliers to quickly find qualified personnel at favorable price levels. In contrast to traditional staffing services providers, which recruit and recommend candidates for contingent positions, PrO’s focus is on helping clients manage their diverse relationships with multiple staffing vendors efficiently and cost-effectively by consolidating billing, monitoring vendor performance, coordinating staffing programs and generating a broad range of customized management reports and proprietary Total Quality Management reviews. In addition, PrO offers payrolling services and compliance advisory services.
As many companies continue to face pressure to contain labor costs and manage headcount numbers, the use of contingent staffing as an alternative to more costly long-term employment has expanded substantially. At the same time, large organizations have increasingly come to rely on outsourced human capital management services as they seek to improve the efficiency of their staffing procurement and management processes and enhance the quality and productivity of their contingent workforces. Management believes that the number of companies utilizing contingent labor will continue to grow as companies work to more effectively manage their cost structures, better position themselves to weather business downturns, and maintain streamlined “just-in-time” labor pools.
While PrO focuses on selling its services primarily to Fortune 1000 companies, management believes PrO’s contingent workforce management services are designed for a cross-section of large employers. In most cases PrO Unlimited provides services on-site at their client’s premises. The Company currently provides these services throughout North America as well as in certain locations in Europe and Asia. PrO’s typical client is a Fortune 1000 or other large company that relies upon highly skilled contingent labor to meet important elements of its staffing needs. PrO currently provides the following primary service offerings for its clients:
Vendor Management Solutions:
| | · | Contingent Staffing Management: We provide an onsite vendor-neutral service for procuring contingent employees. This service allows us, on behalf of our clients, to negotiate with multiple independent staffing vendors to help identify and hire qualified candidates in a short time frame at favorable prices. PrO offers its clients consolidated invoicing, electronic time card functions, staffing supplier reviews, headcount and hours tracking, security and background screening and total quality management of the clients’ supplier base. In addition, clients receive access to numerous standard reports that enhance visibility and overall management of their contingent worker population. |
| | | PrOBid and STOR: Through PrOBid, we provide a bidding environment for various staffing projects, and provide project managers with greater information as to project costs, headcount and vendor performance. In addition, through STOR (Standardization & Tracking of Outsourced Resources), we consolidate project data with other contingent staffing data for enterprise-wide reporting and controls, including data for project-based consultants and outsourced workers based offshore that could otherwise not be consolidated with the rest of a client’s non-employee workforce. The combination of PrOBid and STOR is intended to provide our clients with competitive sourcing and comprehensive visibility and tracking for their entire contingent workforces. |
1099 Management Service:
| | | Workers Classification Solutions: We assist clients in avoiding potential liabilities associated with failing to withhold or pay social security taxes, income taxes, unemployment taxes and workers compensation insurance premiums, or with excluding workers from participation in their pension, profit sharing, health insurance and stock option plans. Our programs include: the evaluation of worker status, ongoing education and training, documentation and maintenance, audit support services, professional payrolling services and the development of a customized YourSource™ system. |
| | · | Co-Employment and Fair Labor Standards Act (FLSA) Compliance Consulting: We offer on-going consulting on co-employment issues. Co-employment is a legal doctrine that applies when two businesses exert a degree of control over an employee’s work, so that both businesses may be held liable for complying with wage, hour and benefits laws. In addition, we assist our clients with the proper classification of workers for overtime purposes (FLSA compliance), which is a critical challenge facing many U.S. employers. |
| | | Consultant Consolidation Services: We consolidate and manage invoicing for clients that engage the services of multiple consulting firms or independent contractors. |
Professional Payrolling Services:
| | | Third Party Payrolling for Professional Contractors: We provide an array of customized third party payroll services for professional level workers as part of our contingent workforce strategy for large companies in North America and select international locations. For these companies, PrO employs the workers, pays unemployment taxes and workers compensation insurance premiums, and provides other benefits including health insurance to its eligible employees. |
Staff Augmentation Segment
RightSourcing Services
The Company’s RightSourcing Services program offers cost savings and process improvement to its clients by managing all aspects of their supplemental staffing and temporary labor program. RightSourcing, a value added human capital management program, facilitates the management of all staffing vendors, order process, invoice approval and consolidation. The Company may place its billable employees at its RightSourcing customers in many cases. Value-added services include comprehensive data capture and analysis related to staff augmentation spend and usage including compilation of performance metrics for vendors and contractor staff. Clients also rely on RightSourcing to provide robust logistical management processes to insure compliance with regulatory and governmental requirements. RightSourcing can monitor certifications, manage credentials, and administer the wide range of logistical details associated with each contractor assignment. Whether clients are challenged with a shortage of skilled personnel or find themselves in a difficult economic environment, RightSourcing is designed to provide a significant return on investment. Client management no longer needs to spend their valuable time reviewing unqualified or under qualified candidates. To the contrary, RightSourcing automatically rates candidates so that our clients choose from the most qualified and cost effective resources. Although we continue to focus on the healthcare field in pursuing outsourcing opportunities related to our RightSourcing Services program, the process improvements and overall benefits it provides are not limited to the healthcare field, or any other particular business sector.
Healthcare Support Services
The Company has identified the healthcare support services market as a source of significant growth potential. The Company’s RightSourcing Services program, described above, has also been primarily focused in the healthcare sector. In this sector, both in conjunction with the RightSourcing program and independent of it, the Company provides clinical skills including nurses and other allied health professionals. In addition, the Company also provides specialty medical office support personnel including credentialed coders for the processing of medical reimbursement claims and other personnel in support of insurance claims processing, billing, medical record keeping and utilization review/case management.
The Company’s customers in this area include hospitals, medical offices, multi-physician practices and other healthcare providers, medical billing companies and insurance companies.
Information Technology (IT)
In the IT field, the Company provides highly skilled software developers, technical support personnel, systems consultants, business analysts, software engineers, technical writers and architects and project managers for a wide range of technical assignments, including client server, mainframe, desktop and help desk services, application development projects, and Internet/Intranet projects. The Company hires the workers it makes available to its customers, in most cases through its recruitment process, and performs all of the obligations of an employer, including processing payrolls, withholding taxes and offering benefits. Additionally, the Company provides managed services by bundling teams of technical personnel for clients as a hybrid answer to IT project solutions. Using the managed services approach to staffing, the Company delivers the human capital as needed using a just-in-time model while the client maintains overall IT project direction and responsibility.
The Company’s IT customers operate in diverse industry sectors which include Fortune 500 companies.
Technical, Engineering and Governmental Services
The Company provides technical and engineering services through its Technical Services division to a diverse client base including both governmental and commercial accounts. It provides highly skilled technical and professional personnel specializing in such areas as public health, environmental safety, avionics and aerospace, civil engineering, electronics, and many other fields. The Company’s government services sector deploys both U.S. employees and foreign national employees to approximately 25 countries worldwide. The Technical Services division also provides its clients with draft/design services, technical writers and skilled technicians, in addition to quality control and assurance personnel in manufacturing environments.
The Company’s technical and engineering customers include major private sector commercial and military aerospace companies, federal research facilities and other federal agencies.
Telecom
The Company’s Telecom division consists of two business units that provide services to the telecommunications industry. This represents a traditional supplemental staffing unit and a complete turnkey engineering, material furnishing, equipment installation, and test/turn (EF&I) unit. We prepare site surveys, provide engineering expertise and furnish material for, and install, test and maintain wireless, wire line, OSP, power and microwave equipment. Our clients are equipment manufacturers, telecom carriers and wireless companies. COMFORCE Telecom is TL 9000 and ISO registered.
Other Staffing
In addition to providing contract consulting and other staffing services in the areas described above, the Company provides a broad range of staffing services to its customers, including scientific support to research facilities, accounting support services, general clerical, data entry and billing support, call center staffing and telemarketing. In this respect, the Company is opportunistic in utilizing its many branch offices, sales networks, customer relationships, computer databases and other resources to obtain engagements that are outside of its core businesses. We also fill our customers’ direct hire requirements, either by conducting searches or by providing them with an option to hire our personnel that are currently on assignment with them.
Financial Outsourcing Services Segment
The Company provides funding and back office support services to independent consulting and staffing companies. The Company’s back office services include payroll processing, billing and funding, preparation of various management reports and analyses, payment of all payroll-related taxes and preparation and filing of quarterly and annual payroll tax returns for the contingent personnel employed and placed by independently owned and operated staffing and consulting firms for which the Company earns a fixed fee. Personnel placed by such independent staffing and consulting firms remain employees of such firms. In providing payroll funding services, the Company purchases the accounts receivable of independent staffing firms and receives payments
directly from the firms’ clients. The Company monitors the collection of all receivables related to its financial outsourcing clients; however, the amount of any accounts receivable that are not collected within a specified period after billing is charged back by the Company to its financial outsourcing clients.
Customers
The Company provides staffing, consulting and outsourcing services to a broad range of customers, including banks and financial services firms, computer software and hardware manufacturers, government agencies, aerospace and avionics firms, utilities, biotech companies, insurance companies, pharmaceutical companies, healthcare facilities, and accounting firms. Services to Fortune 1000 companies represent a majority of the Company’s revenues.
The Company generally contracts directly with its Staff Augmentation customers or through vendor management services agreements to provide that the Company will have the first opportunity to supply the personnel required by that customer.
The Company generally invoices its customers weekly, bi-weekly or monthly. The Company typically enters into longer term contracts with its customers. These contracts customarily allow either party to terminate upon a 30-day or other short advance written notice.
During the fiscal year ended December 27, 2009, no single customer accounted for 10% or more of the Company’s revenues. The largest four customers of the Company, in the aggregate, accounted for approximately 24.4% of the Company’s 2009 revenues.
Sales and Marketing
As of December 27, 2009, the Company serviced its customers through a network of 19 company-owned and 8 licensed offices located in 14 states across the United States and its corporate headquarters located in Woodbury, New York. In addition, in many instances, the Company’s non-billable (staff) employees work on-site at its customers’ facilities, including in Europe and Asia. The Company’s sales and marketing strategy is focused on expanding its business with existing customers through cross-selling and by establishing relationships with new customers. The Company solicits customers through personal sales presentations, networking, webcasts and webinars, telephone marketing, direct mail solicitation, referrals from customers, and through the Company’s websites (www.comforce.com and prounlimited.com), and, to a lesser extent, through magazines, trade publications and the like.
In the case of PrO Unlimited, our marketing efforts are conducted at the national level. We utilize a team-oriented approach to the sales process. In addition to our dedicated sales force, who focus on generating leads, PrO’s key operating officers are closely involved in the sales process, from lead generation through pricing and implementation. An important component of PrO’s marketing program is in establishing its profile as an expert on issues related to the management of the contingent workforce. PrO regularly conducts seminars on independent contractor compliance, co-employment and the Fair Labor Standards Act. Senior management maintains an active public relations effort to provide added visibility. We seek to raise PrO’s profile among potential customers by encouraging its executives to write articles in trade and other publications. PrO develops additional sales leads through an ongoing marketing campaign, including through webinars and its website. Our strong relationships with our existing customers also provide a source of referrals to new customers as well as opportunities to cross-sell additional services to existing customers.
In the Staff Augmentation segment, our sales and marketing efforts are generally conducted on a local or regional basis. Our Sales and Resource Managers, Client Service Coordinators and Regional Account Managers are responsible for maintaining contact with existing clients, maximizing the number of requisitions that we will have the opportunity to fill, and then working with the recruiting staff to offer the client the candidates that best fit their specifications. New account targets are chosen by assessing: (1) the need for contract labor within the skill sets provided by the Company; (2) the appropriateness of the Company’s niche products to the client’s needs; (3) the potential growth and profitability of the account; and (4) the
creditworthiness of the client. While the Company’s corporate office assists in the selection of target accounts, the majority of account selection and marketing occurs locally. Although the Company continues to market to its Fortune 1000 client base, it also places a significant marketing focus on faster-growing middle-market companies, governmental agencies and large not-for-profit institutions such as hospitals and research facilities.
Billable Employees
In the Human Capital Management Services segment, PrO provides employer-of-record payrolling services for contingent workers sourced internally by its clients. For these companies, PrO employs the workers, pays unemployment taxes and workers compensation insurance premiums, and provides other benefits including health insurance to eligible employees. These workers may include former independent contractors, returning retirees or other mission-critical workers internally sourced for contingent work. The Company’s compliance expertise helps clients avoid potential litigation and other co-employment issues associated with this workforce.
Within the Staff Augmentation segment, the Company’s success depends significantly on its ability to effectively and efficiently match skilled personnel with specific customer assignments. The Company has established an extensive national resume database of prospective employees with expertise in the disciplines served by the Company. To identify qualified personnel for inclusion in this database, the Company solicits referrals from its existing personnel and customers, actively recruits through the Internet and job boards, business networking sites, and otherwise places advertisements in local newspapers, trade magazines, and its website. The Company continuously updates its proprietary database to reflect changes in personnel skill levels and availability. Upon receipt of assignment specifications, the Company searches the database to identify suitable personnel. Once an individual’s skills are matched to the specifications, the Company considers other selection criteria such as interpersonal skills, availability and geographic preferences to ensure there is a proper fit between the employee and the assignment being staffed. The Company can search its resume database by a number of different criteria, including specific skills or qualifications, to match the appropriate employee with the assignment.
The Company provides assignments with high-profile customers that make use of advanced technology and offers its employees the opportunity to obtain additional experience that can enhance their skills and overall marketability. To attract and retain qualified personnel, the Company also offers flexible schedules and, depending on the contract or assignment, paid holidays, vacation, and certain benefit plan opportunities.
Some customers seek out the Company’s extensive back office and payrolling capabilities, or elect for strategic reasons to outsource these functions, without utilizing the Company’s recruitment capabilities. Although these contingent workers are sourced internally by the Company’s clients, they are nonetheless employees of the Company.
Information Systems
The Company uses the Pure Internet Architecture of PeopleSoft® 9.0 for its back office Human Resource Financial, Reporting and Employee Self Service application software. Utilizing the web-enabled PeopleSoft architecture has enabled the Company to consolidate its back office operations, improve business processes, enhance customer relationships and improve efficiency and productivity.
The Company uses WebPAS® front-office staffing software, a web-based software solution designed specifically for the staffing and recruiting industry. WebPAS combines candidate resumes and client management into one fully relational and centralized database. This software has enabled us to automate and streamline the workflow of the sales, recruiting, staffing and placement process. The Company also uses the software of a third party vendor in its RightSourcing Services program. Separately, the Company’s PrO Unlimited subsidiary has internally developed and maintains its proprietary SaaS WAND® system, which provides an end-to-end solution for the engagement, management and tracking of the contingent workforce. See “Human Capital Management Services Segment” in this Item 1. The Company continuously upgrades the WAND system to incorporate the latest technology and to enhance the functionality of the system enabling PrO to continue as a leader in contingent workforce management. In addition to enhancing the application
functionality, the WAND infrastructure was also upgraded using a multi-tier architecture approach. This approach separates the application into presentation, middle, service, reporting, integration and data layers. In addition to the flexible design approach, the new application also takes advantage of a variety of industry leading edge technologies such as Oracle 10g, Oracle RAC, Informatica, Actuate BIRT, Java, JavaScript, Spring and Hibernate.
Competition
The contingent staffing and consulting industry is very competitive and fragmented. There are relatively limited barriers to entry and new competitors frequently enter the market. The Company’s competitors vary depending on geographic region and the nature of the service(s) being provided. The Company faces competition from larger firms possessing substantially greater financial, technical and marketing resources than the Company and smaller, regional firms with a strong presence in their respective local markets. The Company competes on the basis of price, level of service, quality of candidates and reputation, and may be in competition with many other staffing companies seeking to fill orders for job openings, including minority or women-owned firms that may receive preferential consideration or set asides.
In the Human Capital Management Services segment, PrO acts as a vendor-neutral facilitator, utilizing its proprietary WAND system to coordinate a customer’s multiple staffing relationships, including billing, monitoring vendor performance and generating management reports. PrO faces heightened competition from other solutions companies purporting to offer similar advantages utilizing widely-available software programs. Management believes that to compete in this segment, the Company must not only regularly upgrade its WAND system but provide experienced personnel to manage the process.
In the Staff Augmentation segment, while the unemployment rates may have increased in 2008 and 2009, the availability of high-quality resources at a competitive rate remains one of the principal elements of competition. The Company believes its ability to compete also depends in part on a number of competitive factors outside its control, including the economic climate generally and in particular industries served by the Company, the ability of its competitors to hire, retain and motivate skilled personnel and the extent of its competitors’ responsiveness to customer needs.
Employees
The Company currently employs approximately 532 full-time staff employees in the United States and approximately 22 in Europe and Asia. Non-billable administrative personnel provide management, sales and marketing, back office and other services in support of the Company’s services in all of its segments.
In addition, since the Company is in the business of providing outsourced staffing management services, specialty staffing, consulting and other outsourcing services, it has many billable employees throughout the world, the number of which fluctuates based on operations. Billable employees are employed by the Company on an as-needed basis, dependent on customer demand and are paid only for time they actually work (plus any accrued vacation time, if applicable). The Company maintains a proprietary database of prospective employees with expertise in the disciplines served by the Company.
Licensed Offices
The Company has granted six licensees the right to operate a total of eight licensed offices. The most recent license for a new office was granted in July 1992, and the Company does not expect to grant more licenses. Licensees recruit contingent personnel and promote their services to both existing and new clients obtained through the licensees’ marketing efforts. However, the Company is involved in the determination of the terms under which services are to be offered to its customers, and, with the exception of a single licensee, the Company is the employer of all of the workers placed through these arrangements. As the primary obligor, the Company is fully responsible for the payment of the employees. The Company submits all bills directly to the customers and they are required to remit their payments for services performed directly to the Company. The Company has the ability to refuse to perform services solicited by the licensee that it does not believe are within
the normal scope of its capabilities, or for other reasons if it does not believe the services to be performed comport with the Company’s objectives. The Company and the licensee office bear joint responsibility for collecting the receivables from the customers and jointly bear the risk of loss for uncollected receivables. The licensee earns a variable percentage of the ultimate gross profit based upon the type of services rendered.
Regulations
Contingent staffing and consulting services firms are generally subject to one or more of the following types of government regulations: (1) regulation of the employer/employees; (2) licensing, record keeping and recording requirements; and (3) substantive limitations on operations. We are governed by laws regulating the employer/employee relationship, such as tax withholding and reporting, social security or retirement, anti-discrimination and workers compensation in the United States and in the foreign countries in which we have employment activities, and, in the case of our government contracts, we are further subject to Federal Acquisition Regulations (FAR). In some instances, the Company’s licensees are deemed to be franchisees, and the arrangements the Company enters into with them are subject to regulation, both by the Federal Trade Commission and a number of states. In addition, in the healthcare support sector, the Company is subject to extensive federal and state laws and regulations, as well as the regulations of various public and private healthcare organizations and authorities.
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.
Global economic conditions have created turmoil in the credit and labor markets that could have a significant adverse impact on our operations.
Since the start of the recession in December 2007 and through February 2010, payroll employment has fallen by 8.4 million. The current economic conditions have been marked by dramatic shifts in market conditions and unprecedented intervention by governments throughout the world. Although the American Recovery and Reinvestment Act of 2009 was enacted to provide broad-based relief to stimulate economic activity, some economists predict that additional stimulus funds will be needed to prevent a prolonging or a recurrence of the recession.
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 and national economic uncertainties, as well as unfavorable local and regional economic conditions 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 services that we provide.
When economic activity slows down, customers often reduce their use of contingent staff before undertaking layoffs of their regular employees resulting in decreased demand for contingent workers. Some of our clients have reduced their workforces, including contingent labor. In addition, since employees are also reluctant to risk changing employers, there are fewer openings available and therefore reduced activity in permanent placements as well. Furthermore, the current economic environment may cause some of the vendors we manage as part of our Human Capital Management Services and RightSourcing Services programs to reduce or discontinue operations, which may adversely affect our ability to manage these programs. 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. If the current economic conditions persist or deteriorate, they could also have a significant adverse impact on our operations by:
| | | creating uncertainty in the business environment, which uncertainty would act as a disincentive for businesses to expand their operations; |
| | | decreasing our customers demand for contingent staff in our Staff Augmentation segment and management and payrolling services in our Human Capital Management Services segment; |
| | | adversely affecting our customers’ ability to obtain credit to fund their operations, which in turn would affect their ability to timely make payment on our invoices; and |
| | | creating greater risks to us in providing Financial Outsourcing Services to our customers as well as increasing our costs of providing funding to these customers. |
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, vendor managed 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. In addition, the growth in demand for vendor managed services has put heightened pressure on the margins of staffing services providers, including us.
Some of our contracts are awarded on the basis of competitive proposals which can be periodically re-bid by the client.
There can be no assurance that existing contracts, including with governmental agencies, will be renewed on satisfactory terms or that additional or replacement contracts will be those awarded to us. In the current economic climate, we expect our competitors to bid more aggressively, which could result in our loss of contracts or a reduction in margins in cases in which we seek to retain contracts by lowering our bids. We may not be able to retain clients or market share in the future, and, in light of competitive pressures, we may not be able to remain profitable.
