UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




FORM 10-Q







ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 27, 2009ORo
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934for the transition period from ________________ to ________________





Commission file number:  1-6081





COMFORCE Corporation


(Exact name of registrant as specified in its charter)





Delaware
36-2262248(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)415 Crossways Park Drive, P.O. Box 9006, Woodbury, NY
11797(Address of principal executive offices)
(Zip Code)





516.437.3300


(Registrant’s telephone number, including area code)





Not applicable


(Former name, former address and former fiscal year, if changed since last report)




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes ý     No o




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 for such shorter period that the registrant was required to submit and post such files).


Yes ý     No 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer o
Accelerated filer  oNon-accelerated filer  o  (Do not check if a smaller reporting company)
Smaller reporting company  ý





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes o     No  ý




Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.




Class

Outstanding at November 2, 2009Common Stock, $0.01 par value per share

17,387,657 shares








COMFORCE Corporation





INDEX











PageNumberPART I
FINANCIAL INFORMATION
3Item 1.
Financial Statements (unaudited)
3Condensed Consolidated Balance Sheets at September 27, 2009 and December 28, 2008
3Condensed Consolidated Statements of Income for the three and nine months ended September 27, 2009 and September 28, 2008
4Condensed Consolidated Statements of Cash Flows for the nine months ended September 27, 2009 and September 28, 2008
5Notes to Unaudited Condensed Consolidated Financial Statements
6Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15Item 3.
Quantitative and Qualitative Disclosures about Market Risk
24Item 4T.
Controls and Procedures
24PART II
OTHER INFORMATION
25Item 1.
Legal Proceedings
25Item 1A.
Risk Factors
26Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26Item 3.
Defaults Upon Senior Securities
26Item 4.
Submission of Matters to a Vote of Security Holders
26Item 5.
Other Information
26Item 6.
Exhibits
26SIGNATURES
27





2


PART I - FINANCIAL INFORMATION





ITEM 1.  FINANCIAL STATEMENTS




COMFORCE CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands, except share and per share amounts)


(unaudited)




Assets

September 27, 2009


December 28, 2008Current assets:Cash and cash equivalents

$
3,819


$
6,137Accounts receivable, less allowance of $128 in 2009 and $92 in 2008


121,516



140,763Funding and service fees receivable, less allowance of $8 in 2009 and $20 in 2008


7,877



8,941Prepaid expenses and other current assets


3,252



3,014Deferred income taxes, net


353



353Total current assets


136,817



159,208Property and equipment, net


9,183



10,057Deferred financing costs, net


96



213Goodwill


32,073



32,073Other assets, net


85



185Total assets

$
178,254


$
201,736Liabilities and Stockholders’ DeficitCurrent liabilities:Accounts payable

$
4,362


$
2,675Short-term debt (related party)


1,849



1,778Accrued expenses


107,226



131,441Total current liabilities


113,437



135,894Long-term debt


65,198



68,200Deferred taxes, net


1,205



1,074Other liabilities


190



401Total liabilities


180,030



205,569Commitments and contingenciesStockholders’ deficit:Common stock, $.01 par value; 100,000,000 shares authorized; 17,387,649 and 17,387,560 shares issued and outstanding in 2009 and 2008, respectively


174



174Convertible preferred stock, $.01 par value:Series 2003A, 6,500 shares authorized; 6,148 shares issued and outstanding at September 27, 2009 and December 28, 2008, with an aggregate liquidation preference of $9,195 at September 27, 2009 and $8,850 at December 28, 2008


4,304



4,304Series 2003B, 3,500 shares authorized; 513 shares issued and outstanding at September 27, 2009 and December 28, 2008, with an aggregate liquidation preference of $743 at September 27, 2009 and $714 at December 28, 2008


513



513Series 2004A, 15,000 shares authorized; 6,737 shares issued and outstanding at September 27, 2009 and December 28, 2008, with an aggregate liquidation preference of $9,170 at September 27, 2009 and $8,790 at December 28, 2008


10,264



10,264Additional paid-in capital


48,458



48,406Accumulated other comprehensive loss


(327
)


(522
)Accumulated deficit


(65,162
)


(66,972
)Total stockholders’ deficit


(1,776
)


(3,833
)Total liabilities and stockholders’ deficit

$
178,254


$
201,736The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3




COMFORCE CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF INCOME


(in thousands except per share amounts)


(unaudited)