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 control over financial reporting that will be required, under current SEC regulations for our 2010 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 federal (FUTA) and state (SUTA) unemployment taxes, workers compensation benefits, healthcare benefits, FICA (social security), 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.
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, or the nature of future engagements may require that we incur significant costs in preparation of the engagement before we generate revenues under the terms of the engagement. 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 persons submitting false credentials, theft of client property, other criminal activity, torts or other claims. Our contracts with our clients often require that we indemnify them against these kinds of losses, in some cases without limitation as to the amount or type of damages. We have policies and guidelines in place to reduce our exposure to risks for these potential losses. 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. For example, our contracts with vendor management services customers frequently require that we confirm that the suppliers of personnel or like service providers maintain insurance coverage as required by the customer, and our failure to require these providers to maintain the required insurance could result in liability to us for any losses our customers incur as a result of this failure.
To reduce our exposure, we maintain general liability insurance, property insurance, automobile insurance, fidelity insurance, errors and omissions insurance, professional liability insurance, fiduciary insurance and directors’ and officers’ liability insurance for domestic and foreign operations as management deems appropriate and prudent. However, we do not maintain employer practices insurance due to its high cost and limited coverage, which means we are not insured for many employment claims, such as harassment and discrimination claims. We may in some cases be held responsible for defending a client against claims raised by one of our billable employees (or former billable employees) alleging wrongful acts by the client’s employee.
Further, 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. Our healthcare staffing services exposes us to potential malpractice claims, a growing area of litigation. 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 $3.5 million. We maintain reserves for uninsured risks and other potential liabilities, but we may be unable to accurately estimate our exposure. 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 throughout 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.
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, these clients 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 bad debt expense and 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 update and 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 use WAND for Human Capital Management Services through PrO Unlimited, but are reliant on a third party software for our RightSourcing Services program. In addition to the RightSourcing Service program, we are reliant on third party vendors in updating and improving other technologies on which our business is dependent. 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, whether utilizing WAND or third party software, 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. If the reputation of our services declines, our ability to maintain our clients and increase our client base will be weakened.
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. As we expand our business globally, we also face increasing costs in copyrighting proprietary materials and registering trademarks in foreign countries. In these cases, we face the risk that we will not receive copyright protection, or that local copyright laws will not be enforced, and the risk that we will be unable to protect (or even use) our U.S. registered or common law trademarks in some countries.
In addition, others may design around our technology or develop substantially equivalent or superior 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:
| | | physical or electronic security breaches; |
| | | telecommunications outages from third-party providers; |
| | | acts of terrorism or sabotage; |
| | | fire, earthquake, flood and other natural disasters; and |
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.
Restrictions and covenants under our bank credit facility and other financing agreements limit our ability to take actions and impose consequences in the event of a compliance failure.
Our $95.0 million Revolving Credit and Security Agreement (the “PNC Credit Facility”) with PNC Bank, National Association, as a lender and administrative agent (“PNC”), imposes various restrictions on our activities without the consent of the lenders, including:
| | | prohibiting us from incurring indebtedness or granting security interests in our assets except in accordance with the covenants and conditions in the PNC Credit Facility; |
| | | prohibiting us from selling or disposing of our assets except in accordance with the covenants and conditions in the PNC Credit Facility; |
| | | prohibiting fundamental changes such as consolidations, mergers and sales and transfer of assets, and limiting our ability or any of our direct or indirect subsidiaries to grant liens upon our property or assets; |
| | | requiring us to meet certain net worth, debt service coverage and other financial requirements; and |
| | | entering into transactions with affiliates other than in accordance with the indenture. |
These covenants and conditions 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 is also limited.
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. See “Financial Condition, Liquidity and Capital Resources” in Item 7.
Our inability to repay or refinance or extend the PNC Credit Facility at its maturity would have a material adverse effect on our financial condition.
The PNC Credit Facility, under which we had $61.0 million in borrowings outstanding at March 7, 2010, matures on November 2, 2012. Our inability to repay, refinance or extend the PNC Credit Facility at its
maturity would have a material adverse effect on our financial condition. We cannot predict whether capital will be available to us with interest rates and on terms acceptable to us, if at all, when the PNC Credit Facility matures.
Shares eligible for future sale may cause the market price for our common stock to decline even if our business is doing well.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline. A substantial number of shares of our common stock are held by persons other than affiliates. In addition, as of the end of fiscal 2009, approximately 21.0 million shares of common stock or equivalent non-voting preferred shares are issuable to a trust in which John C. Fanning, our Chairman and Chief Executive officer, is the beneficiary, and a limited partnership of which Harry V. Maccarrone, our Executive Vice President and Chief Financial Officer, is the general partner and members of Mr. Fanning’s family are limited partners. Subject to some limitations on the holder’s rights, the Company’s Series 2003A Preferred Stock, the Series 2003B Preferred Stock and the Series 2004A Preferred Stock, each of which continue to cumulate dividends, are convertible into these common or non-voting shares at conversion prices ranging from $0.54 to $1.70, which could have a potentially depressing effect on the market price of the Company’s common stock. See notes 11 and 18 to our consolidated financial statements.
We could be required to write-off additional 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. Significant assumptions used in this analysis include expected future revenue growth rates, operating margins, working capital levels and tax rates, which are based on management’s expectation of future results. In the fourth quarter of 2009, we wrote-off $16.1 million of goodwill in the Staff Augmentation segment, principally due to decreased sales and cash flows during 2009 and to lower projected cash flows in future periods than previously anticipated to occur prior to the recession. We previously had write-offs of goodwill of $96.1 million, excluding $5.9 million relating to discontinued operations, in 2002 and 2003. Unfavorable evaluations in future periods could cause us to write-off additional goodwill. Continuation of current unfavorable economic conditions could heighten the risk of future write-offs, and significant write-offs could have a material adverse impact on our financial condition and results of operations.
Adverse results of 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. As described under “State Tax Audit” in Item 3 of this report and “Recent Developments” in Item 7 of this report, we recently settled a state tax examination related to certain non-income related business taxes for $2.8 million. Some state regulatory and taxing authorities appear to us to be more aggressive in their positions, suggesting in some cases an effort to stem declines in tax revenues or close state budget shortfalls. Federal regulators may also pursue positions and collections more aggressively to the extent of declining tax revenues.
Significant foreign currency fluctuations could affect our operating results and the clients that we service.
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 U.S. 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, or our willingness to continue operations in countries in which the risk of loss in currency transactions outweighs the potential profit from our these operations. These risks are heightened in the current volatile economic environment,
including the recent volatility in the value of the U.S. dollar and other currencies worldwide and instability in the credit markets.
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.
The loss of the services of key members of our senior management team or any other key management and operational personnel could adversely affect our business.
Our operations historically have been, and continue to be, dependent on the efforts of the executive team in our Woodbury headquarters, as well as on the performance and productivity of our key personnel with our PrO Unlimited subsidiary and other subsidiaries and divisions including regional operations executives, branch managing directors and field personnel. John Fanning, our Chairman and Chief Executive Officer, age 78, has experienced health issues that have caused him to reduce his work load. He has delegated significant day-to-day responsibilities to other officers, principally Harry V. Maccarrone, Executive Vice President, Chief Financial Officer, Robert Ende, Senior Vice President, Finance, and, as relates to the Company’s PrO Unlimited subsidiary, Andrew Shultz, its President. The loss of key employees, such as those named above who have assumed greater responsibilities, could have an adverse effect on our operations, including our ability to maintain existing client relationships and attract new clients, particularly in the current economic climate.
In addition, 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.
The Company’s stock price may be volatile and investors may not be able to resell shares they purchase at their purchase price.
The stock market has experienced and may in the future experience extreme volatility that has often been unrelated to the operating performance of particular companies. Broad market fluctuations may adversely affect the market price of the Company's common stock. The Company's stock price has in the past, and could in the future, fluctuate as a result of a variety of factors, including factors beyond the Company's control, including:
| | | the relatively low float of the Company's common stock caused, among other reasons, by the holdings of the Company's principal shareholders; |
| | | adverse general economic conditions, including withdrawals of investments in the stock markets generally and a tightening of credit available to potential acquirers of business, that result in lower average prices being paid for public company shares and lower valuations being placed on businesses; |
| | | other domestic and international macroeconomic factors unrelated to the Company's performance; |
| | | the Company's failure to meet the expectations of the investment community; |
| | | industry trends and the business success of the Company's customers; |
| | | fluctuations in the Company's results of operations; and |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company leases all of its office space and owns no real estate. Excluding the Company’s headquarters, these leases are for office space ranging in size from small shared 1,000-square foot executive suites to facilities exceeding 10,000 square feet in size. The remaining terms under the Company’s leases range from less than six months to 11 years. The Company’s current headquarters in Woodbury, New York occupies approximately 38,000 square feet of space in two facilities under separate leases that expire on May 31, 2010. Upon expiration of the existing Woodbury leases, we are scheduled to move to a 37,000 square foot headquarters facility in Bethpage, New York under a new lease we entered into in February 2010. The new lease provides for a term of 11 years, subject to termination at our option after five years if specified conditions are satisfied. In some instances our full-time staff employees work at the client’s site for which we do not incur any rental costs.
The Company believes that its current facilities and proposed new facilities are adequate for its present and reasonably anticipated future business requirements. The Company does not anticipate difficulty locating additional facilities, if needed.
ITEM 3. LEGAL PROCEEDINGS
Lake Calumet Matter: In November 2003, the Company received a general notice letter from the United States Environmental Protection Agency (the “U.S. EPA”) that it is a potentially responsible party at Chicago’s Lake Calumet Cluster Site, which for decades beginning in the late 19th/early 20th centuries had served as a waste disposal site. In December 2004, the U.S. EPA sent the Company and numerous other companies special notice letters requiring the recipients to make an offer by a date certain to perform a remedial investigation and feasibility study (RI/FS) to select a remedy to clean up the site. The Company’s predecessor, Apeco Corporation (“Apeco”), a manufacturer of photocopiers, allegedly sent waste material to this site. The State of Illinois and the U.S. EPA have proposed that the site be designated as a Superfund site. The Company is one of over 500 potentially responsible parties most of which may no longer be in operation or viable to which notices were sent, and the Company has joined a working group of more than 175 members representing potentially responsible parties (the “PRP working group”) for the purpose of responding to the U. S. EPA and the Illinois Environmental Protection Agency (the “Illinois EPA”).
The U.S. EPA and Illinois EPA currently allege that combined past costs for work at the site are close to $20.0 million and estimates to finish the cover remedy at the landfill portion of the site range between $10.0 million and $16.0 million. Although the total volume of waste at the site has not been finalized, a draft interim allocation lists the Company’s total contribution of waste at the site at 13,904 gallons representing slightly less than 0.5% of current total volume estimates. The Company recorded accruals representing the probable costs in connection with this matter of $150,000 in the fourth quarter of 2009.
Presently, the Illinois EPA has taken the lead in negotiating with the PRP working group at the site. The Illinois EPA has also begun but not completed remedial activities directed toward placing an engineered cover to cap the site. Recent discussions between the PRP working group and the Illinois EPA indicate that the agency is seeking a settlement for past costs and either funds to complete the cover remedy at the landfill portion of the site or an agreement by the PRP working group that it will complete the remedy.
The Company has made inquiries of the insurance carriers for Apeco to determine if it has coverage under old insurance policies. No assurance can be given that the costs to the Company to resolve this claim will be within management’s estimates.
State Tax Audit: In January 2010, the Company settled, for $2.8 million, a long-running state tax examination of certain business taxes covering the period from January 2002 through December 2009. In this examination, the Company vigorously defended its filed tax return positions, which it continues to believe were
proper and supportable. However, the Company incurred significant professional costs in the examination process over a period of approximately five years and, in the face of incurring significant additional professional costs and satisfying state bonding requirements, we decided to end the examination by accepting settlement terms. The Company previously recorded accruals in cost of services in connection with this matter, including $1.5 million in the second and third quarters of 2009 and $100,000 in prior years. The resolution of this matter resulted in an additional accrual in the fourth quarter of 2009 of $1.2 million.
Other Matters: The Company is also a party to contract and employment-related litigation matters, and audits of state and local tax returns arising in the ordinary course of its business. In the opinion of Management, the aggregate liability, if any, with respect to such matters will not materially adversely affect our financial position, results of operations, or cash flows. The Company expenses legal costs associated with contingencies when incurred. The Company maintains general liability insurance, property insurance, automobile insurance, fidelity insurance, errors and omissions insurance, professional insurance, fiduciary insurance, and directors’ and officers’ liability insurance for domestic and foreign operations as management deems appropriate and prudent. The Company is generally self-insured with respect to workers compensation, but maintains excess workers compensation coverage to limit its aggregate exposure to losses from such claims.
ITEM 4. [RESERVED]
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price and Dividends
The Company’s Common Stock is traded on the NYSE Amex (formerly, NYSE Alternext U.S. and, prior thereto, the American Stock Exchange) (NYSE Amex: CFS). The high and low reported sales prices for the Common Stock for the periods indicated were as follows:
| Fiscal Year | | Quarter | | High ($) | | | Low ($) | |
| | | | 1.70 | | | 0.01 | (1) | |
| | | | | 1.50 | | | 1.13 | | |
| | | | | 1.75 | | | 1.16 | | |
| | | | | 1.47 | | | 1.03 | | |
| | | | | | | | | | |
| | | | 2.65 | | | 1.20 | | |
| �� | | | | 2.19 | | | 1.60 | | |
| | | | | 2.05 | | | 0.70 | | |
| | | | | 1.65 | | | 0.52 | | |
(1) Management considers this single after hours trade on an at-the-market sell order without a minimum price to have been an aberration, as the closing price reported on NYSE Amex for that day was $0.90 and the opening price the following day was $0.87.
The closing price of the Common Stock of the Company on March 19, 2010 was $1.15 per share. As of such date, there were approximately 3,700 stockholders of record and 11,971,179 shares of Common Stock held by non-affiliates. The aggregate market value of the voting stock held by non-affiliates of the registrant on March 19, 2010 was $13,766,856.
No dividends were declared or paid on the Common Stock during 2009. The terms of the PNC Credit Facility effectively prohibit the payment of dividends. In addition, until undeclared, cumulated dividends on its Series 2003A, 2003B and 2004A Preferred Stock (approximately $6.0 million in the aggregate at December 27, 2009) are fully paid, no dividends are permitted to be paid on Common Stock. Accordingly, the Company does not anticipate that it will pay cash dividends on its Common Stock for the foreseeable future.
Equity Compensation Plan Information
The following table describes options and warrants issued as part of the Company’s equity compensation plans at the end of fiscal 2009.
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column). |
| Equity compensation plans approved by security holders (1) | | 2,655,000 | | $ 2.05 | | 315,000 |
| Equity compensation plans not approved by security holders | | - | | - | | - |
| Total | | 2,655,000 | | $ 2.05 | | 315,000 |
(1) At December 27, 2009, the Company had two equity compensation plans that had been approved by stockholders, the Long-Term Stock Investment Plan (the “1993 Plan”) and the 2002 Stock Option Plan (the “2002 Plan”). Securities shown as being issuable pursuant to outstanding options, warrants and rights in the first column represent option grants made under the 1993 Plan and the 2002 Plan. No options or other rights have been issuable under the 1993 Plan since December 31, 2002. Accordingly, the number of securities shown in the third column as being available for future issuance includes only the shares of common stock remaining available for issuance under the 2002 Plan upon exercise of options or other rights that may be granted thereunder in future periods. At the Company’s 2006 annual meeting of stockholders, the stockholders approved the increase in the number of shares issuable under the 2002 Plan from 1,000,000 to 2,000,000.
Convertible Instruments
The Company has outstanding 6,148 shares of Series 2003A Convertible Preferred Stock, 513 shares of Series 2003B Convertible Preferred Stock and 6,737 shares of Series 2004A Convertible Preferred Stock (collectively, “Series Preferred Stock”). These shares of Series Preferred Stock are convertible into common stock (or, in certain circumstances, into a participating preferred stock which in turn will be convertible into common stock at the same effective rate). The three classes of Series Preferred Stock are substantially identical except that the conversion price is $1.05 per share for the Series 2003A Preferred Stock, $0.54 per share for the Series 2003B Preferred Stock and $1.70 per share for the Series 2004A Preferred Stock. The conversion price is the price at which a holder of shares of Series Preferred Stock may convert such instruments into common stock (or participating preferred stock). Each share of Series Preferred Stock has a face amount of $1,000, has no voting rights and bears annual cumulative dividends of $75 per share (7.5% per annum). See “Financial Condition, Liquidity and Capital Resources” in Item 7 and notes 11 and 18 to our consolidated financial statements for a discussion of the Series Preferred Stock. If all of the outstanding shares of Series Preferred Stock were converted into common stock, the Company would have outstanding 15.7 million additional shares of common stock.
Until its repayment in full at maturity on December 2, 2009, the Company also had outstanding the Company’s 8% Convertible Subordinated Note (the “Convertible Note”) with outstanding principal of $1.9 million. Through the date of maturity, the Convertible Note was convertible into common stock at $1.70 per share (or, in certain circumstances, into a participating preferred stock which in turn was convertible into common stock at the same effective rate). See “Financial Condition, Liquidity and Capital Resources” in Item 7 and notes 9 and 18 to our consolidated financial statements for a discussion of the Convertible Note and the interests of related parties therein.
| ITEM 6. SELECTED FINANCIAL DATA |
The following table sets forth selected historical financial data of the Company as of and for each of the five fiscal years in the period ended December 27, 2009. The Company derived the statement of operations and balance sheet data as of and for each of the five fiscal years in the period ended December 27, 2009 from its audited historical consolidated financial statements (in thousands, except per share data).
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Statement of Operations Data: | | | | | | | | | | | | | | | |
| Net sales of services | | $ | 563,788 | | | $ | 606,636 | | | $ | 586,685 | | | $ | 567,821 | | | $ | 539,841 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| Cost of services | | | 483,420 | | | | 510,188 | | | | 494,104 | | | | 478,927 | | | | 460,581 | |
| Selling, general and administrative expenses | | | 69,732 | | | | 77,129 | | | | 74,012 | | | | 68,821 | | | | 59,919 | |
| Goodwill impairment (1) | | | 16,100 | | | | - | | | | - | | | | - | | | | - | |
| Depreciation and amortization | | | 3,599 | | | | 3,156 | | | | 2,803 | | | | 3,095 | | | | 3,700 | |
| Total costs and expenses | | | 572,851 | | | | 590,473 | | | | 570,919 | | | | 550,843 | | | | 524,200 | |
| Operating (loss) income | | | (9,063 | ) | | | 16,163 | | | | 15,766 | | | | 16,978 | | | | 15,641 | |
| Other (expense) income: | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | (2,132 | ) | | | (4,400 | ) | | | (7,669 | ) | | | (9,369 | ) | | | (10,744 | ) |
| Loss on debt extinguishment (2) | | | - | | | | (278 | ) | | | (443 | ) | | | (169 | ) | | | (336 | ) |
| Other income (expense), net | | | 150 | | | | (1,064 | ) | | | 644 | | | | 11 | | | | 186 | |
| | | | (1,982 | ) | | | (5,742 | ) | | | (7,468 | ) | | | (9,527 | ) | | | (10,894 | ) |
| (Loss) income from continuing operations before income taxes | | | (11,045 | ) | | | 10,421 | | | | 8,298 | | | | 7,451 | | | | 4,747 | |
| Provision (benefit) for income taxes | | | 1,106 | | | | 4,535 | | | | 3,309 | | | | 3,373 | | | | (1,455 | ) |
| (Loss) income from continuing operations | | | (12,151 | ) | | | 5,886 | | | | 4,989 | | | | 4,078 | | | | 6,202 | |
| Income from discontinued operations, net of income taxes (3) | | | - | | | | - | | | | 1,000 | | | | - | | | | 70 | |
| Net (loss) income | | $ | (12,151 | ) | | $ | 5,886 | | | $ | 5,989 | | | $ | 4,078 | | | $ | 6,272 | |
| | | | | | | | | | | | | | | | | | | | | |
| Dividends on preferred stock | | | 1,005 | | | | 1,005 | | | | 1,005 | | | | 1,005 | | | | 1,005 | |
| Net (loss) income available to common stockholders | | $ | (13,156 | ) | | $ | 4,881 | | | $ | 4,984 | | | $ | 3,073 | | | $ | 5,267 | |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted (loss) income per share: | | | | | | | | | | | | | | | | | | | | |
| (Loss) income from continuing operations | | $ | (0.76 | ) | | $ | 0.18 | | | $ | 0.16 | | | $ | 0.13 | | | $ | 0.21 | |
| Income from discontinued operations | | | - | | | | - | | | | 0.03 | | | | - | | | | - | |
| Net (loss) income available to common stockholders | | $ | (0.76 | ) | | $ | 0.18 | | | $ | 0.19 | | | $ | 0.13 | | | $ | 0.21 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet data: | | | | | | | | | | | | | | | | | | | | |
| Working capital | | $ | 16,609 | | | $ | 23,314 | | | $ | 34,513 | | | $ | 32,345 | | | $ | 43,163 | |
| Trade and funding receivables, net | | | 133,245 | | | | 149,704 | | | | 131,264 | | | | 127,249 | | | | 118,916 | |
| Goodwill | | | 15,973 | | | | 32,073 | | | | 32,073 | | | | 32,073 | | | | 32,073 | |
| Total assets | | | 165,285 | | | | 201,736 | | | | 183,384 | | | | 175,138 | | | | 173,978 | |
| Total debt, including current maturities | | | 56,600 | | | | 69,978 | | | | 83,858 | | | | 89,770 | | | | 105,792 | |
| Stockholders’ deficit (4) | | | (15,459 | ) | | | (3,833 | ) | | | (9,503 | ) | | | (18,715 | ) | | | (23,031 | ) |
| | (1) | The Company recorded a goodwill impairment charge of $16.1 million during the fourth quarter of 2009 as a charge against operating income in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Others. |
| | (2) | During 2005, the Company repurchased some of its then outstanding 12% Senior Notes due December 1, 2010 (the “Senior Notes”), and, as a result of these repurchases, the Company recognized a loss on debt extinguishment of $336,000, net of $178,000 of deferred financing costs. During 2006, the Company repurchased and redeemed additional Senior Notes, and, as a result of these repurchases and redemptions, the Company recognized a loss on debt extinguishment of $169,000, net of $128,000 of deferred financing costs. During 2007, the Company redeemed and repurchased additional Senior Notes, and, as a result of the redemption and repurchase, the Company recognized a loss on debt extinguishment of $443,000, net of $137,000 of deferred financing costs. During 2008, the Company redeemed and repurchased all remaining Senior Notes, and, as a result of the redemption and repurchase, the Company recognized a loss on debt extinguishment of $278,000, net of $108,000 of deferred financing costs. |
| | (3) | Effective March 1, 2004, the Company sold its interest in two telecom subsidiaries in the Staff Augmentation segment. In accordance with ASC Topic 360, Property, Plant, and Equipment, the results of operations from the sale of this telecom operation have been reclassified as discontinued operations. The Company initiated a lawsuit against the purchaser of this telecom operation and, following mediation and extended negotiations, the parties reached a settlement in September 2007 under which $1.0 million was received by the Company in the fourth quarter of 2007. |
| | (4) | In June 2006, the Financial Accounting Standards Board (“FASB”) issued guidance now codified as ASC Topic 740, Income Taxes. Under ASC Topic 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the tax position. The tax benefits recognized in the financial statements from such tax position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company adopted the provisions of ASC Topic 740 effective January 1, 2007. The impact upon adoption was to decrease accumulated deficit by approximately $3.4 million and to decrease accruals for uncertain tax positions and related penalties and interest by a corresponding amount. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion set forth below supplements the information found in the audited consolidated financial statements and related notes of COMFORCE Corporation (“COMFORCE”) and its wholly-owned subsidiaries, including COMFORCE Operating, Inc. (“COI”) (collectively, the “Company”).
Overview
Staffing personnel placed by the Company are employees of the Company. The Company is responsible for employment related expenses for its employees, including workers compensation, unemployment compensation insurance, Medicare and Social Security taxes and general payroll expenses. The Company offers health, dental, 401(k), disability and life insurance to its eligible employees. Staffing and consulting companies, including the Company, typically pay their billable employees for their services before receiving payment from their clients, resulting in significant outstanding receivables.
The Company reports its results through three operating segments -- Human Capital Management
Services, Staff Augmentation and Financial Outsourcing Services. The Human Capital Management Services segment primarily provides staffing management services that enable Fortune 1000 companies and other large employers to consolidate, automate and manage staffing, compliance and oversight processes for their contingent workforces. The Staff Augmentation segment provides healthcare support services, technical and engineering, information technology, telecommunications and other staffing needs. The Financial Outsourcing Services segment provides funding and back office support services to independent consulting and staffing companies.
As reported by the Bureau of Labor Statistics (U.S. Department of Labor) in a report released March 5, 2010, the unemployment rate was 9.7% in February 2010. Job losses continued in construction and information, while employment continued to increase in contingent staffing. However, nonfarm payroll employment continued to decline slightly in February 2010 (by 36,000) and the number of long-term unemployed has remained fairly constant since December 2009 at 6.1 million. Since the start of the recession in December 2007 through February 2010, payroll employment has fallen by 8.4 million.
While the staffing industry has been significantly and adversely affected by current economic conditions and weak labor markets, the Department of Labor report offers an indication that the staffing industry may be seeing the beginning of a recovery, however modest. The contingent staffing sector continued to show improvement in February 2010 with 48,000 jobs added. Since reaching a low point in September 2009, employment in the contingent staffing sector has risen by 284,000. Management continues to closely monitor economic conditions and government responses.
The Company recorded a goodwill impairment charge of $16.1 million in the Staff Augmentation segment in the fourth quarter of 2009 principally due to decreased sales and cash flows during 2009 and to lower projected cash flows in future periods than previously anticipated to occur prior to the recession. See “Critical Accounting Policies and Estimates--Goodwill Impairment” in this Item 7.
We are also continuing our efforts to contain or reduce our general and administrative expenses. In addition, the impact of the current credit markets on our interest expense through the third quarter of 2009 was limited, but under the amended and restated PNC Credit Facility that became effective November 2, 2009, our interest rates increased and we are incurring additional costs and fees in that connection. See “Financial Condition, Liquidity and Capital Resources” in this Item 7 and note 9 to our consolidated financial statements for a discussion of the terms of the PNC Credit Facility.
In January 2010, the Company settled, for $2.8 million, a long-running state tax examination of certain non-income related business taxes covering the period from January 2002 through December 2009. In this examination, the Company vigorously defended its filed tax return positions, which it continues to believe were proper and supportable. However, the Company incurred significant professional costs in the examination process over a period of approximately five years and, in the face of incurring significant additional professional costs and satisfying state bonding requirements, we decided to end the examination by accepting settlement terms. The Company previously recorded accruals in cost of services in connection with this matter, including $1.5 million in the second and third quarters of 2009 and $100,000 in prior years. The resolution of this matter resulted in an additional expense of $1.2 million in the fourth quarter of 2009.
At its maturity on December 2, 2009, the Company repaid, in cash, the outstanding principal of $1.9 million plus interest accrued since June 1, 2009 of $74,389 under the Company’s Convertible Note. Fanning CPD Assets, LP (the “Fanning CPD Partnership”), a limited partnership in which John C. Fanning, the Company’s Chairman and Chief Executive officer, held an 82.7% economic interest, was the holder of the Convertible Note until its repayment in full at its maturity. Following repayment of the Convertible Note, the Fanning CPD Partnership was terminated and its assets, including the holdings in Preferred Stock described below, were distributed to its partners. See “Convertible Instruments” in Item 5 and notes 9 and 18 to our consolidated financial statements.
John Fanning, our Chairman and Chief Executive Officer, age 78, has experienced health issues that have caused him to reduce his work load. He has delegated significant day-to-day responsibilities to other officers, principally Harry V. Maccarrone, Executive Vice President, Chief Financial Officer, Robert Ende,
Senior Vice President, Finance, and, as relates to the Company’s PrO Unlimited subsidiary, Andrew Shultz, its President. In addition, the Board has established an executive committee consisting of Mr. Fanning, Mr. Maccarrone and Mr. Robinett, an independent director, to address policy questions that may arise between meetings of the Board, and to ensure that the Company will have a decision-making body in place as needed.
Results of Operations
Fiscal year ended December 27, 2009 compared to fiscal year ended December 28, 2008.
Net services for the year ended December 27, 2009 were $563.8 million, which represents a 7.1% decrease from the $606.6 million in net sales of services recorded for the year ended December 28, 2008. In the Staff Augmentation segment, net sales of services decreased $46.8 million, or 21.9%, reflecting a decrease in clients’ demand for services in this segment and a reduction in clients serviced. Net sales of services in the Financial Outsourcing Services segment decreased $1.2 million, or 37.7%, due to a reduction of clients it services and reduced volume at existing clients. This decrease was partially offset by an increase in sales of services in the Human Capital Management Services segment of $5.1 million, or 1.3% due primarily to the addition of new clients and increased services provided to certain existing clients. While management believes that such an increase is reflective of a trend over the past decade for companies to rely increasingly on providers of human capital management services, such as those provided by the Company’s PrO Unlimited subsidiary, the recent economic environment (see “Recent Developments” in this Item 7) has impacted this trend.
Cost of services for the year ended December 27, 2009 was 85.7% of net sales of services as compared to 84.1% for the year ended December 28, 2008. This increase in cost of services as a percentage of net sales is primarily a result of pricing pressures, lower sales volume on higher margin services and less favorable workers compensation claim experience in 2009 compared to 2008. In addition, the Company recorded an accrual of $2.7 million in 2009 related to a state tax examination settlement (see Item 3 of this report and note 13 to our consolidated financial statements). Cost of services as a percentage of net sales of services in the Human Capital Management Services segment for the year ended December 27, 2009 was 87.5% as compared to 86.7% for 2008. In the Staff Augmentation segment, cost of services as a percentage of net sales of services for 2009 was 82.6% as compared to 80.6% for 2008.
Selling, general and administrative expenses as a percentage of net sales of services were 12.4% for the year ended December 27, 2009, compared to 12.7% for the year ended December 28, 2008. The $7.4 million decrease in selling, general and administrative expenses is primarily due to lower personnel costs in the Human Capital Management Services and Staff Augmentation segments and lower corporate expenses, principally as a result of the decrease of net sales of services discussed above. This decrease was partially offset by $325,000 in litigation settlement expense relating to the long-running pipeline litigation that was resolved in the third quarter of 2009. Management has undertaken and continues to undertake initiatives to reduce selling, general and administrative expenses and has been successful in reducing costs as sales decreased.
The Company recorded a goodwill impairment charge of $16.1 million in the Staff Augmentation segment in the fourth quarter of 2009, principally due to decreased sales and cash flows during 2009 and to lower projected cash flows in future periods than previously anticipated to occur prior to the recession. See “Critical Accounting Policies and Estimates--Goodwill Impairment” in this Item 7.
Operating loss for the year ended December 27, 2009 was $9.1 million, or 1.6% of net sales, as compared to operating income of $16.2 million, or 2.7% of net sales, for the year ended December 28, 2008. This operating loss for the fiscal year December 27, 2009 is principally attributable to the Company’s fourth quarter $16.1 million write-off and an increase in cost of services discussed above, partially offset by the decrease in selling, general, and administrative expenses discussed above.
The Company’s interest expense was principally attributable to interest recorded on the PNC Credit Facility, and, prior to its repayment at maturity in December 2009, the Convertible Note and, prior to their redemption in August 2008, the 12% Senior Notes (“Senior Notes”). Interest expense of $2.1 million for 2009 was lower as compared to the interest expense of $4.4 million for 2008. This decrease in
interest expense was principally due to the repurchase and redemption of $6.5 million principal amount of Senior Notes in April 2008 and its final redemption of $5.2 million principal amount of Senior Notes in August 2008, and to lower interest rates under the PNC Credit Facility prior to the November 2009 amendments to the facility. As a result of the repurchase and redemption of Senior Notes in 2008, the Company recognized a loss on debt extinguishment of $278,000 in the year ended December 28, 2008, including the write-off of $108,000 of deferred financing costs.
Other income, net, for the year ended December 27, 2009 of $150,000 compared to other expense, net of $1.1 million for the year ended December 28, 2008, principally consists of gains and losses, respectively, on foreign currency exchanges, and a gain reported in 2009 on the settlement of a third party dispute.
The income tax provision for the year ended December 27, 2009 was $1.1 million on loss before income taxes of $11.0 million. The income tax provision for the year ended December 28, 2008 was $4.5 million (a rate of 43.5%) on income before income taxes of $10.4 million. The difference between the federal statutory income tax rate and the Company’s effective tax rates relates primarily to the non-deductibility of a significant portion of the goodwill impairment discussed above, state income taxes and a disallowance for travel and entertainment expenses. Included in the income tax provision for the year ended December 28, 2008 are discrete items related to an income tax benefit for certain return-to-provision items based on the filing of the Company’s 2007 tax return, partially offset by the accrual of interest pursuant to ASC Topic 740.
The Company’s total unrecognized tax benefit as of December 27, 2009 was approximately $1.1 million, which, if recognized, would affect the Company’s effective tax rate. For the year ended December 27, 2009, the Company recognized approximately $36,000 of accrued interest and penalties which are reflected in the tax provision.
Fiscal Year ended December 28, 2008 compared to fiscal year ended December 30, 2007
Net sales of services for the year ended December 28, 2008 were $606.6 million, which represents a 3.4% increase from the $586.7 million in net sales of services recorded for the year ended December 30, 2007. Net sales of services in the Human Capital Management Services segment increased by $25.8 million, or 7.1%, due primarily to an increase in services provided to new clients. While management believes that such an increase is reflective of a trend over the past decade for companies to rely increasingly on providers of human capital management services, such as those provided by the Company’s PrO Unlimited subsidiary, the recent economic environment (see “Recent Developments” in this Item 7) has impacted this trend. Management has observed that, in 2008, PrO’s customers generally did not seek to expand the scope of services they engaged PrO to perform. In the Staff Augmentation segment, net sales of services decreased $5.6 million, or 2.5%, which decrease was principally attributable to the decrease of services provided to technical services customers, partially offset by an increase in services provided to healthcare support services and information technology customers.
Cost of services for the year ended December 28, 2008 was 84.1% of net sales of services as compared to cost of services of 84.2% of net sales of services for the year ended December 30, 2007. Cost of services as a percentage of net sales of services in the Human Capital Management Services segment for fiscal 2008 was 86.7% as compared to 86.8% for fiscal 2007. In the Staff Augmentation segment, cost of services as a percentage of net sales of services for fiscal 2008 was 80.6% as compared to 81.3% in this segment for fiscal 2007, principally due to higher gross margins associated with the healthcare support services described above.
Selling, general and administrative expenses as a percentage of net sales of services were 12.7% for the year ended December 28, 2008, compared to 12.6% for the year ended December 30, 2007. The $3.1 million increase in selling, general and administrative expenses is primarily due to higher personnel costs incurred to support the increase in consultant consolidation services provided in the Human Capital Management Services segment discussed above.
Operating income for the year ended December 28, 2008 was $16.2 million, or 2.7% of net sales, as compared to operating income of $15.8 million, or 2.7% of net sales, for the year ended December 30, 2007. The Company’s operating income for fiscal 2008 is slightly higher than for fiscal 2007 principally due to an
increase in net sales of services and related gross margins in Human Capital Management Services and healthcare support services, partially offset by an increase in selling, general, and administrative expenses discussed above.
The Company’s interest expense for the year ended December 28, 2008 was principally attributable to interest recorded on the PNC Credit Facility, the Convertible Note and, prior to their redemption, the Senior Notes. Interest expense of $4.4 million for fiscal 2008 was lower as compared to the interest expense of $7.7 million for fiscal 2007. This decrease in interest expense was principally due to the repurchases and redemptions of $22.9 million of Senior Notes since the beginning of 2007, including the redemption of the remaining $5.2 million principal amount of Senior Notes in August 2008, and to lower interest rates under the PNC Credit Facility.
As a result of its repurchase of $6.5 million principal amount of Senior Notes in April 2008 and its final redemption of $5.2 million principal amount of Senior Notes in August 2008, the Company recognized a loss on debt extinguishment of $278,000 in the year ended December 28, 2008, including the write-off of $108,000 of deferred financing costs. As a result of its redemption of $10.0 million principal amount of Senior Notes in June 2007 and its repurchase of $1.2 million of Senior Notes in December 2007, the Company recognized a loss on debt extinguishment of $443,000 in the year ended December 30, 2007, including the write-off of $137,000 of deferred financing costs.
Other expense, net, for the year ended December 28, 2008 of $1.1 million, principally consists of losses on foreign currency exchanges as compared to other income, net, for the year ended December 30, 2007 of $644,000, principally consisting of gains on foreign currency exchanges.
The income tax provision for the year ended December 28, 2008 was $4.5 million (a rate of 43.5%) on income from continuing operations before income taxes of $10.4 million. Included in the income tax provision for the year ended December 28, 2008 are discrete items related to an income tax benefit for certain return-to-provision items based on the filing of the Company’s 2007 tax return, partially offset by the accrual of interest pursuant to ASC Topic 740. The income tax provision for the year ended December 30, 2007 was $3.3 million (a rate of 39.9%) on income from continuing operations before income taxes of $8.3 million. Included in the income tax provision for fiscal 2007 is an income tax benefit related to certain tax deductions realized upon the dissolution of a subsidiary that operated one branch office that has been closed.
The Company’s total unrecognized tax benefit as of December 28, 2008 was approximately $818,000, which, if recognized, would affect the Company’s effective tax rate. As of December 28, 2008, the Company had approximately $24,000 of accrued interest and penalties which are reflected in the tax provision.
In accordance with ASC Topic 360, the results of operations from the sale of the Company’s niche telecom operations (as described in note 19 to our consolidated financial statements) have been recorded as discontinued operations. The net income from discontinued operations was $1.0 million for the year ended December 30, 2007, which represented the settlement received in November 2007. As a result of a capital loss relating to this settlement, no provision for income taxes was recorded.
Financial Condition, Liquidity and Capital Resources
Management has continued to observe tight credit markets with higher borrowing costs, and weak labor markets that have contributed to declines in revenues during 2009 as compared to 2008. Although some indications suggest that the current economic climate in the United States is improving, employment in the United States has yet to reverse its declines. Continued weakness in the labor markets coupled with the tight credit markets could affect our liquidity in future periods in a number of ways, including by:
| | · | depressing the demand for contingent staff, although recent government reports indicate an increase in jobs for contingent workers; |
| | | affecting our clients’ ability to timely make payment on our invoices, particularly if they are unable to obtain working capital financing or the costs of this financing increases; and |
| | | increasing our own interest expense under the PNC Credit Facility, as recently amended. |
The Company generally pays its billable employees weekly or bi-weekly for their services, and remits certain statutory payroll and related taxes as well as other fringe benefits. Invoices are generated to reflect these costs plus the Company’s markup. These invoices are typically paid within 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.
Staffing personnel placed by the Company are employees of the Company. The Company is responsible for employment related expenses for its employees, including workers compensation, unemployment compensation insurance, Medicare and Social Security taxes and general payroll expenses. The Company offers health, dental, 401(k), disability and life insurance to its eligible employees. Staffing and consulting companies, including the Company, typically pay their billable employees for their services before receiving payment from their customers, resulting in significant outstanding receivables.
To the extent the Company grows, these receivables will increase and there will be greater need for borrowing availability under the PNC Credit Facility. However, in recent periods we have had significant unused availability--on which we paid a commitment fee of 0.25% per annum. In negotiating the extension of the PNC Credit Facility in 2009, management requested that the maximum availability under the facility be reduced to $95.0 million from $110.0 million. The new commitment fee is 0.375% on unused availability.
At December 27, 2009, we had outstanding $56.6 million principal amount under the PNC Credit Facility with remaining availability of up to $22.8 million based upon the borrowing base, as defined under the PNC Credit Facility agreement, to fund operations.
Off-Balance Sheet and Contractual Obligations: As of December 27, 2009, we had no off-balance sheet arrangements other than operating leases entered into in the normal course of business, as indicated in the table below. The table set forth below shows contractual commitments associated with operating lease agreements, employment agreements and principal repayments on debt obligations (excluding interest) calculated as of December 27, 2009:
| | | Payments due by fiscal year (in thousands) | |
| | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | Thereafter | |
| Operating Leases (1) | | $ | 2,119 | | | $ | 1,477 | | | $ | 974 | | | $ | 155 | | | $ | 69 | |
| Employment Agreements | | | 1,095 | | | | - | | | | - | | | | - | | | | - | |
| PNC Credit Facility principal repayments | | | - | | | | - | | | | 56,600 | | | | - | | | | - | |
| Total | | $ | 3,214 | | | $ | 1,477 | | | $ | 57,574 | | | $ | 155 | | | $ | 69 | |
| (1) | Represents payments under our current lease in Woodbury, New York. In February 2010, we entered into a new lease for our headquarters facility in Bethpage, New York, and this table does not include that obligation. We expect to take possession of the facility in June 2010 and to pay monthly rent as follows: |
| | Payments due by fiscal year (in thousands) | |
| | 2010 | | $ | 447 | |
| | 2011 | | | 780 | |
| | 2012 | | | 804 | |
| | 2013 | | | 828 | |
| | Thereafter | | | 6,072 | |
| | Total | | $ | 8,931 | |
COMFORCE, COI and various of their operating subsidiaries, as co-borrowers and guarantors, are parties to the PNC Credit Facility with PNC, as a lender and administrative agent, and other financial institutions participating as lenders to provide for a revolving line of credit with available borrowings based, generally, on 87.0% of the Company’s accounts receivable aged 90 days or less, subject to specified limitations and exceptions. The Company entered into the PNC Credit Facility in June 2003 and it has been subject to nine amendments, including an amendment and restatement effective November 2, 2009 under which the term was extended from July 24, 2010 to November 2, 2012 and, as discussed above, the maximum availability was reduced to $95.0 million from $110.0 million. In addition, reflective of current credit markets, the interest rate was increased. Prior to the effective date of the amendment, borrowings bore interest, at the Company’s option, at a per annum rate equal to (1) the higher of the federal funds rate plus 0.5% or the base commercial lending rate of PNC as announced from time to time, or (2) LIBOR plus a specified margin, ranging from 1.5% to 2.5% based upon the Company’s fixed charged ratio. Beginning on the effective date of the amendment, the existing as well as new borrowings under the PNC Credit Facility bear interest, at the Company’s option:
| | | for loans denominated as domestic rate loans, at a per annum rate equal to 1.75% plus the highest of |
(1) the federal funds open rate plus 0.5%,
(2) the base commercial lending rate of PNC as announced from time to time, or
(3) one-month LIBOR, as published each business day in The Wall Street Journal, adjusted to take into account any changes in the Federal Reserve requirements for bank eurocurrency fundings, plus 1.0%; or
| | | for loans denominated as eurodollar rate loans, at a per annum rate equal to 2.75% plus the higher of |
(1) LIBOR, as it appears at a specified time each business day on Bloomberg Page BBAM1, adjusted to take into account any changes in the Federal Reserve requirements for bank eurocurrency fundings, or
(2) 1.50%.