Three Months Ended


Nine Months EndedSeptember 27, 2009


September 28, 2008


September 27, 2009


September 28, 2008Net sales of services

$
139,710


$
149,435


$
419,428


$
452,401Costs and expenses:Cost of services


119,762



125,884



358,651



380,651Selling, general and administrative expenses


16,405



18,727



53,425



57,978Depreciation and amortization


920



824



2,633



2,237Total costs and expenses


137,087



145,435



414,709



440,866Operating income


2,623



4,000



4,719



11,535Other (expense) income:Interest expense


(398
)


(963
)


(1,483
)


(3,531
)Loss on debt extinguishment


-



(149
)


-



(278
)Other (expense) income, net


(286
)


(445
)


106



(622
)(684
)


(1,557
)


(1,377
)


(4,431
)Income before income taxes


1,939



2,443



3,342



7,104Provision for income taxes


883



1,096



1,532



3,166Net income

$
1,056


$
1,347


$
1,810


$
3,938Dividends on preferred stock


252



252



754



754Net income available to common stockholders

$
804


$
1,095


$
1,056


$
3,184Basic income per common share

$
0.05


$
0.06


$
0.06


$
0.18Diluted  income per common share

$
0.03


$
0.04


$
0.05


$
0.12Weighted average common shares outstanding, basic


17,388



17,388



17,388



17,388Weighted average common shares outstanding, diluted


33,834



33,021



28,209



32,612





The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4


COMFORCE CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)




Nine Months EndedSeptember 27, 2009


September 28, 2008Cash flows from operating activities:Net income

$
1,810


$
3,938Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of property and equipment


2,633



2,237Amortization of deferred financing fees


118



134Net provision (recoveries) for bad debts


24



(1
)Deferred income taxes


-



(31
)Interest expense paid by the issuance of convertible notes


71



66Loss on repurchase of Senior Notes


-



278Share-based payment compensation expense


46



65Changes in assets and liabilities:Accounts, funding and service fees receivable


20,527



(4,496
)Prepaid expenses and other current assets


(161
)


1,053Accounts payable and accrued expenses


(22,555
)


8,429Income tax receivable


23



(2
)Net cash provided by operating activities


2,536



11,670Cash flows from investing activities:Purchases of property and equipment


(1,759
)


(4,713
)Net cash used in investing activities


(1,759
)


(4,713
)Cash flows from financing activities:Net repayments under capital lease obligations


(189
)


(175
)Net (repayments) borrowings under line of credit agreements


(3,002
)


9,377Repurchases of Senior Notes


-



(11,884
)Debt financing costs


(1
)


-Net cash used in financing activities


(3,192
)


(2,682
)Net (decrease) increase in cash and cash equivalents


(2,415
)


4,275Effect of exchange rates on cash


97



116Cash and cash equivalents at beginning of period


6,137



6,654Cash and cash equivalents at end of period

$
3,819


$
11,045Supplemental disclosures:Cash paid for:Interest

$
1,314


$
3,619Income taxes


1,875



896




The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.




5


COMFORCE CORPORATION AND SUBSIDIARIES


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




1.   GENERAL




COMFORCE Corporation (“COMFORCE”) is a provider of outsourced staffing management services that enable Fortune 1000 companies and other large employers to consolidate, automate and manage staffing, compliance and oversight processes for their contingent workforces.  The Company also provides specialty staffing, consulting
and other outsourcing services to Fortune 1000 companies and other large employers for their healthcare support services, technical and engineering, information technology, telecommunications and other staffing needs.  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.




The accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in annual financial statements have been condensed or
omitted pursuant to those rules and regulations.  In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included.  Management believes that the disclosures made are adequate to ensure that the information presented is not misleading; however, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report
on Form 10-K for the fiscal year ended December 28, 2008.  The results for the three and nine month periods ended September 27, 2009 are not necessarily indicative of the results of operations that might be expected for the entire year.  In accordance with the Accounting Standards Codification (“ASC”) Topic 855, Subsequent Events (see note 4 below), we have evaluated all events or transactions for recognition or disclosure
through November 5, 2009, the date the financial statements were issued.







2.   ESTIMATES




The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.  Some of the significant estimates involved are the collectibility of receivables, the fair value of goodwill and share-based compensation expense, the recoverability of long-lived assets, deferred tax assets and tax uncertainties, accrued workers compensation liabilities and the assessment of litigation and contingencies.  Actual results could differ from those estimates.