The PNC Credit Facility also provides for a commitment fee of 0.375% (0.25% prior to the November 2, 2009 restatement) of the unused portion of the facility.
The obligations under the PNC Credit Facility are collateralized by a pledge of the capital stock of certain operating subsidiaries of the Company and by security interests in substantially all of the assets of the Company. The PNC Credit Facility contains various financial and other covenants and conditions, including, but not limited to, a prohibition on paying cash dividends and limitations on engaging in affiliate transactions, making acquisitions and incurring additional indebtedness. The PNC Credit Facility also limits capital expenditures to $6.0 million annually.
The Company also had standby letters of credit outstanding under the PNC Credit Facility at December 27, 2009 in the aggregate amount of $3.6 million, principally as security for the Company’s obligations under its workers compensation insurance policies.
As reported in the accompanying cash flow statement, during 2009, our primary source of funds was $13.2 million provided by operating activities due primarily to the results of the Company, excluding the $16.1 million non-cash goodwill impairment charge, which was offset by $14.3 million used in financing activities. We also used cash of $2.2 million in investing activities due to the purchases of property and equipment.
At December 27, 2009, we had outstanding $56.6 million principal amount under the PNC Credit Facility bearing interest at a weighted average rate of 4.27% per annum.
At its maturity on December 2, 2009, the Company repaid, in cash, the outstanding principal of $1.9 million plus interest accrued since June 1, 2009 of approximately $74,000 under the Company’s Convertible Note using funds available under the PNC Credit Facility.
Our Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of 7.5% per annum and, at December 27, 2009 there were cumulated, unpaid and undeclared dividends of $3.2 million on the Series 2003A Preferred Stock, $241,000 on the Series 2003B Preferred Stock and $2.6 million on the Series 2004A Preferred Stock. If such dividends and underlying instruments were converted to voting or non-voting common stock, the aggregate amount would equal 15.7 million shares at December 27, 2009 (as compared to 14.9 million shares at December 28, 2008).
Management of the Company believes that cash flow from operations and funds anticipated to be available under the PNC Credit Facility will be sufficient to service the Company’s indebtedness and to meet currently anticipated working capital requirements for the next 12 months. The Company was in compliance with all covenants under the PNC Credit Facility at December 27, 2009 and expects to remain in compliance for the next 12 months.
The Company undergoes audits for certain state and local tax returns from time to time. We recently settled for $2.8 million a state tax examination related to certain non-income related business taxes, as described above under “Recent Developments” in this Item 7 and in Item 3. The Company has agreed to pay the settlement amount in installments by the end of the second quarter of 2010. Except for this settlement, the possible effects of other audits are not expected to have a material effect upon the Company’s results of operations.
In 2006, COMFORCE Technical Services, Inc. (“CTS”) entered into a contract with a United States government agency (the “Agency”) to provide technical, operational and professional services in foreign countries throughout the world for humanitarian purposes. Persons employed by CTS in the host countries include U.S. nationals, nationals of the host countries (local nationals) and nationals of other countries (third country nationals). The contract provides, generally, that the U.S. government will reimburse the Company for all direct labor properly chargeable to the contract plus fringe benefits, in some cases at specified rates and profit. Although not anticipated, the amount of foreign payroll taxes and other taxes related to these employees could potentially exceed the amount available to us from our own resources or under the PNC Credit Facility. See note 13 to our consolidated financial statements.
Critical Accounting Policies and Estimates
Management’s discussion in this Item 7 addresses the Company’s consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently actual results could differ from those estimates. A discussion of the more significant estimates follows. Management has discussed the development, selection and disclosure of these estimates and assumptions with the Audit Committee of the Board of Directors.
Revenue Recognition
Staff Augmentation and Human Capital Management Services: The Company provides supplemental staff to its customers under arrangements that typically require supervision by the customers’ management for a
period of time. In these arrangements, the Company is solely responsible for employees engaged to provide services to a customer. The Company is the sole employer of record, pays the employees’ wages, pays unemployment taxes and workers compensation insurance premiums, provides health insurance and other benefits to eligible employees, and is responsible for paying all related taxes. The Company enters into service agreements with its customers, negotiates the terms of the services, including pricing, and bears the credit risk relative to customer payments. The Company bills its customers for these services with payment generally due upon receipt of the invoice. Revenue under these arrangements is recognized upon the performance of the service by the Company’s employees. The associated payroll costs are recorded as cost of sales. There is no right of cancellation or refund provisions in these arrangements and the Company has no further obligations once the services are rendered by the employee.
The Company’s contingent staffing management services enable customers to manage the selection, procurement and supervision of contingent staffing suppliers through its web-enabled proprietary and third party software, and include providing Company operating and support personnel to assist customers. The Company does not sell its software to customers, but rather utilizes it in connection with providing services. Consultant consolidation services, provided as a component of contingent staffing management services, comprise the management of invoicing for a customer’s multiple services providers that results in the consolidation of invoices for all of a customer’s individual staffing vendors. The Company recognizes revenue for the amount of its fees for these services, which are determined as a percentage of the gross billings to customers from the contingent staffing suppliers, as the services are performed. The Company invoices its customers for its fees together with the billings from the contingent staffing suppliers, which are reflected in accounts receivable as there is no right of offset with the liabilities for amounts due to the contingent staffing suppliers. Amounts invoiced related to contingent staffing supplier billings are included in accrued expenses and are settled after our collection of the related receivables.
We rely on our billable employees, staffing suppliers and clients to timely submit their work and expense reports. It is our policy to record all activity (net sales of services and cost of services) performed during each reporting period for which we receive and process the submissions of our billable employees, staffing suppliers and clients within two weeks after the end of each of our first three quarters and within five weeks after the end of our fiscal year.
In accordance with ASC Topic 605-45, Principal Agent Considerations, reimbursements received by the Company for out-of-pocket expenses are characterized as revenue.
The Company follows ASC Topic 605-45, Principal Agent Considerations, in the presentation of revenues and expenses. This guidance requires that the Company assess whether it acts as a principal in the transaction or as an agent acting on behalf of others. In situations where the Company is the principal in the transaction and has the risks and rewards of ownership, the transactions are recorded gross in our consolidated statements of operations.
Staff Augmentation: A portion of the Company’s revenue is attributable to license agreements. Under the terms of such license agreements, the Company is fully responsible for the payment of the employees. The Company submits all invoices for services performed to the customers and they are required to remit their payments for services performed directly to the Company. The Company includes these revenues and related direct costs in its net sales of services and cost of services on a gross basis. The net distribution to the licensee is based on a percentage of gross profit generated.
Financial Outsourcing Services: The Company provides back office support to unaffiliated independently owned staffing companies. These arrangements typically require the Company to process the payrolls and invoicing for these unaffiliated staffing companies through the use of the Company’s information technology system. In return, these unaffiliated staffing companies (the Company’s customers) pay the Company a fixed percentage of the weekly billings it processed for them. Payment of the Company’s fees is due upon the completion of the processing of weekly payrolls and invoicing. Revenue is recognized over the period as the Company performs these services for the amount of the fixed fee the Company receives as stipulated in
the applicable contract. There is no right of cancellation or refund provisions in these arrangements and the Company has no further obligations once the services are rendered.
The Company also provides funding services to unaffiliated independently owned staffing companies. These arrangements typically require the Company to advance funds to these unaffiliated staffing companies (the Company’s customers) in exchange for the receivables related to invoices remitted to their clients for services performed during the prior week. The advances are repaid through the remittance of payments of receivables by their clients directly to the Company. The Company withholds from these advances an administrative fee and other charges as well as the amount of receivables relating to prior advances that remain unpaid after a specified number of days. These administrative fees and other charges are recognized as revenue when earned. There is no right of cancellation or refund provisions in these arrangements and the Company has no further obligations once the services are rendered.
Accounts Receivable
The Company’s accounts receivable balances are comprised of trade and unbilled receivables. The Company maintains an allowance for doubtful accounts recorded as an estimate of the accounts receivable balance that may not be collected. This allowance is calculated on the trade receivables with consideration for the Company’s historical write-off experience, the current aging of receivables, general economic climate and the financial condition of customers. After giving due consideration to these factors, the Company establishes specific allowances for uncollectible accounts. The allowance for the funding and service fee receivables is calculated with consideration for the ability of the Company’s clients to absorb chargebacks due to the uncollectibility of the funded receivables. Bad debt expense, which increases the allowance for doubtful accounts, is recorded as an operating expense in our consolidated statements of operations. Factors that would cause this provision to increase primarily relate to increased bankruptcies by customers, the inability of the Company’s funding services clients to absorb chargebacks and other difficulties collecting amounts billed. On the other hand, an improved write-off experience and aging of receivables would result in a decrease to the provision.
Accrued Workers Compensation Liability
The Company records its estimate of the ultimate cost of, and liabilities for, workers compensation based on actuarial computations using the Company's loss history as well as industry statistics. Furthermore, in determining its liabilities, the Company includes amounts for estimated claims incurred but not reported. The ultimate cost of workers compensation will depend on actual costs incurred to settle the claims and may differ from the liabilities recorded for those claims, subject to stop loss limits under our insurance policy.
Accruals for workers compensation claims are included in accrued expenses in our consolidated balance sheets. A significant increase in claims or changes in laws may require the Company to record additional expenses related to workers compensation. On the other hand, significantly improved claim experience may result in lower annual expense levels.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance against deferred tax assets for which realization of the asset is not considered more-likely-than-not.
Management’s judgment is required in determining the realizability of the deferred tax assets and liabilities, and any valuation allowances recorded. The net deferred tax assets may need to be adjusted in the event that tax rates are modified, or management’s estimates of future taxable income change, such that deferred tax assets or liabilities are expected to be recovered or settled at a different tax rate than currently estimated. In
addition, valuation allowances may need to be adjusted in the event that management’s estimate of future taxable income changes from the amounts currently estimated.
The Company provides for income taxes on a quarterly basis based upon an estimated annual effective tax rate. In determining this rate, management estimates taxable income for each of the jurisdictions where the Company operates, as well as the tax rate that will be in effect for each state and foreign country. To the extent these estimates change during the year, or that actual results differ from these estimates, the estimated annual tax rate may change between quarterly periods and may differ from the actual effective tax rate for the year.
Goodwill Impairment
The Company is required to test goodwill for impairment in accordance with the provisions of ASC Topic 350, Intangibles--Goodwill and Other, as of the end of each fiscal year or earlier during each fiscal year as circumstances require. The Company tested for goodwill impairment as of the end of the fourth quarter of 2009 and, as a result of this testing, wrote-off $16.1 million of goodwill in the Staff Augmentation segment.
In connection with these goodwill tests, the Company engages an independent valuation firm to assist management in the determination of the fair values of its reporting units (as defined by ASC Topic 350). In its determination of the fair values, the firm engaged by the Company primarily utilizes a discounted cash flow analysis as well as various other valuation approaches, including (i) capitalization multiples of companies with investment characteristics resembling those of the reporting units, (ii) the enterprise value of the Company, and (iii) asset and liability structure.
Significant assumptions used in this analysis include (i) expected future revenue growth rates, operating unit profit margins, and working capital levels, (ii) a discount rate, and (iii) a terminal value multiple. The revenue growth rates, working capital levels and operating unit profit margins are based on management’s expectation of future results. If management’s expectations of future operating results change, or if there are changes to other assumptions, the estimate of the fair value of the Company’s reporting units could change significantly. Such a change could result in additional goodwill impairment charges in future periods, which could have a significant impact on the Company’s consolidated financial statements.
Share-based Payment
With our adoption of the FASB guidance now codified as ASC Topic 718, Compensation--Stock Compensation, effective December 26, 2005, we are required to record the fair value of share-based payment awards as an expense. In order to determine the fair value of stock options on the date of grant, the Company utilizes the Black-Scholes-Merton option-pricing model. Inherent in this model are assumptions related to expected stock price volatility, option life, risk-free interest rate and dividend yield. Expected volatilities are based on historical volatility of our shares using daily price observations over a period consistent with the expected life. For options granted in fiscal 2006 and later, we use historical experience for similar awards, giving consideration to the contractual terms of the share-based awards, including their vesting and termination provisions, or the “simplified method” prescribed in the safe harbor guidance under SEC Staff Accounting Bulletin No. 107, to the extent applicable, to estimate the expected life of options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods similar to the expected life. While the risk-free interest rate and dividend yield are less subjective assumptions that, typically, are based on factual data derived from public sources, the expected stock price volatility and option life assumptions require a greater level of judgment which makes them critical accounting estimates.
New Accounting Pronouncements
In December 2007, the FASB issued guidance now codified as ASC Topic 805, Business Combinations. This standard was adopted on December 29, 2008, and applies prospectively to business combinations for which the acquisition date is on or after December 29, 2008. ASC Topic 805 significantly changes the accounting for acquisitions. Some of the major provisions are that acquisition related costs will generally be expensed as incurred, contingent consideration will be recorded at fair value on the acquisition date, with adjustments to
certain forms of contingent liabilities impacting the results of operations. The impact that ASC Topic 805 will have on our consolidated financial statements will depend on the nature, terms, and size of any such business combinations, if any.
In December 2007, the FASB issued guidance now codified as ASC Topic 810, Consolidation. ASC Topic 810-10-65 re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and requires the classification of minority interests as a component of equity. Under ASC Topic 810, a change in control will be measured at fair value, with any gain or loss recognized in earnings. The effective date for ASC Topic 810 was December 29, 2008 for the Company. We currently do not have minority interests in our consolidated subsidiaries and the adoption of ASC Topic 810 had no impact on our financial position or results of operations.
On December 31, 2007, we adopted certain provisions of ASC Topic 820, Fair Value Measurements and Disclosure. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. ASC Topic 820 applies when another standard requires or permits assets or liabilities to be measured at fair value. Accordingly, ASC Topic 820 does not require any new fair value measurements. On December 29, 2008, we adopted the remaining provisions of ASC Topic 820 as it relates to non-financial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis. The adoption of ASC Topic 820 did not materially impact our consolidated financial statements. See note 5 to our consolidated financial statements for a discussion of the fair value measurement consideration relating to goodwill.
In April 2009, the FASB issued ASC Topic 825, Financial Instruments. ASC Topic 825 requires interim disclosures regarding the fair values of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. Additionally, ASC Topic 825 requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments on an interim basis as well as changes of the methods and significant assumptions from prior periods. ASC Topic 825 does not change the accounting treatment for these financial instruments and is effective for interim reporting periods ending after June 15, 2009. All appropriate disclosures have been made, where applicable.
In May 2009, the FASB issued guidance now codified as ASC Topic 855, Subsequent Events, but this guidance was amended by new authoritative guidance issued in February 2010. The original guidance required the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date--that is, whether that date represents the date the financial statements were issued or were available to be issued. The new guidance removes the requirement for an SEC filer to disclose a date in both issued and revised financial statements. This amendment removes potential conflicts with SEC requirements. ASC Topic 855 became effective for the Company as of June 28, 2009. See note 21 to our consolidated financial statements.
In June 2009, the FASB issued guidance now codified as ASC Topic 105, Generally Accepted Accounting Principles. ASC Topic 105 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP in the United States. ASC Topic 105 explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants. ASC Topic 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted ASC Topic 105 in the third quarter of 2009. This pronouncement had no effect on the Company’s consolidated financial statements.
Seasonality
In the Human Capital Management Services segment, PrO Unlimited does not observe significant seasonal variations in its business. In the Staff Augmentation segment, demand for services has historically been lower during the second half of the fourth quarter through the following second quarter, and, generally shows gradual improvement until the second half of the fourth quarter. The Company’s quarterly operating results are, however, affected by the number of billing days in the quarter. Management has noted that the observance of seasonal trends has been limited in the current economic climate.
Forward Looking Statements
We have made statements under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under this Item 7, as well as in other sections of this report that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “forecasts,” “projects,” “predicts,” “intends,” “potential,” “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business and industry. These statements are only predictions based on our current expectations and projections about future events.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, level of activity, performance or achievements, particularly in light of the current global economic crisis that has been marked by dramatic and rapid shifts in market conditions and government responses (see “Recent Developments” and “Financial Condition, Liquidity and Capital Resources,” each in this Item 7). Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We undertake no obligation to update any of these forward-looking statements after the date of this report to conform our prior statements to actual results or revised expectations.
Factors which may cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements include the following:
| | | unfavorable global, national or local economic conditions that cause our clients to defer hiring contingent workers or reduce spending on the human capital management services and staffing that we provide; |
| | | the current economic crisis has created a tightening of the credit markets coupled with increasing interest rates, which, if these conditions persist or deteriorate, could significantly increase our interest expense under the PNC Credit Facility; |
| | | in the current economic climate, some state taxing authorities are more strictly interpreting business tax laws and regulations and more aggressively seeking to enforce these laws and regulations to address shortfalls in state tax revenues; |
| | | increases in the effective rates of any payroll-related or business taxes or costs that we are unable to pass on to or recover from our clients, particularly in a climate of heightened competitive pressure; |
| | | increases in the costs of complying with the complex federal, state and foreign laws and regulations in which we operate, or our inability to comply with these laws and regulations; |
| | | our inability to collect fees due to the bankruptcy of our clients, including the amount of any wages we have paid to our employees for work performed for these clients; |
| | | our inability to keep pace with rapid changes in technology in our industry; |
| | | potential losses relating to the placement of our employees in other workplaces, including our employees’ misuse of client proprietary information, misappropriation of funds, discrimination, harassment, theft of property, accidents, torts or other claims; |
| | | our inability to successfully develop new services or enhance our existing services as the markets in which we compete grow more competitive; |
| | | continuing unfavorable developments in our business may result in the necessity of writing off goodwill in future periods, in addition to write-offs in 2009 and earlier periods; |
| | | as a result of covenants and restrictions in the agreements governing the PNC Credit Facility or any future debt instruments, our inability to use available cash in the manner management believes will maximize stockholder value; |
| | | unfavorable press or analysts’ reports concerning our industry or our company could negatively affect the perception investors have of our company and our prospects; or |
any of the other factors described under “Risk Factors” in Item 1A of this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 27, 2009, we had $56.6 million outstanding under the PNC Credit Facility bearing variable rate interest at the weighted average interest rate of 4.27% per annum as compared to $68.2 million outstanding at December 28, 2008 at a weighted average interest rate of 3.35% per annum. Our interest costs increased in the fourth quarter of 2009 due to the amendment and extension of the PNC Credit Facility. Prior to the effective date of the amendment, our LIBOR-based borrowings bore interest at a per annum rate equal to LIBOR plus margins ranging from 1.5% to 2.5% depending upon our fixed charge ratio. Beginning on the effective date of the amendment, the existing as well as new LIBOR-based borrowings under the PNC Credit Facility bear interest equal to 2.75% plus the higher of (1) LIBOR, adjusted to take into account any changes in the Federal Reserve requirements for bank eurocurrency fundings, or (2) 1.50%. As described above in Item 7 under “Financial Condition, Liquidity and Capital Resources,” we may also elect to borrow based on domestic measures (subject to floors, including by reference to LIBOR). Assuming an immediate 10.0% increase in the weighted average interest rate of 4.27% in variable rate obligations of $56.6 million, the impact to the Company in annualized interest expense would be approximately $242,000.
The Company has not entered into any swap agreements or other hedging transactions as a means of limiting exposure to interest rate or foreign currency fluctuations. Although the Company provides its services in several countries, including Great Britain, Hong Kong and Japan, based upon the current level of investments in these countries, it does not believe that even a 25% change in foreign currency rates would have a material impact to the Company’s financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Schedule as listed on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | |
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting includes policies and procedures pertaining to the Company’s ability to record, process, and report reliable information. The Company’s internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of the Company’s published financial statements.
The Company’s management assessed the effectiveness of internal control over financial reporting as of December 27, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on this assessment, the Company’s management identified no material weaknesses in its internal control over financial reporting and has concluded that, as of December 27, 2009, the Company’s internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
During the Company’s fiscal quarter ended December 27, 2009, there were no changes in the Company’s internal controls over financial reporting that have materially and adversely affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Management of the Company has also evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of December 27, 2009. Based upon this evaluation, our management has concluded that, as of December 27, 2009, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this section will be included in the Company’s Proxy Statement, which will be filed with the Securities and Exchange Commission on or before April 26, 2010 and is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section will be included in the Company’s Proxy Statement, which will be filed with the Securities and Exchange Commission on or before April 26, 2010 and is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this section will be included in the Company’s Proxy Statement, which will be filed with the Securities and Exchange Commission on or before April 26, 2010 and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section will be included in the Company’s Proxy Statement, which will be filed with the Securities and Exchange Commission on or before April 26, 2010 and is incorporated by reference herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this section will be included in the Company’s Proxy Statement, which will be filed with the Securities and Exchange Commission on or before April 26, 2010 and is incorporated by reference herein.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
1. Financial Statements as listed on page F-1.
2. Financial Statement Schedule listed on page F-1.
3. Exhibits as listed on the Exhibit Index.
(b) Exhibits
The exhibits filed herewith are listed on the Exhibit Index.
(c) Other Financial Statement Schedules
None
A copy of this annual report on Form 10-K will accompany the Company’s proxy statement and be posted on the Company’s website: www.comforce.com. In addition, the Company will provide to stockholders upon request, without charge, copies of the exhibits to the annual report. Requests should be submitted to Linda Annicelli, Vice President, Administration, at COMFORCE Corporation, 415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York 11797.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| COMFORCE Corporation | |
| | | |
| By: | /s/ John C. Fanning | |
| | John C. Fanning | |
| | Chairman and Chief Executive Officer | |
| Date: March 25, 2010 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE | | TITLE | | DATE |
/s/ John C. Fanning | | | | |
| John C. Fanning | | Chairman, Chief Executive Officer and Director (Principal Executive Officer) | | March 25, 2010 |
| | | | | |
| /s/ Harry V. Maccarrone | | | | |
| Harry V. Maccarrone | | Executive Vice President and Director (Principal Financial and Accounting Officer) | | March 25, 2010 |
| | | | | |
| /s/ Rosemary Maniscalco | | | | |
| Rosemary Maniscalco | | Vice Chairman and Director | | March 25, 2010 |
| | | | | |
| /s/ Daniel Raynor | | | | |
| Daniel Raynor | | Director | | March 25, 2010 |
| | | | | |
| /s/ Gordon Robinett | | | | |
| Gordon Robinett | | Director | | March 25, 2010 |
| | | | | |
| /s/ Kenneth J. Daley | | | | |
| Kenneth J. Daley | | Director | | March 25, 2010 |
| | | | | |
| /s/ Pierce J. Flynn | | | | |
| Pierce J. Flynn | | Director | | March 25, 2010 |
COMFORCE CORPORATION AND SUBSIDIARIES
Table of Contents
| Report of Independent Registered Public Accounting Firm | | F-2 |
| | | |
| Consolidated Financial Statements: | | |
| Consolidated Balance Sheets as of December 27, 2009 and December 28, 2008 | | F-3 |
| Consolidated Statements of Operations for the fiscal years ended December 27, 2009, December 28, 2008 and December 30, 2007 | | F-4 |
| Consolidated Statements of Stockholders’ Deficit and Comprehensive Income for the fiscal years ended December 27, 2009, December 28, 2008 and December 30, 2007 | | F-5 |
| Consolidated Statements of Cash Flows for the fiscal years ended December 27, 2009, December 28, 2008 and December 30, 2007 | | F-6 |
| Notes to Consolidated Financial Statements | | F-7 |
| | | |
| Schedule: | | |
| Schedule II -- Valuation and Qualifying Accounts | | F-30 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
COMFORCE Corporation:
We have audited the accompanying consolidated balance sheets of COMFORCE Corporation and subsidiaries, as of December 27, 2009 and December 28, 2008, and the related consolidated statements of operations, stockholders’ deficit and comprehensive income, and cash flows for each of the fiscal years in the three-year period ended December 27, 2009, and the related financial statement schedule listed in Item 15 (a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of COMFORCE Corporation and subsidiaries as of December 27, 2009 and December 28, 2008, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended December 27, 2009 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Melville, New York
March 25, 2010
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 27, 2009 and December 28, 2008
(in thousands, except share and per share amounts)
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 2,986 | | | $ | 6,137 | |
| Accounts receivable, less allowance of $94 in 2009 and $92 in 2008 | | | 125,138 | | | | 140,763 | |
| Funding and service fees receivable, less allowance of $8 in 2009 and $20 in 2008 | | | 8,107 | | | | 8,941 | |
| Prepaid expenses and other current assets | | | 3,003 | | | | 3,014 | |
| Deferred income taxes, net | | | 707 | | | | 353 | |
| Total current assets | | | 139,941 | | | | 159,208 | |
| Property and equipment, net | | | 8,624 | | | | 10,057 | |
| Deferred financing costs, net | | | 634 | | | | 213 | |
| Goodwill | | | 15,973 | | | | 32,073 | |
| Other assets, net | | | 113 | | | | 185 | |
| Total assets | | $ | 165,285 | | | $ | 201,736 | |
| Liabilities and Stockholders’ Deficit | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 2,491 | | | $ | 2,675 | |
| Short-term debt (related party) | | | - | | | | 1,778 | |
| Accrued expenses | | | 120,841 | | | | 131,441 | |
| Total current liabilities | | | 123,332 | | | | 135,894 | |
| Long-term debt | | | 56,600 | | | | 68,200 | |
| Deferred income taxes, net | | | 636 | | | | 1,074 | |
| Other liabilities | | | 176 | | | | 401 | |
| Total liabilities | | | 180,744 | | | | 205,569 | |
| Commitments and contingencies (note 13) | | | | | | | | |
| Stockholders’ deficit: | | | | | | | | |
| Common stock, $.01 par value; 100,000,000 shares authorized, 17,387,663 and 17,387,560 shares issued and outstanding in 2009 and 2008, respectively | | | 174 | | | | 174 | |
| Convertible preferred stock, $.01 par value: | | | 4,304 | | | | 4,304 | |
| Series 2003A, 6,500 shares authorized, 6,148 shares issued and outstanding at December 27, 2009 and December 28, 2008, with an aggregate liquidation preference of $9,311 at December 27, 2009 and $8,850 at December 28, 2008 |
| Series 2003B, 3,500 shares authorized, 513 shares issued and outstanding at December 27, 2009 and December 28, 2008, with an aggregate liquidation preference of $752, at December 27, 2009 and $714 at December 28, 2008 | | | 513 | | | | 513 | |
| Series 2004A, 15,000 shares authorized, 6,737 shares issued and outstanding at December 27, 2009 and December 28, 2008, with an aggregate liquidation preference of $9,296 at December 27, 2009 and $8,790 at December 28, 2008 | | | 10,264 | | | | 10,264 | |
| Additional paid-in capital | | | 48,700 | | | | 48,406 | |
| Accumulated other comprehensive loss | | | (291 | ) | | | (522 | ) |
| Accumulated deficit | | | (79,123 | ) | | | (66,972 | ) |
| Total stockholders’ deficit | | | (15,459 | ) | | | (3,833 | ) |
| Total liabilities and stockholders’ deficit | | $ | 165,285 | | | $ | 201,736 | |
| | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. | |
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the fiscal years ended December 27, 2009, December 28, 2008 and December 30, 2007
(in thousands, except per share amounts)
| | | | | | | | | | |
| | | | | | | | | | |
| Net sales of services | | $ | 563,788 | | | $ | 606,636 | | | $ | 586,685 | |
| Costs and expenses: | | | | | | | | | | | | |
| Cost of services | | | 483,420 | | | | 510,188 | | | | 494,104 | |
| Selling, general and administrative expenses | | | 69,732 | | | | 77,129 | | | | 74,012 | |
| Goodwill impairment | | | 16,100 | | | | - | | | | - | |
| Depreciation and amortization | | | 3,599 | | | | 3,156 | | | | 2,803 | |
| Total costs and expenses | | | 572,851 | | | | 590,473 | | | | 570,919 | |
| Operating (loss) income | | | (9,063 | ) | | | 16,163 | | | | 15,766 | |
| Other (expense) income: | | | | | | | | | | | | |
| Interest expense | | | (2,132 | ) | | | (4,400 | ) | | | (7,669 | ) |
| Loss on debt extinguishment | | | - | | | | (278 | ) | | | (443 | ) |
| Other income (expense), net | | | 150 | | | | (1,064 | ) | | | 644 | |
| | | | (1,982 | ) | | | (5,742 | ) | | | (7,468 | ) |
| (Loss) income from continuing operations before income taxes | | | (11,045 | ) | | | 10,421 | | | | 8,298 | |
| Provision for income taxes | | | 1,106 | | | | 4,535 | | | | 3,309 | |
| (Loss) income from continuing operations | | | (12,151 | ) | | | 5,886 | | | | 4,989 | |
| Income from discontinued operations, net of tax benefits of $0 in 2007 | | | - | | | | - | | | | 1,000 | |
| Net (loss) income | | $ | (12,151 | ) | | $ | 5,886 | | | $ | 5,989 | |
| Dividends on preferred stock | | | 1,005 | | | | 1,005 | | | | 1,005 | |
| Net (loss) income available to common stockholders | | $ | (13,156 | ) | | $ | 4,881 | | | $ | 4,984 | |
| Basic (loss) income per common share: | | | | | | | | | | | | |
| (Loss) income from continuing operations | | $ | (0.76 | ) | | $ | 0.28 | | | $ | 0.23 | |
| Income from discontinued operations | | | - | | | | - | | | | 0.06 | |
| Net (loss) income | | $ | (0.76 | ) | | $ | 0.28 | | | $ | 0.29 | |
| Diluted (loss)income per common share: | | | | | | | | | | | | |
| (Loss) income from continuing operations | | $ | (0.76 | ) | | $ | 0.18 | | | $ | 0.16 | |
| Income from discontinued operations | | | - | | | | - | | | | 0.03 | |
| Net (loss) income | | $ | (0.76 | ) | | $ | 0.18 | | | $ | 0.19 | |
| Weighted average common shares outstanding, basic | | | 17,388 | | | | 17,388 | | | | 17,385 | |
| Weighted average common shares outstanding, diluted | | | 17,388 | | | | 32,580 | | | | 31,870 | |
The accompanying notes are an integral part of these consolidated financial statements.
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Deficit and Comprehensive Income
Fiscal years ended December 27, 2009, December 28, 2008 and, December 30, 2007
(in thousands, except share amounts)
| | | | | | | | | Additional paid-in | | | Accumulated Other Comprehensive | | | Accumulated | | | Total stock-holders’ | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2006 | | | 17,370,551 | | | $ | 174 | | | | 13,398 | | | $ | 15,081 | | | $ | 48,190 | | | $ | 55 | | | $ | (82,215 | ) | | $ | (18,715 | ) |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,989 | | | | 5,989 | |
| Adoption of FASB Interpretation No. 48 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,368 | | | | 3,368 | |
| Foreign currency translation adjustment, net of tax of $199 | | | - | | | | - | | | | - | | | | - | | | | - | | | | (311 | ) | | | | | | | (311 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 9,046 | |
| Exercise of stock options, including excess tax benefit of $5 | | | 17,000 | | | | - | | | | - | | | | - | | | | 30 | | | | - | | | | - | | | | 30 | |
| Issuance of common stock | | | 2 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Share-based payment compensation expense | | | - | | | | - | | | | - | | | | - | | | | 90 | | | | - | | | | - | | | | 90 | |
| Beneficial conversion feature attributable to 8% Notes, net of tax of $3 | | | - | | | | - | | | | - | | | | - | | | | 46 | | | | - | | | | - | | | | 46 | |
| Balance at December 30, 2007 | | | 17,387,553 | | | | 174 | | | | 13,398 | | | | 15,081 | | | | 48,356 | | | | (256 | ) | | | (72,858 | ) | | | (9,503 | ) |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,886 | | | | 5,886 | |
| Foreign currency translation adjustment, net of tax of $181 | | | - | | | | - | | | | - | | | | - | | | | - | | | | (266 | ) | | | | | | | (266 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,620 | |
| Issuance of common stock | | | 7 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Share-based payment compensation expense | | | - | | | | - | | | | - | | | | - | | | | 65 | | | | - | | | | - | | | | 65 | |
| Beneficial conversion feature attributable to 8% Notes, net of tax of $26 | | | - | | | | - | | | | - | | | | - | | | | (15 | ) | | | - | | | | - | | | | (15 | ) |
| Balance at December 28, 2008 | | | 17,387,560 | | | | 174 | | | | 13,398 | | | | 15,081 | | | | 48,406 | | | | (522 | ) | | | (66,972 | ) | | | (3,833 | ) |
| Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (12,151 | ) | | | (12,151 | ) |
| Foreign currency translation adjustment, net of tax of $154 | | | - | | | | - | | | | - | | | | - | | | | - | | | | 231 | | | | - | | | | 231 | |
| Total comprehensive (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (11,920 | ) |
| Issuance of common stock | | | 103 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Share-based payment compensation expense | | | - | | | | - | | | | - | | | | - | | | | 288 | | | | - | | | | - | | | | 288 | |
| Other | | | - | | | | - | | | | - | | | | - | | | | 6 | | | | - | | | | - | | | | 6 | |
| Balance of December 27, 2009 | | | 17,387,663 | | | $ | 174 | | | | 13,398 | | | $ | 15,081 | | | $ | 48,700 | | | $ | (291 | ) | | $ | (79,123 | ) | | $ | (15,459 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal years ended December 27, 2009, December 28, 2008 and December 30, 2007
(in thousands)
| | | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | |
| Net (loss) income | | $ | (12,151 | ) | | $ | 5,886 | | | $ | 5,989 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization of property and equipment | | | 3,599 | | | | 3,156 | | | | 2,803 | |
| Amortization of deferred financing costs | | | 173 | | | | 173 | | | | 204 | |
| Net recoveries of bad debts | | | (10 | ) | | | (60 | ) | | | (103 | ) |
| Deferred income taxes | | | (946 | ) | | | 1,428 | | | | 1,413 | |
| Interest expense paid by the issuance of convertible notes | | | 71 | | | | 134 | | | | 124 | |
| Gain from sale of discontinued niche telecom operations | | | - | | | | - | | | | (1,000 | ) |
| Loss on repurchase of Senior Notes | | | - | | | | 278 | | | | 443 | |
| Goodwill impairment | | | 16,100 | | | | - | | | | - | |
| Share-based payment compensation expense | | | 288 | | | | 65 | | | | 90 | |
| Excess tax benefit from stock option exercises | | | - | | | | - | | | | (5 | ) |
| Changes in assets and liabilities: | | | | | | | | | | | | |
| Accounts, funding and service fees receivable | | | 16,646 | | | | (19,938 | ) | | | (3,606 | ) |
| Prepaid expenses and other assets | | | 72 | | | | 1,463 | | | | 466 | |
| Income taxes receivable | | | 15 | | | | (19 | ) | | | (121 | ) |
| Accounts payable and accrued expenses | | | (10,673 | ) | | | 27,156 | | | | 6,124 | |
| Net cash provided by operating activities | | | 13,184 | | | | 19,722 | | | | 12,821 | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchases of property and equipment | | | (2,166 | ) | | | (5,490 | ) | | | (4,427 | ) |
| Net cash used in investing activities | | | (2,166 | ) | | | (5,490 | ) | | | (4,427 | ) |
| Net cash provided by discontinued investing activities | | | - | | | | - | | | | 1,000 | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Net (repayments) borrowings under line of credit agreements | | | (11,600 | ) | | | (2,300 | ) | | | 5,140 | |
| Repurchases of Senior Notes | | | - | | | | (11,884 | ) | | | (11,482 | ) |
| Repayment of 8% Subordinated Convertible Note | | | (1,849 | ) | | | - | | | | - | |
| Debt financing costs | | | (594 | ) | | | - | | | | (13 | ) |
| Excess tax benefit from stock option exercises | | | - | | | | - | | | | 5 | |
| Proceeds from exercise of stock options | | | - | | | | - | | | | 25 | |
| Repayments under capital lease obligations | | | (254 | ) | | | (236 | ) | | | (152 | ) |
| Net cash used in financing activities | | | (14,297 | ) | | | (14,420 | ) | | | (6,477 | ) |
| Net (decrease) increase in cash and cash equivalents | | | (3,279 | ) | | | (188 | ) | | | 2,917 | |
| Effect of exchange rates on cash | | | 128 | | | | (329 | ) | | | (45 | ) |
| Cash and cash equivalents, beginning of fiscal year | | | 6,137 | | | | 6,654 | | | | 3,782 | |
| Cash and cash equivalents, end of fiscal year | | $ | 2,986 | | | $ | 6,137 | | | $ | 6,654 | |
| Supplemental cash flow information: | | | | | | | | | | | | |
| Cash paid during the fiscal year for: | | | | | | | | | | | | |
| Interest | | $ | 1,789 | | | $ | 4,429 | | | $ | 7,651 | |
| Income taxes | | | 2,788 | | | | 1,009 | | | | 2,317 | |
Supplemental schedule of significant non-cash investing and financing activities: | | | | | | | | | | | | |
Capital lease obligations incurred for the purchase of new equipment | | | - | | | | - | | | | 723 | |
| | |
| The accompanying notes are an integral part of these consolidated financial statements. | |
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
| (1) | Nature of Business and Basis of Presentation |
COMFORCE Corporation (“COMFORCE”) is a provider of outsourced staffing management services that enable Fortune 1000 companies and other large employers to consolidate, automate and manage staffing, compliance and oversight processes for their contingent workforces. The Company also provides specialty staffing, consulting and other outsourcing services to Fortune 1000 companies and other large employers for their healthcare support services, technical and engineering, information technology, telecommunications and other staffing needs. In addition, the Company provides funding and back office support services to independent consulting and staffing companies.
COMFORCE Operating, Inc. (“COI”), a wholly-owned subsidiary of COMFORCE, was formed for the purpose of facilitating certain of the Company’s financing transactions in November 1997. Unless the context otherwise requires, the term the “Company” refers to COMFORCE, COI and all of their direct and indirect subsidiaries, all of which are wholly-owned.
| (2) | Summary of Significant Accounting Policies |
Fiscal Year
The Company’s fiscal year consists of the 52 or 53 weeks ending on the last Sunday in December. The Company’s most recently completed fiscal year ended on December 27, 2009. Fiscal years 2009, 2008 and 2007 each contained 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of COMFORCE, COI and their subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Staff Augmentation and Human Capital Management Services: The Company provides supplemental staff to its customers under arrangements that typically require supervision by the customers’ management for a period of time. In these arrangements, the Company is solely responsible for employees engaged to provide services to a customer. The Company is the sole employer of record, pays the employees’ wages, pays unemployment taxes and workers compensation insurance premiums, provides health insurance and other benefits to eligible employees, and is responsible for paying all related taxes. The Company enters into service agreements with its customers, negotiates the terms of the services, including pricing, and bears the credit risk relative to customer payments. The Company bills its customers for these services with payment terms generally due upon receipt of the invoice. Revenue under these arrangements is recognized upon the performance of the service by the Company’s employees. The associated payroll costs are recorded as cost of sales. There is no right of cancellation or refund provisions in these arrangements and the Company has no further obligations once the services are rendered by the employee.
The Company’s contingent staffing management services enable customers to manage the selection, procurement and supervision of contingent staffing suppliers through its web-enabled proprietary and third party software, and include providing Company operating and support personnel to assist customers. The Company does not sell its software to customers, but rather utilizes it in connection with providing services. Consultant consolidation services, provided as a component of contingent staffing management services, comprise the management of invoicing for a customer’s multiple services providers that results in the consolidation of invoices for all of a customer’s individual staffing vendors. The Company recognizes revenue for the amount of its fees for these services, which are determined as a percentage of the gross
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
billings to customers from the contingent staffing suppliers, as the services are performed. The Company invoices its customers for its fees together with the billings from the contingent staffing suppliers, which are reflected in accounts receivable as there is no right of offset with the liabilities for amounts due the contingent staffing suppliers. Amounts invoiced related to contingent staffing supplier billings are included in accrued expenses and are settled after our collection of the related receivables.
We rely on our billable employees, staffing suppliers and clients to timely submit their work and expense reports. It is our policy to record all activity (net sales of services and cost of services) performed during each reporting period for which we receive and process the submissions of our billable employees, staffing suppliers and clients within two weeks after the end of each of our first three quarters and within five weeks after the end of our fiscal year.