3.   SHARE-BASED PAYMENTS




For the nine months ended September 27, 2009, the Company recorded $46,200 of compensation expense relating to the granting of stock options, which options immediately vested.  The compensation expense has been recorded within selling, general and administrative expenses.  In addition, the Company recorded an income tax
benefit of $21,000 in the accompanying statements of income related to these grants.  For the nine months ended September 28, 2008, $65,100 of compensation expense has been recorded within selling, general and administrative expense and the Company has recorded an income tax benefit of $26,000 in the accompanying statements of income for options granted during the second quarter of 2008, which options immediately vested.




The Company estimates the fair value of share-based payments using the Black-Scholes 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.




6


The per share weighted average grant date fair value of stock options was $0.66 during the nine months ended September 27, 2009 and $0.93 during the nine months ended September 28, 2008.  In addition to the exercise and grant date prices of the awards, certain weighted average assumptions that were used to estimate the fair value
of stock option grants in the nine month periods are listed in the table below:




Nine Months EndedSeptember 27, 2009

September 28, 2008Expected dividend yield


0.0%



0.0%Expected volatility


55.7%



47.2%Risk-free interest rate


2.93%



3.49%Expected term (years)


5



5







The Company estimates expected volatility based primarily on historical monthly 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 term of these
awards was determined using the “simplified method” prescribed in SEC Accounting Staff Bulletin (“SAB”) No. 107, as the Company believes that there is insufficient historical option exercise information available to make a reasonable estimate of the expected term.







4.   NEW ACCOUNTING PRONOUNCEMENTS




In December 2007, the Financial Accounting Standards Board (the “FASB”) issued guidance now codified as ASC Topic 805,  Business Combinations(“ASC  805”).  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 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 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, Noncontrolling Interest in Consolidated Financial Statements (“ASC  810”).  ASC 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 810, a change in control will be measured at fair value, with any gain or loss recognized in earnings.  The effective date for ASC 810 was December 29, 2008 for the Company.  We currently do not have minority interests in our consolidated subsidiaries and the adoption of ASC 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 Disclosures(“ASC 820”).  ASC 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 820 applies when another standard requires or permits assets or liabilities to be measured at fair value.  Accordingly, ASC 820 does not require any new fair value measurements. On December 29, 2008, we adopted the remaining provisions of ASC 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 820 did not materially impact our consolidated
financial statements.




In April 2009, the FASB issued ASC Topic 825,Financial Instruments (“ASC 825”).  ASC 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 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 825 does not change the accounting treatment for these financial instruments and is effective for interim reporting periods ending after June 15, 2009.   The additional disclosures required by ASC 825 are included
in note 6 to our condensed consolidated financial statements.




7


In May 2009, the FASB issued guidance now codified as ASC Topic 855, Subsequent Events (“ASC 855”).   ASC 855 establishes general standards of accounting for disclosing events that occur after the balance sheet date but before financial statements are
issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued.  ASC 855 became effective for the Company as of June 28, 2009.




In June 2009, the FASB issued guidance now codified as ASC Topic 105, Generally Accepted Accounting Principles (“ASC 105”).  ASC 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 105 explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants.   ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company adopted ASC 105 in the third quarter of 2009.  This
pronouncement had no effect on the Company’s condensed consolidated financial statements.







5.   DEBT




Long-term and short-term debt at September 27, 2009 and December 28, 2008, consisted of (in thousands):




September 27, 2009


December 28, 2008Convertible Related Party Note, due December 2, 2009

$
1,849


$
1,778Revolving line of credit, due November 2, 2012*, with interest payable at prime and/or LIBOR plus 1.5%* with weighted average rates of 1.9% at September 27, 2009 and 3.4% at December 28, 2008


65,198



68,200Total long-term and short-term debt

$
67,047


$
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) pluswith an interest rate spread of 1.5%.  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 5).





Contractual maturities of long-term debt are as follows (in thousands):





2012

$
65,198Total

$
65,198





Convertible Related Party Note:  The Company’s 8.0% Subordinated Convertible Note due December 2, 2009 (the “Convertible Note”) is 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 holder of the Convertible Note is a related party, Fanning CPD Assets, LP, a limited partnership in which John C. Fanning, the Company’s chairman and chief executive officer, holds an 82.4% economic interest. The Company intends to repay the Convertible Note in cash on its maturity date on December 2, 2009 using funds available under the Company’s
revolving line of credit (see “--Revolving Line of Credit,” below in this note 5).