In accordance with Accounting Standards Codification (“ASC”) Topic 605-45, Principal Agent Considerations, reimbursements received by the Company for out-of-pocket expenses are characterized as revenue.
The Company follows ASC 605-45, Principal Agent Considerations, in the presentation of revenues and expenses. This guidance requires that the Company assess whether it acts as a principal in the transaction or as an agent acting on behalf of others. In situations where the Company is the principal in the transaction and has the risks and rewards of ownership, the transactions are recorded gross in our consolidated statements of operations.
Staff Augmentation: A portion of the Company’s revenue is attributable to license agreements. Under the terms of such license agreements, the Company is fully responsible for the payment of the employees. The Company submits all invoices for services performed to the customers and they are required to remit their payments for services performed directly to the Company. The Company includes these revenues and related direct costs in its net sales of services and cost of services on a gross basis. The net distribution to the licensee is based on a percentage of gross profit generated. The net distributions to licensees included in selling, general and administrative expenses for the fiscal years ended December 27, 2009, December 28, 2008 and December 30, 2007 were approximately $1,279,000, $1,852,000 and $2,147,000, respectively.
Financial Outsourcing Services: The Company provides back office support to unaffiliated independently owned staffing companies. These arrangements typically require the Company to process the payrolls and invoicing for these unaffiliated staffing companies through the use of the Company’s information technology system. In return, these unaffiliated staffing companies (the Company’s customers) pay the Company a fixed percentage of the weekly billings it processed for them. Payment of the Company’s fees is due upon the completion of the processing of weekly payrolls and invoicing. Revenue is recognized over the period as the Company performs these services for the amount of the fixed fee the Company receives as stipulated in the applicable contract. There is no right of cancellation or refund provisions in these arrangements and the Company has no further obligations once the services are rendered.
The Company also provides funding services to unaffiliated independently owned staffing companies. These arrangements typically require the Company to advance funds to these unaffiliated staffing companies (the Company’s customers) in exchange for the receivables related to invoices remitted to their clients for services performed during the prior week. The advances are repaid through the remittance of payments of receivables by their clients directly to the Company. The Company withholds from these advances an administrative fee and other charges as well as the amount of receivables relating to prior advances that remain unpaid after a specified number of days. These administrative fees and other charges are recognized as revenue when earned. There is no right of cancellation or refund provisions in these arrangements and the Company has no further obligations once the services are rendered.
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
Cash Equivalents
The Company considers all highly liquid short-term investments with an original maturity at the time of purchase of three months or less to be cash equivalents. Cash equivalents consist of overnight deposits. The Company reflects book overdraft positions within operating cash flows, when the bank has not advanced cash to the Company.
Accounts Receivable
The Company’s accounts receivable balances are comprised of trade and unbilled receivables. The Company maintains an allowance for doubtful accounts recorded as an estimate of the accounts receivable balance that may not be collected. This allowance is calculated on the trade receivables with consideration for the Company’s historical write-off experience, the current aging of receivables, general economic climate and the financial condition of customers. After giving due consideration to these factors, the Company establishes specific allowances for uncollectible accounts. The allowance for the funding and service fee receivables is calculated with consideration for the ability of the Company’s clients to absorb chargebacks due to the uncollectibility of the funded receivables. Bad debt expense, which increases the allowance for doubtful accounts, is recorded as an operating expense in our consolidated statements of operations.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the life of the lease or of the improvement. Maintenance and repairs are charged to expense as incurred and improvements that extend the useful life of the related asset are capitalized. The Company capitalizes its internal costs related to the development of software for internal use under the provisions of ASC Topic 350, which are amortized over the estimated life of the software of approximately three to five years.
If events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition in accordance with the guidance issued by the Financial Accounting Standards Board (“FASB”) now codified as ASC Topic 360, Property, Plant, and Equipment. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the long-lived asset, an impairment loss is recognized for the difference between the fair value and carrying amount of the asset.
Goodwill
The Company applies the guidance issued by the FASB that is now codified as ASC Topic 350, Intangibles--Goodwill and Other, to evaluate goodwill impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. ASC Topic 350 requires that goodwill be tested for impairment at the reporting unit level. The Company’s reporting units are represented by the reportable segments (see note 17). Goodwill is tested for impairment using a two-step process. In the first step, the fair market value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is not considered impaired and no further testing is required. The Company engages an independent valuation specialist to assist with the determination of the fair value of reporting units which is based on a combination of both the income approach and the market approach of the valuation analysis. Under the income approach, fair value is determined based on estimated future cash flows discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the Company.
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
Estimated future cash flows are based on the Company’s internal projection model and include significant judgment relating to growth rates, discount factors, tax rates and other considerations. Under the market approach, comparable companies based on valuation multiples are used to arrive at a fair value. For reasonableness, the summation of reporting units’ fair values is compared to the Company’s market capitalization.
If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, a second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill. Determining the implied fair value of goodwill requires valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference.
The Company tested its goodwill for impairment as of the end of the fourth quarter of 2009 and, as a result of this testing, we recorded an impairment charge of $16.1 million in our Staff Augmentation segment. This impairment was principally due to decreased sales and cash flows in the Staff Augmentation segment during 2009 and to lower projected cash flows in future periods than previously anticipated to occur prior to the recession.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those differences are expected to be recovered or settled. The Company records a valuation allowance against deferred tax assets for which realization of the asset is not considered more-likely-than-not.
In June 2006, the FASB issued guidance now codified as ASC Topic 740, Income Taxes. Under ASC Topic 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the tax position. The tax benefits recognized in the financial statements from such tax position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company adopted the guidance now codified as ASC Topic 740 effective January 1, 2007. The impact upon adoption was to decrease accumulated deficit in 2007 by approximately $3.4 million and to decrease accruals for uncertain tax positions and related penalties and interest by a corresponding amount.
The Company recognizes accrued interest and penalties related to income tax matters within the provision for income tax expense.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as to provide disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the significant estimates involved are the collectibility of receivables, the recoverability of long-lived assets, recoverability of deferred tax assets, goodwill, accrued workers compensation liabilities, reserves for litigation and contingencies and the fair value of share-based payment compensation. Particularly given current global economic conditions, estimates are subject to uncertainty and actual results could differ from those estimates.
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
Fair Values of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable, funding and service fees receivable, accounts payable and accrued expenses are believed to approximate fair value due to the short-term maturity of these financial instruments. The carrying amounts of the Company’s revolving line of credit obligations is believed to approximate its fair value since the interest rate fluctuates with market changes in interest rates.
Deferred Financing Costs
Deferred financing costs consist of costs associated with the issuance of the Company’s debt. Such costs are amortized over the three-year life of the related debt, and unamortized costs are fully expensed upon discharge of indebtedness. The Company wrote-off deferred financing costs of $108,000 in fiscal 2008 and $137,000 in fiscal 2007 due to the early extinguishment of debt. Such costs are included in loss on debt extinguishment in the consolidated statements of operations. The amendment and extension of the Company’s revolving credit facility in November 2009 resulted in the deferral of the unamortized financing costs of $594,000.
(Loss) Income per Share
Basic (loss) income per common share is computed by dividing net (loss) income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted (loss) income per share is computed assuming the exercise of stock options and warrants with exercise prices less than the average market value of the common stock during the period, and the conversion of convertible debt and preferred stock into common stock, if dilutive.
Foreign Currency
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars using the exchange rate in effect at the balance sheet date. Results of operations are translated using the average exchange rates during the fiscal year. Related translation adjustments are accumulated in a separate component of stockholders’ deficit and transaction gains and losses are recognized in the consolidated statement of operations when realized.
Accrued Workers Compensation Liability
The Company is generally self-insured with respect to workers compensation claims, but maintains excess workers compensation coverage to limit exposure for amounts over $3.5 million. The Company records its estimate of the ultimate cost of, and liabilities for, workers compensation obligations based on actuarial computations using the Company's loss history as well as industry statistics. In determining its liabilities, the Company includes amounts for estimated claims incurred but not reported.
The ultimate cost of workers compensation will depend on actual costs incurred to settle the claims and may differ from the liabilities established by the Company for those claims, subject to stop loss limits under our insurance policy. Accruals for workers compensation claims are included in accrued expenses in the consolidated balance sheets.
Stock Compensation Plans
Under the provisions of ASC Topic 718, Compensation--Stock Compensation, share-based payments are measured at the grant date, based on the fair value of the award, and are expensed over the requisite service period. For the fiscal year ended December 27, 2009, $288,000 of compensation expense was recorded within selling,
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
general and administrative expense and the Company recognized an income tax benefit of $114,000 related to such expense. For the fiscal year ended December 28, 2008, $65,000 of compensation expense was recorded within selling, general and administrative expense and the Company recognized an income tax benefit of $28,000 related to such expense. For the fiscal year ended December 30, 2007, $90,000 of compensation expense was recorded within selling, general and administrative expense and the Company recognized an income tax benefit of $35,000 related to such expense. Stock compensation expense was recorded on the date of grant since all options were immediately vested.
The Company estimates the fair value of share-based payments using the Black-Scholes-Merton option pricing model. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards.
The following assumptions were used to calculate the fair value of stock option award grants:
| | | | Fiscal Year | |
| | | | December 27, 2009 | | December 28, 2008 | | December 30, 2007 | |
| | | | | | | | | | | | |
| | Expected dividend yield | | 0.0 | % | | 0.0 | % | | 0.0 | % | |
| | Weighted average volatility | | 55.94 | % | | 47.2 | % | | 49.0 | % | |
| | Range of risk free interest rates | | 2.51%-2.93 | % | | 3.5 | % | | 5.2 | % | |
| | Weighted average expected life | | 5.3 | | | 5.0 | | | 5.0 | | |
| | Weighted average grant date fair value | | $0.43 | | | $0.93 | | | $1.28 | | |
The Company estimates expected volatility based primarily on historical daily price changes of the Company’s stock and other known or expected trends. The risk-free interest rate is based on the United States (“U.S.”) treasury yield curve in effect at the time of grant. The expected option term is the number of years that the Company estimates that options will be outstanding prior to exercise. The expected term of these awards was determined using historical experience for similar awards, giving consideration to the contractual terms of the share-based awards, including their immediate vesting and termination provisions or the “simplified method” prescribed in SEC Staff Accounting Bulletin No. 107, to the extent applicable.
No stock options were exercised in fiscal 2009 or 2008 and, consequently, no income tax benefits were realized by the Company. The income tax benefit realized relating to the exercise of stock option awards was $5,000 for the year ended December 30, 2007, all of which is classified as a financing cash inflow in the Company’s consolidated statement of cash flows.
Out- of-Period Adjustments
In the fourth quarter of 2008, the Company recorded an adjustment to decrease accumulated other comprehensive income and increase other income for approximately $223,000, net of tax, relating to immaterial errors that originated in each of the prior quarters of 2008. Since these errors, either individually or in the aggregate, were not material to any of the prior 2008 quarterly periods, and the error had no impact on the full year 2008 financial statements, the Company recorded the out-of-period correction of these errors in the fourth quarter results. The out-of-period correction had no impact on the
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
financial position of the Company since the activity was contained within stockholders’ deficit.
New Accounting Pronouncements
In December 2007, the FASB issued guidance now codified as ASC Topic 805, Business Combinations. This standard was adopted on December 29, 2008, and applies prospectively to business combinations for which the acquisition date is on or after December 29, 2008. ASC Topic 805 significantly changes the accounting for acquisitions. Some of the major provisions are that acquisition related costs will generally be expensed as incurred, contingent consideration will be recorded at fair value on the acquisition date, with adjustments to certain forms of contingent liabilities impacting the results of operations. The impact that ASC Topic 805 will have on our consolidated financial statements will depend on the nature, terms, and size of any such business combinations, if any.
In December 2007, the FASB issued guidance now codified as ASC Topic 810, Topic 810, Consolidation. ASC Topic 810-10-65 re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and requires the classification of minority interests as a component of equity. Under ASC Topic 810, a change in control will be measured at fair value, with any gain or loss recognized in earnings. The effective date for ASC Topic 810 was December 29, 2008 for the Company. We currently do not have minority interests in our consolidated subsidiaries and the adoption of ASC Topic 810 had no impact on our financial position or results of operations.
On December 31, 2007, we adopted certain provisions of ASC Topic 820, Fair Value Measurements and Disclosure. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. ASC Topic 820 applies when another standard requires or permits assets or liabilities to be measured at fair value. Accordingly, ASC Topic 820 does not require any new fair value measurements. On December 29, 2008, we adopted the remaining provisions of ASC Topic 820 as it relates to non-financial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis. The adoption of ASC Topic 820 did not materially impact our consolidated financial statements. See note 5 for a discussion of the fair value measurement consideration relating to goodwill.
In April 2009, the FASB issued ASC Topic 825, Financial Instruments. ASC Topic 825 requires interim disclosures regarding the fair values of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. Additionally, ASC Topic 825 requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments on an interim basis as well as changes of the methods and significant assumptions from prior periods. ASC Topic 825 does not change the accounting treatment for these financial instruments and is effective for interim reporting periods ending after June 15, 2009. All appropriate disclosures have been made, where applicable.
In May 2009, the FASB issued guidance now codified as ASC Topic 855, Subsequent Events, but this guidance was amended by new authoritative guidance issued in February 2010. The original guidance required the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date--that is, whether that date represents the date the financial statements were issued or were available to be issued. The new guidance removes the requirement for an SEC filer to disclose a date in both issued and revised financial statements. This amendment removes potential conflicts with SEC requirements. ASC Topic 855 became effective for the Company as of June 28, 2009. See note 21.
In June 2009, the FASB issued guidance now codified as ASC Topic 105, Generally Accepted Accounting Principles. ASC Topic 105 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP in the United States. ASC Topic 105
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants. ASC Topic 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted ASC Topic 105 in the third quarter of 2009. This pronouncement had no effect on the Company’s consolidated financial statements.
(3) Property and Equipment
Property and equipment as of December 27, 2009 and December 28, 2008, consisted of (in thousands):
| | | | Estimated useful lives in years | | | 2009 | | | 2008 | |
| | Computer equipment and related software | | | 3-5 | | | $ | 33,850 | | | $ | 32,208 | |
| | Furniture and fixtures | | | 3-10 | | | | 2,360 | | | | 2,426 | |
| | Leasehold improvements | | | 3-7 | | | | 680 | | | | 676 | |
| | | | | | | | | 36,890 | | | | 35,310 | |
| | Less accumulated depreciation and amortization | | | | | | | (28,266 | ) | | | (25,253 | ) |
| | | | | | | | $ | 8,624 | | | $ | 10,057 | |
Depreciation and amortization expense related to property and equipment was $3,599,000, $3,156,000 and $2,803,000 for the fiscal years ended December 27, 2009, December 28, 2008 and December 30, 2007, respectively.
(4) Goodwill
As a result of the Company’s annual impairment test in the fourth quarter of 2009, the Company recorded a goodwill impairment charge in the Staff Augmentation segment of $16.1 million as a charge against operating income in accordance with the provisions of ASC Topic 350, Intangibles--Goodwill and Other. This impairment charge was principally due to decreased sales and cash flows in the Staff Augmentation segment during 2009 and to lower projected cash flows in future periods than previously anticipated to occur prior to the recession.
The changes in the carrying amount of goodwill for the years ended December 28, 2008 and December 27, 2009 are as follows (in thousands):
| | | | Staff Augmentation | | | Human Capital Management | | | Financial Outsourcing | | | Total | |
| | | | | | | | | | | | | | | | | | |
| | Gross goodwill as of December 30, 2001 | | $ | 113,742 | | | $ | 11,100 | | | $ | 9,400 | | | $ | 134,242 | |
| | Accumulated impairment losses as of December 30, 2007 | | | (90,869 | ) | | | (1,900 | ) | | | (9,400 | ) | | | (102,169 | ) |
| | | | | 22,873 | | | | 9,200 | | | | - | | | | 32,073 | |
| | Impairment losses | | | - | | | | - | | | | - | | | | - | |
| | Goodwill as of December 28, 2008 | | | 22,873 | | | | 9,200 | | | | - | | | | 32,073 | |
| | Impairment losses | | | (16,100 | ) | | | - | | | | - | | | | (16,100 | ) |
| | Goodwill as of December 27, 2009 | | $ | 6,773 | | | $ | 9,200 | | | $ | - | | | $ | 15,973 | |
If the carrying value of a reporting unit’s goodwill is less than its fair value, no adjustment is permitted to be made under GAAP. As of the testing date, the fair value of goodwill in the Human Capital management segment was more than 800% of its carrying value.
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
(5) Fair Value Measurements
The carrying amounts of cash equivalents, accounts receivable, funding and service fees receivable, accounts payable and accrued expenses are believed to approximate fair value due to the short-term maturity of these financial instruments. The carrying amounts of the Company’s revolving line of credit obligations is believed to approximate its fair value since the interest rate fluctuates with market changes in interest rates.
We also measure goodwill on a non-recurring basis, for which we recognized an impairment charge in 2009 that is summarized as follows (in thousands):
| | | | December 27, 2009 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Unobservable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total Losses | |
| | Goodwill | | $ | 15,973 | | | $ | - | | | $ | - | | | $ | 15,973 | | | $ | 16,100 | |
Goodwill, with a carrying amount of $32.1 million was written down to its fair value of $16.0 million in 2009, resulting in an impairment charge of $16.1 million.
(6) Accrued Expenses
Accrued expenses as of December 27, 2009 and December 28, 2008, consisted of (in thousands):
| | | | 2009 | | | 2008 | |
| | Payroll, payroll taxes and sub-vendor payables | | $ | 97,979 | | | $ | 106,310 | |
| | Book overdrafts | | | 12,916 | | | | 13,497 | |
| | Other | | | 9,946 | | | | 11,634 | |
| | | | $ | 120,841 | | | $ | 131,441 | |
(7) Foreign Currency
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 U.S. 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. These risks are heightened in the current volatile economic environment, including the recent volatility in the value of the U.S. dollar and other currencies worldwide and instability in the credit markets.
In 2009, we experienced $27,000 in gains on foreign currency transactions as compared to $1.0 million in losses in 2008. We have not entered into any swap agreements or other hedging transactions as a means of limiting exposure to interest rate or foreign currency fluctuations.
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
(8) Income Taxes
The Company’s income tax provision for the years ended of December 27, 2009, December 28, 2008 and December 30, 2007 was as follows (in thousands):
| | | | 2009 | | | 2008 | | | 2007 | |
| | Current: | | | | | | | | | |
| | Federal | | $ | 1,646 | | | $ | 2,538 | | | $ | 1,318 | |
| | State | | | 291 | | | | 429 | | | | 315 | |
| | Foreign | | | 113 | | | | 120 | | | | 263 | |
| | Total current | | | 2,050 | | | | 3,087 | | | | 1,896 | |
| | | | | | | | | | | | | | |
| | Deferred: | | | | | | | | | | | | |
| | Federal | | | (932 | ) | | | 1,125 | | | | 1,237 | |
| | State | | | (9 | ) | | | 307 | | | | 176 | |
| | Foreign | | | (3 | ) | | | 16 | | | | - | |
| | Total deferred | | | (944 | ) | | | 1,448 | | | | 1,413 | |
| | Total income tax provision (benefit) | | $ | 1,106 | | | $ | 4,535 | | | $ | 3,309 | |
The total income tax provision relating to continuing operations differed from income taxes at the statutory federal income tax rate of 34% as a result of the following items (in thousands):
| | | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | |
| | Income taxes at statutory federal tax rate of 34.0% | | $ | (3,756 | ) | | $ | 3,543 | | | $ | 2,821 | |
| | State and local taxes, net of federal tax | | | 154 | | | | 576 | | | | 384 | |
| | Change in tax rates | | | - | | | | - | | | | 20 | |
| | Foreign taxes | | | 113 | | | | 80 | | | | 263 | |
| | Loss on subsidiary stock | | | - | | | | - | | | | (476 | ) |
| | Non-deductible meals | | | 317 | | | | 399 | | | | 245 | |
| | Non-deductible goodwill impairment | | | 4,291 | | | | - | | | | - | |
| | Other non-deductible expenses | | | (13 | ) | | | (63 | ) | | | 52 | |
| | Income tax provision | | $ | 1,106 | | | $ | 4,535 | | | $ | 3,309 | |
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
The components of deferred tax assets and liabilities as of December 27, 2009 and December 28, 2008 (in thousands) are as follows:
| | | | 2009 | | | 2008 | |
| | Deferred tax assets: | | | | | | |
| | Receivable allowances | | $ | 40 | | | $ | 44 | |
| | Tax benefit of foreign NOL carry forwards | | | 208 | | | | 213 | |
| | Unrealized gains and losses | | | 319 | | | | 568 | |
| | Excess book amortization expense | | | 465 | | | | - | |
| | Accrued liabilities and other | | | 2,206 | | | | 2,134 | |
| | Share-based payment compensation | | | 225 | | | | 112 | |
| | Tax benefit of capital loss carryforward | | | 1,024 | | | | 2,165 | |
| | Tax benefit of state NOL carryforwards,net of federal effect | | | 668 | | | | 716 | |
| | | | | 5,155 | | | | 5,952 | |
| | Less valuation allowance | | | (1,799 | ) | | | (2,855 | ) |
| | Total deferred tax assets | | | 3,356 | | | | 3,097 | |
| | Deferred tax liabilities: | | | | | | | | |
| | Prepaids | | | 458 | | | | 504 | |
| | Excess tax depreciation | | | 2,827 | | | | 3,065 | |
| | Excess tax amortization | | | - | | | | 249 | |
| | Total deferred tax liabilities | | | 3,285 | | | | 3,818 | |
| | Net deferred tax asset (liability) | | $ | 71 | | | $ | (721 | ) |
At December 27, 2009, the Company had approximately $12.2 million of state net operating losses which expire in the tax years 2010 through 2029, if unused. In addition, the Company had approximately $721,000 of foreign net operating losses which expire from 2013 through 2017, except for the United Kingdom and Namibia which have indefinite carry forward periods. At December 27, 2009, the Company had approximately $2.6 million of capital loss carry forwards which expire in the tax year 2012, if unused.
The net decrease in the Company’s valuation allowance was primarily related to the write-offs of deferred tax assets with a full valuation allowance of $1,141,000 for capital losses which expired, a net decrease in foreign net operating losses of $5,000 for which management has determined that it may not realize the future tax benefits on a more likely-than-not basis, and an increase for additional state net operating losses of $90,000.
In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is provided when it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income, the ability to carryback future losses to recover income taxes paid and tax planning strategies that could be implemented. As of December 27, 2009, the Company’s deferred tax asset valuation allowance related to: capital loss carry forwards ($1,024,000), net operating loss carry forwards ($566,000), and foreign net operating loss carry forwards of ($208,000).
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
A reconciliation of the total amounts of the Company’s unrecognized tax benefits for the fiscal year ended December 27, 2009 is as follows (in thousands):
| | Unrecognized tax benefits at December 28, 2008 | | $ | 878 | |
| | Increases (decreases) in unrecognized tax benefits – tax positions taken during a prior period | | | 36 | |
| | Increases (decreases) in unrecognized tax benefits – tax positions taken during the current period | | | 232 | |
| | Increases (decreases) in unrecognized tax benefits – settlements with taxing authorities | | | - | |
| | Reductions in unrecognized tax benefits – lapses of the statutes of limitations | | | - | |
| | Unrecognized tax benefits as of December 27, 2009 | | $ | 1,146 | |
The Company believes that it is reasonably possible that its uncertain tax positions (excluding interest and penalties) will decrease by $77,000 in 2010 as a result of lapses in applicable statutes of limitation for various jurisdictions.
As of and for the fiscal year ended December 27, 2009, interest and penalties recognized in the Company’s consolidated balance sheets or statements of operations were immaterial. If recognized, the total amount of the Company’s unrecognized tax benefits as of December 27, 2009 would affect the Company’s effective tax rate.
The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2006 through 2009 tax years generally remain subject to examination by federal, most state tax, and foreign authorities. In addition to the U.S., the Company’s major taxing jurisdictions include Hong Kong and Japan. The Company has not been nor is it currently under examination for any of the tax years within the statute of limitations.
(9) Debt
Long-term and short-term debt at December 27, 2009 and December 28, 2008, consisted of (in thousands):
| | | | December 27, 2009 | | | December 28, 2008 | |
| | Convertible Related Party Note, due December 2, 2009 | | $ | - | | | $ | 1,778 | |
| | Revolving line of credit, due November 2, 2012*, with interest payable at prime and/or LIBOR plus 1.5%* with weighted average rates of 4.3% at December 27, 2009 and 3.4% at December 28, 2008 | | | 56,600 | | | | 68,200 | |
| | Total long-term and short-term debt | | $ | 56,600 | | | $ | 69,978 | |
* Prior to the November 2, 2009 amendment of the revolving line of credit, the maturity date was July 24, 2010, and the interest rate was calculated based upon LIBOR (without an interest rate floor) plus an interest rate spread of 1.5% (or an alternative domestic rate based on the prevailing prime rate). The interest rate calculation has been changed under the revolving line of credit, as amended, including an interest rate floor for eurocurrency loans and an increase of the spread, as of the effective date of the amendment (see “--Revolving Line of Credit,” below in this note 9).
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
Contractual maturities of long-term debt are as follows (in thousands):
| | | | | |
| | 2012 | | $ | 56,600 | |
| | Total | | $ | 56,600 | |
Convertible Related Party Note: The Company’s 8.0% Subordinated Convertible Note due December 2, 2009 (the “Convertible Note”) was repaid in cash at maturity using funds available under the Company’s revolving line of credit (see “--Revolving Line of Credit,” below in this note 9). Through the date of maturity, the Convertible Note was convertible into common stock at $1.70 per share (or, in certain circumstances, into a participating preferred stock which in turn would be convertible into common stock at the same effective rate). The Convertible Note was held by a related party, Fanning CPD Assets, LP, a limited partnership in which John C. Fanning, the Company’s chairman and chief executive officer, held an 82.7% economic interest. See also note 18.
Under the terms of the Convertible Note, interest was payable either in cash or in-kind at the Company’s election. Debt service costs associated with the Convertible Note were satisfied through additions to principal through June 1, 2009. As a result of its election to pay interest in-kind under the Convertible Note, the Company recognized beneficial conversion features of $14,000 during 2008, which resulted in an increase in deferred financing costs and paid-in capital. There were no beneficial conversion features recorded in 2009 since the conversion price of $1.70 was greater than the closing price on the in-kind interest payment date.
Revolving Line of Credit: At December 27, 2009, COMFORCE, COI and various of their operating subsidiaries, as co-borrowers and guarantors, were parties to a Revolving Credit and Security Agreement (the “PNC Credit Facility”) with PNC Bank, National Association, as a lender and administrative agent (“PNC”), and other financial institutions participating as lenders to provide for a revolving line of credit with available borrowings based, generally, on 87.0% of the Company’s accounts receivable aged 90 days or less, subject to specified limitations and exceptions. On November 2, 2009, the PNC Credit Facility was amended and restated, and various terms were modified. The term was extended from July 24, 2010 to November 2, 2012, and, at the Company’s request, the maximum availability under the facility was reduced from $110.0 million to $95.0 million.
In addition, the interest rate was increased. Prior to the effective date of the amendment, borrowings bore interest, at the Company’s option, at a per annum rate equal to (1) the higher of the federal funds rate plus 0.5% or the base commercial lending rate of PNC as announced from time to time, or (2) LIBOR plus a specified margin, ranging from 1.5% to 2.5% based upon the Company’s fixed charged ratio. Beginning on the effective date of the amendment, the existing as well as new borrowings under the PNC Credit Facility bear interest, at the Company’s option:
| | · | for loans denominated as domestic rate loans, at a per annum rate equal to 1.75% plus the highest of |
(1) the federal funds open rate plus 0.5%,
(2) the base commercial lending rate of PNC as announced from time to time, or
| | (3) | one-month LIBOR, as published each business day in The Wall Street Journal, adjusted to take into account any changes in the Federal Reserve requirements for bank eurocurrency fundings, plus 1.0%; or |
| | | for loans denominated as eurodollar rate loans, at a per annum rate equal to 2.75% plus the higher of |
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
| | (1) | LIBOR, as it appears at a specified time each business day on Bloomberg Page BBAM1, adjusted to take into account any changes in the Federal Reserve requirements for bank eurocurrency fundings, or |
(2) 1.50%.
The PNC Credit Facility also provides for a commitment fee of 0.375% (0.25% prior to the effective date of the amendment) of the unused portion of the facility. The obligations under the PNC Credit Facility are collateralized by a pledge of the capital stock of certain operating subsidiaries of the Company and by security interests in substantially all of the assets of the Company. The PNC Credit Facility contains various financial and other covenants and conditions, including, but not limited to, a prohibition on paying cash dividends and limitations on engaging in affiliate transactions, making acquisitions and incurring additional indebtedness. The PNC Credit Facility also limits capital expenditures to $6.0 million annually.
Under the PNC Credit Facility, the Company had outstanding $3.6 million of standby letters of credit, principally as security for the Company’s obligations under its workers compensation insurance policies and had remaining availability of $22.8 million as of December 27, 2009 based upon the borrowing base as defined in the loan agreement. The Company was in compliance with all financial covenants under the PNC Credit Facility at December 27, 2009.
| (10) | (Loss) Income Per Share |
Basic (loss) income per common share is computed by dividing net (loss) income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted (loss) income per share is computed assuming the exercise of stock options and warrants with exercise prices less than the average market value of the common stock during the period and the conversion of convertible debt and preferred stock into common stock to the extent such conversion assumption is dilutive. The following represents a reconciliation of the numerators and denominators for the basic and diluted (loss) income per share computations (in thousands, except per share amounts):
| | | | 2009 | | | 2008 | | | 2007 | |
| | Basic (loss) income per common share: | | | | | | | | | |
| | Net (loss) income from continuing operations | | $ | (12,151 | ) | | $ | 5,886 | | | $ | 4,989 | |
| | Dividends on preferred stock: | | | | | | | | | | | | |
| | Series 2003A | | | 461 | | | | 461 | | | | 461 | |
| | Series 2003B | | | 38 | | | | 38 | | | | 38 | |
| | Series 2004A | | | 506 | | | | 506 | | | | 506 | |
| | | | | 1,005 | | | | 1,005 | | | | 1,005 | |
| | | | | | | | | | | | | | |
| | (Loss) income available to common stockholders | | $ | (13,156 | ) | | $ | 4,881 | | | $ | 3,984 | |
| | | | | | | | | | | | | | |
| | Weighted average common shares outstanding | | | 17,388 | | | | 17,388 | | | | 17,385 | |
| | | | | | | | | | | | | | |
| | Basic (loss) income per common share | | $ | (0.76 | ) | | $ | 0.28 | | | $ | 0.23 | |
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
| | Diluted (loss) income per common share: | | | | | | | | | |
| | (Loss) income available to common stockholders | | $ | (13,156 | ) | | | 4,881 | | | | 3,984 | |
| | Dividends on preferred stock: | | | | | | | | | | | | |
| | Series 2003A | | | - | | | | 461 | | | | 461 | |
| | Series 2003B | | | - | | | | 38 | | | | 38 | |
| | Series 2004A | | | - | | | | 506 | | | | 506 | |
| | | | | - | | | | 1,005 | | | | 1,005 | |
| | After tax equivalent of interest expense on 8% Subordinated Convertible Note | | | - | | | | 76 | | | | 76 | |
| | (Loss) income for purposes of computing diluted income per common share | | $ | (13,156 | ) | | $ | 5,962 | | | $ | 5,065 | |
| | | | | | | | | | | | | | |
| | Weighted average common shares outstanding | | | 17,388 | | | | 17,388 | | | | 17,385 | |
| | Dilutive stock options | | | - | | | | 102 | | | | 278 | |
| | Assumed conversion of 8% Subordinated Convertible Note | | | - | | | | 974 | | | | 900 | |
| | Assumed conversion of Preferred Stock: | | | | | | | | | | | | |
| | Series 2003A | | | - | | | | 7,990 | | | | 7,549 | |
| | Series 2003B | | | - | | | | 1,253 | | | | 1,182 | |
| | Series 2004A | | | - | | | | 4,873 | | | | 4,576 | |
| | Weighted average common shares outstanding for purposes of computing diluted (loss) income per share | | | 17,388 | | | | 32,580 | | | | 31,870 | |
| | Diluted (loss) income per common share from continuing operations | | $ | (0.76 | ) | | $ | 0.18 | | | $ | 0.16 | |
In addition, options and warrants to purchase 2,655,000, 1,939,000 and 1,295,000 shares of common stock were outstanding as of the end of the fiscal years 2009, 2008 and 2007, respectively, but were not included in the computation of diluted (loss) income per share because their effect would be anti-dilutive.
The Company’s certificate of incorporation authorizes the Company to issue up to 10,000,000 shares, par value $.01 per share, of preferred stock in such series and having such rights and preferences as determined by the Company’s board of directors. The board has created three series of preferred stock, Series 2003A with 6,500 authorized shares, Series 2003B with 3,500 authorized shares and Series 2004A with 15,000 authorized shares.
The rights and preferences of the Company’s Series 2003A, 2003B and 2004A Convertible Preferred Stock (collectively, the “Series Preferred Stock”) are substantially identical except that the conversion price is $1.05 per share for the Series 2003A Preferred Stock, $0.54 per share for the Series 2003B Preferred Stock and $1.70 per share for the Series 2004A Preferred Stock. The conversion price is the price at which a holder of shares of Series Preferred Stock may convert such instruments into common stock (or, in certain circumstances, into a participating preferred stock which in turn will be convertible into common stock at the same effective rate). The Company is permitted to require conversion of the Series Preferred Stock if the average market price of its common stock for any six month period is at least $3.25 per share for the Series 2003A and 2003B Preferred Stock or $4.50 per share for the Series 2004A Preferred Stock, but only if the shares of Series Preferred Stock can be converted into freely tradable common stock.
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
Each share of Series Preferred Stock has a face amount of $1,000, has no voting rights and bears annual cumulative dividends of $75 per share (7.5% per annum). Upon liquidation, the holders of the Series Preferred Stock will be entitled to a liquidation preference of $1,000 per share plus the amount of cumulated, unpaid dividends before any distributions shall be made to the holders of common stock or any other junior series or class of stock of the Company. Unless the holders of two-thirds of the shares of the Series Preferred Stock outstanding shall have otherwise consented, no series or class of preferred stock having rights or preferences that are not junior to the Series Preferred Stock shall be issued by the Company. The holders of the Series Preferred Stock have no redemption rights.
The Company can only pay dividends on the Series Preferred Stock if (i) dividends can legally be paid in accordance with Delaware law, (ii) the Company’s board of directors, in its discretion upon the exercise of its fiduciary duties, declares that a dividend be paid, and (iii) payment of the dividend is permitted under the terms of the PNC Credit Facility. At December 27, 2009, there were cumulative, unpaid and undeclared dividends of $3.2 million on the Series 2003A Preferred Stock, $241,000 on the Series 2003B Preferred Stock and $2.6 million on the Series 2004A Preferred Stock.
In the event that the conversion of Series Preferred Stock into common stock of COMFORCE would require stockholder approval in accordance with the rules and regulations of the Securities and Exchange Commission or the NYSE Amex, or any other exchange or quotation system on which the Company’s shares are then listed, the Series Preferred Stock held by such holder shall not be convertible into common stock, but rather is convertible into shares of non-voting participating preferred stock having a liquidation preference of $0.01 per share (but no other preferences) to be created by the Company. The participating preferred stock will in turn be convertible into the Company’s common stock (on the same basis as if the conversion to common stock from Series Preferred Stock had occurred directly) if the conversion will not require stockholder approval in accordance with the rules and regulations of the Securities and Exchange Commission or NYSE Amex, or any other exchange or quotation system on which the Company’s shares are then listed. The holder of the Series Preferred Stock is a related party (see note 18).
(12) Stock Options and Warrants
Stock Options:
In 1993, the Company adopted, with stockholder approval, a Long-Term Stock Investment Plan (the “1993 Plan”) which, as amended, authorized the grant of options to purchase up to 5,000,000 shares of the Company’s common stock to executives, key employees and agents of the Company and its subsidiaries. All executive officers and other officers, directors and employees, as well as independent agents and consultants, of the Company and its subsidiaries were eligible to participate in the 1993 Plan and to receive option grants made before December 31, 2002. Effective as of December 31, 2002, no additional options were issuable under the 1993 Plan.
In 2002, the Company adopted with stockholder approval the 2002 Stock Option Plan (the “2002 Plan”), which originally authorized the grant of options to purchase up to 1,000,000 shares of the Company’s common stock to executives, key employees and agents of the Company and its subsidiaries. In 2006, the stockholders approved an amendment to the 2002 Plan to permit the issuance of an additional 1,000,000 shares under the plan. All executive officers and other officers, directors and employees, as well as independent agents and consultants, of the Company and its subsidiaries are eligible to participate in the 2002 Plan and to receive option grants.
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
The following table summarizes stock option activity during the year ended December 27, 2009:
| | | | Number of Shares | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value | | Weighted Average Grant Date Option Fair Value | |
| | | | | | | | | | | | | | | | |
| | Outstanding at December 28, 2008 | | | 2,355,000 | | | $ | 2.57 | | | | | | | |
| | Granted | | | 675,000 | | | | 1.70 | | | | | | $ | 0.43 | |
| | Forfeitures | | | - | | | | - | | | | | | | | |
| | Expired | | | (375,000 | ) | | | (4.69 | ) | | | | | | | |
| | Exercised | | | - | | | | - | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | Outstanding and exercisable at December 27, 2009 | | | 2,655,000 | | | $ | 2.05 | | 5.01 | | $ 14,600 | | | | |
The contractual term of all outstanding stock option awards is 10 years. There were no stock option exercises in 2009 or 2008. The total cash received from stock option exercises for the years ended December 30, 2007 was $26,000. The aggregate intrinsic value of exercised options for December 30, 2007 was $12,472. The Company expects to settle future employee stock option exercises with the issuance of new shares.
Warrants:
At December 27, 2009, the Company had no outstanding warrants to purchase common stock. At December 28, 2008, the Company had outstanding warrants to purchase a total of 169,000 shares of common stock at a price of $7.55 per share, which warrants expired in December 2009.
(13) Litigation and Contingencies
Lake Calumet Matter: In November 2003, the Company received a general notice letter from the United States Environmental Protection Agency (the “U.S. EPA”) that it is a potentially responsible party at Chicago’s Lake Calumet Cluster Site, which for decades beginning in the late 19th/early 20th centuries had served as a waste disposal site. In December 2004, the U.S. EPA sent the Company and numerous other companies special notice letters requiring the recipients to make an offer by a date certain to perform a remedial investigation and feasibility study (RI/FS) to select a remedy to clean up the site. The Company’s predecessor, Apeco Corporation (“Apeco”), a manufacturer of photocopiers, allegedly sent waste material to this site. The State of Illinois and the U.S. EPA have proposed that the site be designated as a Superfund site. The Company is one of over 500 potentially responsible parties most of which may no longer be in operation or viable to which notices were sent, and the Company has joined a working group of more than 175 members representing potentially responsible parties (the “PRP working group”) for the purpose of responding to the U. S. EPA and the Illinois Environmental Protection Agency (the “Illinois EPA”).
The U.S. EPA and Illinois EPA currently allege that combined past costs for work at the site are close to $20.0 million and estimates to finish the cover remedy at the landfill portion of the site range between $10.0 million and $16.0 million. Although the total volume of waste at the site has not been finalized, a draft interim allocation lists the Company’s total contribution of waste at the site at 13,904 gallons
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
representing slightly less than 0.5% of current total volume estimates. The Company recorded accruals representing the probable costs in connection with this matter of $150,000 in the fourth quarter of 2009.
Presently, the Illinois EPA has taken the lead in negotiating with the PRP working group at the site. The Illinois EPA has also begun but not completed remedial activities directed toward placing an engineered cover to cap the site. Recent discussions between the PRP working group and the Illinois EPA indicate that the agency is seeking a settlement for past costs and either funds to complete the cover remedy at the landfill portion of the site or an agreement by the PRP working group that it will complete the remedy.
The Company has made inquiries of the insurance carriers for Apeco to determine if it has coverage under old insurance policies. No assurance can be given that the costs to the Company to resolve this claim will be within management’s estimates.
Pipeline Case: In July 2005, the Company’s subsidiary, COMFORCE Technical Services, Inc. (“CTS”) was served with an amended complaint in the suit titled Reyes V. East Bay Municipal Utility District, et al, filed in the Superior Court of California, Alameda County, in connection with a gas pipeline explosion in November 2004 that killed five workers and injured four others. As part of a construction project to lay a water transmission line, a backhoe operator employed by a construction contractor unaffiliated with CTS allegedly struck and breached a gas pipeline and an explosion occurred when leaking gas ignited. The complaint names various persons involved in the construction project as defendants, including CTS. The complaint alleges, among other things, that CTS was negligent in failing to properly mark the location of the pipeline. The complaint did not specify specific monetary damages.
CTS was subsequently named as a defendant in 15 other lawsuits concerning this accident in the Superior Court of California which have been consolidated with the Reyes case in a single coordinated action styled as the Gas Pipeline Explosion Cases in the Superior Court of California, Contra Costa County. Two co-defendants brought cross-claims against CTS. In addition, a company that provided insurance coverage to a private home and property damaged by the explosion brought a subrogation action against CTS. CTS denies any culpability for this accident. Following an investigation of the accident, Cal-OSHA issued citations to four unrelated contractors on the project, but declined to issue any citations against CTS. Although Cal-OSHA did not issue a citation against CTS, it will not be determinative in the pending civil cases.
CTS requested that its insurance carriers defend it in these actions, and the carrier under the primary policy appointed counsel and has defended CTS in these actions. As of June 2007, CTS settled with 17 of the 19 plaintiffs, in each case within the limits of its primary policy, except as described below. With the settlements, the limits under the primary policy have been reached. The umbrella insurance carrier for CTS had previously denied the claims of CTS for coverage, claiming that the matter was within the policy exclusions. As of February 2009 one of the two remaining matters was settled when one plaintiff discontinued its pursuit of an appeal of a prior settlement and announced it would accept its allocated portion of a prior settlement. In July 2009, CTS reached an oral agreement in principle to settle with the final plaintiff, Mountain Cascade, Inc. Under the arrangements reached with the umbrella insurance carrier in the second quarter of 2009, the Company agreed to bear $325,000 of expenses associated with these matters and accrued this amount as an expense in the financial statements for 2009.
Contract Contingency: In 2006, CTS entered into a contract with a United States government agency (the “Agency”) to provide technical, operational and professional services in foreign countries throughout the world for humanitarian purposes. Persons employed by CTS or its subsidiaries in the host countries include U.S. nationals, nationals of the host countries (local nationals) and nationals of other countries (third country nationals). The contract provides, generally, that the U.S. government will reimburse the Company for all direct labor properly chargeable to the contract plus fringe benefits, in some cases at specified rates and profit.
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
The contract did not directly address taxes payable to foreign jurisdictions, but the contracting officer advised CTS by letter that it should not make tax payments or withholdings in the host countries because the Agency had negotiated or would negotiate with the host countries and expected these discussions to lead to bilateral agreements exempting contractors and contractor personnel from all tax liability. The contract provides that CTS will be reimbursed for “all fines, penalties, and reasonable litigation expenses incurred as a result of compliance with specific contract terms and conditions or written instructions from the Contracting Officer.”
The contracting officer subsequently advised CTS that the U.S. government has concluded its efforts to obtain bilateral agreements, and directed CTS to itself undertake mitigation efforts. CTS engaged an independent accounting firm to assist it with these efforts, which have been substantially completed except in some countries experiencing social unrest and government instability. As a result of its analysis of host country tax laws and negotiations with host country governments, in most cases, CTS has either determined that no liability exists for wage tax liabilities or it has instituted procedures to withhold or pay applicable wage taxes for its employees. As for any remaining host countries, management has concluded that it is not probable that wage tax assessments will be made against CTS. Although the Agency has agreed to reimburse us with respect to any such wage tax liabilities, any amounts assessed against CTS for wage tax liabilities could potentially exceed the amount available to us from our own resources or under the PNC Credit Facility. In such event, it is anticipated that the Company would request PNC to make a special advance or request the Agency to pre-fund these liabilities.
State Tax Audit: In January 2010, the Company settled, for $2.8 million, a long-running state tax examination of certain non-income related business taxes covering the period from January 2002 through December 2009. In this examination, the Company vigorously defended its filed tax return positions, which it continues to believe were proper and supportable. However, the Company incurred significant professional costs in the examination process over a period of approximately five years and, in the face of incurring significant additional professional costs and satisfying state bonding requirements, we decided to end the examination by accepting settlement terms. The Company previously recorded accruals in cost of services in connection with this matter, including $1.5 million in the second and third quarters of 2009. The resolution of this matter resulted in an additional accrual in the fourth quarter of 2009 of $1.2 million and $100,000 in prior years.
Other Matters: The Company is also a party to contract and employment-related litigation matters, and audits of state and local tax returns arising in the ordinary course of its business. In the opinion of Management, the aggregate liability, if any, with respect to such matters will not materially adversely affect our financial position, results of operations, or cash flows. The Company expenses legal costs associated with contingencies when incurred. The Company maintains general liability insurance, property insurance, automobile insurance, fidelity insurance, errors and omissions insurance, professional/medical malpractice insurance, fiduciary insurance, and directors’ and officers’ liability insurance for domestic and foreign operations as management deems appropriate and prudent. The Company is generally self-insured with respect to workers compensation, but maintains excess workers compensation coverage to limit its maximum exposure to such claims.
(14) Savings Incentive and Profit Sharing Plan
The Company provides a savings incentive and profit sharing plan (the “Plan”). All eligible employees may make contributions to the Plan on a pre-tax salary deduction basis in accordance with the provisions of Section 401(k) of the Internal Revenue Code. No contributions to the Plan were made by the Company in 2009, 2008 or 2007.
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
Certain employees who perform work for governmental agencies are required to be covered under a separate defined contribution plan. During 2009, 2008 and 2007, the Company recorded approximately $443,000, $641,000 and $858,000, respectively, of expense related to these benefits.
(15) Lease Commitments
The Company leases certain office space and equipment. Rent expense for all operating leases in 2009, 2008 and 2007 approximated $3,118,000, $3,235,000 and $3,177,000, respectively.
As of December 27, 2009, future minimum rent payments due under the terms of noncancelable operating leases excluding amounts that will be paid for operating costs are (in thousands):
| | 2010 | | $ | 2,119 | |
| | 2011 | | | 1,477 | |
| | 2012 | | | 974 | |
| | 2013 | | | 155 | |
| | Thereafter | | | 69 | |
| | | | $ | 4,794 | |
(16) Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk consist primarily of cash and cash equivalents and trade receivables.
The Company maintains cash in bank accounts which may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash balances.
At the end of fiscal 2009, the Company had five customers that accounted for 41.1% of the Company’s total accounts receivable, one of which had accounts receivable balances in excess of 10% of the Company’s total accounts receivable. At the end of fiscal 2008, the Company had three customers that accounted for 29.1% of the Company’s total accounts receivable, one of which had accounts receivable balances in excess of 10% of the Company’s total accounts receivable. At the end of fiscal 2007, the Company had five customers that accounted for 42.5% of the Company’s total accounts receivable, one of which had accounts receivable balances in excess of 10% of the Company’s total accounts receivable. The largest four customers of the Company accounted for an aggregate of approximately 24.4%, 26.3% and 24.7% of the Company’s revenues for the fiscal years 2009, 2008 and 2007, respectively.
(17) Segment Information
The Company’s reportable segments are distinguished principally by the types of services offered to the Company’s clients. The Company manages its operations and reports its results through three operating segments -- Human Capital Management Services, Staff Augmentation and Financial Outsourcing Services. The Human Capital Management Services segment primarily provides contingent workforce management services. The Staff Augmentation segment provides healthcare support, technical and engineering, information technology (IT), telecommunications and other staffing services. The Financial Outsourcing Services segment provides funding and back office support services to independent consulting and staffing companies.
COMFORCE evaluates the performance of its segments and allocates resources to them based on operating contribution, which represents segment revenues less direct costs of operations, excluding the allocation of
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
corporate general and administrative expenses. Assets of the operating segments reflect primarily accounts receivable and goodwill associated with segment activities; all other assets are included as corporate assets. The Company does not evaluate or account for expenditures for long-lived assets on a segment basis.
The table below presents information on revenues and operating contribution for each segment for the years ended December 27, 2009, December 28, 2008 and December 30, 2007, and items which reconcile segment operating contribution to COMFORCE’s reported (loss) income from continuing operations before income taxes (in thousands):
| | | | | | | | | | |
| Net sales of services: | | | | | | | | | |
| Human Capital Management Services | | $ | 394,614 | | | $ | 389,482 | | | $ | 363,696 | |
| Staff Augmentation | | | 167,154 | | | | 213,912 | | | | 219,471 | |
| Financial Outsourcing Services | | | 2,020 | | | | 3,242 | | | | 3,518 | |
| | | $ | 563,788 | | | $ | 606,636 | | | $ | 586,685 | |
| Operating contribution: | | | | | | | | | | | | |
| Human Capital Management Services | | $ | 18,075 | | | $ | 16,975 | | | $ | 16,140 | |
| Staff Augmentation (1) | | | (7,041 | ) | | | 18,527 | | | | 18,207 | |
| Financial Outsourcing Services | | | 1,910 | | | | 3,034 | | | | 3,078 | |
| | | | 12,944 | | | | 38,536 | | | | 37,425 | |
| Consolidated expenses: | | | | | | | | | | | | |
| Corporate general and administrative expenses | | | 18,408 | | | | 19,217 | | | | 18,856 | |
| Depreciation and amortization | | | 3,599 | | | | 3,156 | | | | 2,803 | |
| Interest and other, net | | | 1,982 | | | | 5,464 | | | | 7,025 | |
| Loss on debt extinguishment | | | - | | | | 278 | | | | 443 | |
| | | | 23,989 | | | | 28,115 | | | | 29,127 | |
| | | | | | | | | | | | | |
| (Loss) income from continuing operations before income taxes | | $ | (11,045 | ) | | $ | 10,421 | | | $ | 8,298 | |
| | | | | | | | | | | | | |
| Total assets: | | | | | | | | | | | | |
| Human Capital Management Services | | $ | 106,123 | | | $ | 113,775 | | | | | |
| Staff Augmentation | | | 34,988 | | | | 59,061 | | | | | |
| Financial Outsourcing Services | | | 8,107 | | | | 8,941 | | | | | |
| Corporate | | | 16,067 | | | | 19,959 | | | | | |
| | | $ | 165,285 | | | $ | 201,736 | | | | | |
| (1) | Included in December 27, 2009 was a goodwill impairment charge of $16.1 million (see notes 4 and 5). |
| (18) | Related Party Transactions |
Convertible Note and Preferred Stock: Fanning CPD Assets, LP (the “Fanning CPD Partnership”), a limited partnership in which John C. Fanning, the Company’s chairman and chief executive officer, held an 82.7% economic interest, was the holder of $1.9 million principal amount of the Company’s 8% Convertible Subordinated Note (the “Convertible Note”) until its repayment in full at its maturity on December 2, 2009.
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
Under the terms of the Convertible Note, the Company was permitted to pay interest in cash or kind, at its election. As permitted under the terms of the Convertible Note, the semi-annual interest payment due on June 1, 2009 was paid in kind through the addition to the principal of the Convertible Note of accrued interest of approximately $71,000. All principal under the Convertible Note and the accrued interest payment of $1.9 million due at its maturity on December 2, 2009 were paid in cash, principally from funds borrowed under the PNC Credit Facility.
During fiscal 2009, dividends cumulated in the amount of $3.2 million on the Company’s Series 2003A Preferred Stock, $241,000 on the Series 2003B Preferred Stock and $2.6 million on the Series 2004A Preferred Stock. Although these cumulated dividends have not been declared by the Company’s board of directors and are not payable, the holders can elect to convert all or any portion of these shares of Series Preferred Stock, including the cumulated dividends, into common stock (or, in certain circumstances, into a participating preferred stock which in turn will be convertible into common stock at the same effective rate) at a conversion price of $1.05 per share for the Series 2003A Preferred Stock, $0.54 per share for the Series 2003B Preferred Stock and $1.70 per share for the Series 2004A Preferred Stock. See note 9 to our consolidated financial statements.
Other Transactions: Rosemary Maniscalco, through a company owned by her, provided consulting services to the Company, at the rate of up to $1,500 per day, plus expenses. During 2009, 2008 and 2007, the Company paid $77,582, $113,923 and $124,420, respectively, for such consulting services. Rosemary Maniscalco is the vice chairman of the Company’s board of directors.
| (19) | Sale of Niche Telecom Operations |
In 2004, COMFORCE sold its interest in two telecom subsidiaries in the Staff Augmentation segment. The buyer, Spears Holding Company, Inc. (“Spears”), is controlled by an individual who was one of the principals of these companies when they were sold to COMFORCE in 1998. The consideration included cash of $1,448,000 and short-term promissory notes of $1,150,000 which were paid during fiscal 2004. Consideration also included three long-term promissory notes totaling $3.7 million which were valued at $1.4 million by an independent valuation firm. The sale resulted in a gain of $1,102,000, which represented the excess of the net proceeds (cash and short-term notes of $2,598,000 plus the fair value of the long-term notes of $1,400,000, less transaction costs of $144,000), over the net book value of the net assets of the business sold of $2,752,000. The Company did not recognize any gain on this transaction until the cash payments it received exceeded its investment ($2,896,000) in the business sold. The cash received under the sale agreement, including principal and interest on the notes, was recorded as a reduction of, and, during the second quarter of 2005, had eliminated the balance in net assets held for sale. Cash received during 2005 in excess of net assets held for sale of $101,000 has been recorded as a gain from the sale of discontinued operations. This was partially offset by $31,000, net of tax, of legal fees which resulted in income from discontinued operations for fiscal 2005 of $70,000.
Following mediation and extended negotiations, the parties reached settlement in September, 2007 under which $1.0 million was received in the fourth quarter of 2007 in full satisfaction of all amounts due to the Company. The $1.0 million was recorded as a gain from the sale of discontinued operations in 2007. The settlement resulted in a capital loss for income tax purposes. Accordingly, no provision for income taxes was recorded.
COMFORCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009, December 28, 2008 and December 30, 2007
(20) Selected Quarterly Financial Data (unaudited)
(In thousands, except per share data and footnotes)
| | Fiscal 2009 | | Quarter | | | | |
| | | | First | | | Second | | | Third | | | Fourth | | | Year ended December 27, 2009 | |
| | Net sales of services | | $ | 138,029 | | | $ | 141,689 | | | $ | 139,710 | | | $ | 144,360 | | | $ | 563,788 | |
| | Gross profit | | | 20,619 | | | | 20,210 | | | | 19,948 | | | | 19,591 | | | | 80,368 | |
| | Net (loss) income | | | 156 | | | | 598 | | | | 1,056 | | | | (13,961 | ) | | | (12,151 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | (Loss) income per share: (1) | | | | | | | | | | | | | | | | | | | | |
| | Basic | | $ | (0.01 | ) | | $ | 0.02 | | | $ | 0.05 | | | $ | (0.82 | ) | | $ | (0.76 | ) |
| | Diluted | | $ | (0.01 | ) | | $ | 0.02 | | | $ | 0.03 | | | $ | (0.82 | ) | | $ | (0.76 | ) |
| | Fiscal 2008 | | Quarter | | | | |
| | | | First | | | Second | | | Third | | | Fourth | | | Year ended December 28, 2008 | |
| | Net sales of services | | $ | 150,210 | | | $ | 152,756 | | | $ | 149,435 | | | $ | 154,235 | | | $ | 606,636 | |
| | Gross profit | | | 23,808 | | | | 24,391 | | | | 23,551 | | | | 24,698 | | | | 96,448 | |
| | Net income | | | 992 | | | | 1,599 | | | | 1,347 | | | | 1,948 | | | | 5,886 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Income per share: (1) | | | | | | | | | | | | | | | | | | | | |
| | Basic | | $ | 0.04 | | | $ | 0.08 | | | $ | 0.06 | | | $ | 0.10 | | | $ | 0.28 | |
| | Diluted | | $ | 0.03 | | | $ | 0.05 | | | $ | 0.04 | | | $ | 0.06 | | | $ | 0.18 | |
| (1) | Since per share information is computed independently for each quarter and the full year, based on the respective average number of common shares outstanding, the sum of the quarterly per share amounts does not necessarily equal the per share amounts for the fiscal year. |
(21) Subsequent Events
In February 2010, we entered into a new lease for our headquarters facility in Bethpage, New York, and we expect to take possession of the facility in June 2010 and to pay monthly rent as follows:
| | Payments due by fiscal year (in thousands) | |
| | 2010 | | $ | 447 | |
| | 2011 | | | 780 | |
| | 2012 | | | 804 | |
| | 2013 | | | 828 | |
| | Thereafter | | | 6,072 | |
| | Total | | $ | 8,931 | |
The Company has evaluated subsequent events through the time of filing of these financial statements with the SEC, and noted there were no other events that are subject to recognition or disclosure.
COMFORCE CORPORATION AND SUBSIDIARIES
Schedule II Valuation and Qualifying Accounts
Fiscal years ended December 27, 2009, December 28, 2008 and December 30, 2007
(in thousands)
| | | Balance at beginning of period | | | Charged to costs and expenses | | | Charged to other accounts | | | Deductions (Net (write-offs) recoveries) | | | | |
| For the fiscal year ended December 27, 2009: | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 112 | | | | 36 | | | | - | | | | (46 | ) | | $ | 102 | |
| For the fiscal year ended December 28, 2008: | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 173 | | | | 1 | | | | - | | | | (62 | ) | | $ | 112 | |
| For the fiscal year ended December 30, 2007: | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 276 | | | | 89 | | | | - | | | | (192 | ) | | $ | 173 | |
EXHIBIT INDEX
Unless otherwise indicated, for documents incorporated herein by reference to exhibits included in SEC filings of COMFORCE Corporation, the registration number for COMFORCE Corporation is 001-06801.
| 3.1 | Restated Certificate of Incorporation of COMFORCE Corporation, as amended by Certificates of Amendment filed with the Delaware Secretary of State on June 14, 1987 and February 12, 1991 (included as an exhibit to Amendment No. 1 to the Registration Statement on Form S-1 of COMFORCE Corporation filed with the Commission on May 10, 1996 (Registration No. 033-6043) and incorporated herein by reference). |
| 3.2 | Certificate of Ownership (Merger) of COMFORCE Corporation into Lori Corporation (included as an exhibit to COMFORCE Corporation’s Annual Report on Form 10-K for the fiscal year December 31, 1995 and incorporated herein by reference). |
| 3.3 | Certificate of Amendment of Certificate of Incorporation of COMFORCE Corporation filed with the Secretary of State of Delaware on October 28, 1996 (included as an exhibit to COMFORCE Corporation’s Registration Statement on Form S-8 of COMFORCE Operating, Inc. filed with the Commission on March 13, 2000 (Registration No. 333-56962) and incorporated herein by reference). |
| 3.4 | Certificate of Ownership (Merger) of AZATAR into COMFORCE Corporation (included as an exhibit to COMFORCE Corporation's Current Report on Form 8-K dated November 8, 1996 and incorporated herein by reference). |
| 3.5 | Amended and Restated Certificate of Designation and Determination of Rights and Preferences of Series 2003A, 2003B and 2004A Convertible Preferred Stock of COMFORCE Corporation filed with the Secretary of State of Delaware on December 8, 2004 (included as an exhibit to COMFORCE Corporation's Current Report on Form 8-K dated December 13, 2004 and incorporated herein by reference). |
| 3.6 | Bylaws of COMFORCE Corporation, as amended and restated effective as of February 26, 1997 (included as an exhibit to COMFORCE Corporation’s Annual Report on Form 10-K for the fiscal year December 31, 1996 and incorporated herein by reference). |
| 3.7 | Amendment to Amended and Restated Bylaws of COMFORCE Corporation, as adopted and effective as of May 3, 2006 (included as an exhibit to COMFORCE Corporation’s Current Report on Form 8-K filed May 4, 2006 and incorporated herein by reference). |
| 3.8 | Amendment to Amended and Restated Bylaws of COMFORCE Corporation, as adopted on December 20, 2007 and effective as of January 1, 2008 (included as an exhibit to COMFORCE Corporation’s Current Report on Form 8-K filed December 20, 2007 and incorporated herein by reference). |
| 10.1 | Amended and Restated Employment Agreement dated as of March 31, 2008 between COMFORCE Corporation, COMFORCE Operating, Inc. and John C. Fanning (filed as an exhibit to the Company’s Current Report on Form 8-K filed April 2, 2008 and incorporated herein by reference). |
| 10.2 | Amended and Restated Employment Agreement dated as of March 31, 2008 between COMFORCE Corporation, COMFORCE Operating, Inc. and Harry V. Maccarrone (filed as an exhibit to the Company’s Current Report on Form 8-K filed April 2, 2008 and incorporated herein by reference). |
| 10.3 | Company’s 2002 Stock Option Plan adopted at the Company’s 2002 annual meeting of stockholders held June 13, 2002 (included as Annex A to the definitive proxy statement of COMFORCE Corporation filed April 29, 2002 and incorporated herein by reference). |
| 10.4 | Amendment to the Company’s 2002 Stock Option Plan adopted at the Company’s 2006 annual meeting of stockholders held June 7, 2006 (included as an exhibit to COMFORCE Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 25, 2006 and incorporated herein by reference). |
| 10.5 | Second Restated Deferred Compensation Plan approved as of March 31, 2008 (filed as an exhibit to the Company’s Current Report on Form 8-K filed April 2, 2008 and incorporated herein by reference). |
| 10.6 | Second Restated Deferred Vacation Plan approved as of March 31, 2008 (filed as an exhibit to the Company’s Current Report on Form 8-K filed April 2, 2008 and incorporated herein by reference). |
| 10.7 | Amended and Restated Revolving Credit and Security Agreement dated as of November 2, 2009 among the Company, PNC Bank, National Association, as lender and administrative agent, and other named lenders (included as an exhibit to COMFORCE Corporation's Current Report on Form 8-K filed on November 5, 2009 and incorporated herein by reference). |
| 21.1* | List of Subsidiaries. |
| 23.1* | Consent of KPMG LLP. |
| 31.1* | Rule 13a-14(a) certification of chief executive officer in accordance with section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2* | Rule 13a-14(a) certification of chief financial officer in accordance with section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1* | Section 1350 certification of chief executive officer in accordance with section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2* | Section 1350 certification of chief financial officer in accordance with section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed herewith.