8


Under the terms of the Convertible Note, interest is payable either in cash or in-kind at the Company’s election. Debt service costs associated with the Convertible Note have been satisfied through additions to principal through June 1, 2009 (the most recent semi-annual interest payment date).  Additional principal is convertible
into common stock on the same basis as other amounts outstanding under the Convertible Note, which provides for conversion into common stock at the rate of $1.70 per share.  As a result of its election to pay interest in-kind under the Convertible Note, the Company recognized beneficial conversion features of $14,000 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.  The Convertible Note may be prepaid in whole or in part, provided that the market value of the Company’s common stock exceeds $2.13 per share for a specified period of time.  The holder has 10 days to convert the Convertible Note following notice of prepayment.




Revolving Line of Credit:  At September 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, 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 aseurodollar 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 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.




9


Under the PNC Credit Facility, the Company had outstanding $3.8 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 $18.5 million as of September 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 September 27, 2009.







6.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.




The Company’s remaining fixed rate debt obligations are not traded, and their fair value may fluctuate significantly due to changes in the demand for securities of their type, the overall level of interest rates, conditions in the high yield capital markets, and perceptions as to the Company’s condition and prospects.  After
giving consideration to similar debt issues, and other market information, the Company believes that its remaining outstanding fixed rate debt instruments, being $1.8 million outstanding principal amount of its 8% Convertible Subordinated Notes, had an approximate fair value of $1.8 million at September 27, 2009.







7.   INCOME PER SHARE




Basic income per common share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during each period.  Diluted 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 income per share computations (in thousands, except per share amounts):




10




Three Months Ended


Nine Months EndedSeptember 27, 2009


September 28, 2008


September 27, 2009


September 28, 2008Basic income per common share:Net income

$
1,056


$
1,347


$
1,810


$
3,938Dividends on preferred stock:Series 2003A


115



115



345



345Series 2003B


10



10



29



29Series 2004A


127



127



380



380252



252



754



754Income available to common stockholders

$
804


$
1,095


$
1,056


$
3,184Weighted average common shares outstanding


17,388



17,388



17,388



17,388Basic income per common share

$
0.05


$
0.06


$
0.06


$
0.18Diluted income per common share:Income available to common stockholders

$
804


$
1,095


$
1,056


$
3,184Dividends on preferred stock:Series 2003A


115



115



345



345Series 2003B


10



10



29



29Series 2004A


127



127



-



380252



252



374



754After tax equivalent of interest expense on 8% Subordinated Convertible Note


20



20



59



61Income for purposes of computing diluted income per common share

$
1,076


$
1,367


$
1,489


$
3,999Weighted average common shares outstanding


17,388



17,388



17,388



17,388Dilutive stock options


24



101



16



135Assumed conversion of 8% Subordinated Convertible Note


1,095



1,013



1,053



974Assumed conversion of Preferred Stock:Series 2003A


8,648



8,209



8,428



7,989Series 2003B


1,360



1,289



1,324



1,253Series 2004A


5,319



5,021



-



4,873Weighted average common shares outstanding for purposes of computing diluted income per share


33,834



33,021



28,209



32,612Diluted income per common share

$
0.03


$
0.04


$
0.05


$
0.12





In addition, options and warrants to purchase 1.7 million and 1.9 million shares of common stock were outstanding as of the end of the third quarter of 2009 and 2008, respectively, but were not included in the computation of diluted income per share because their effect would be anti-dilutive.




11


8.   INDUSTRY 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 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 three and nine months ended September 27, 2009 and September 28, 2008, and items which reconcile segment operating contribution to COMFORCE’s reported income before income taxes (in thousands):




Three Months Ended


Nine Months EndedSeptember 27, 2009


September 28, 2008


September 27, 2009


September 28, 2008Net sales of services:Human Capital Management Services

$
99,877


$
96,925


$
287,986


$
290,214Staff Augmentation


39,301



51,524



129,931



159,567Financial Outsourcing Services


532



986



1,511



2,620$
139,710


$
149,435


$
419,428


$
452,401Operating contribution:Human Capital Management Services

$
5,113


$
4,272


$
12,228


$
11,978Staff Augmentation


2,448



4,280



7,759



13,834Financial Outsourcing Services


507



936



1,426



2,4698,068



9,488



21,413



28,281Consolidated expenses:Corporate general and administrative expenses


4,525



4,664



14,061



14,509Depreciation and amortization


920



824



2,633



2,237Interest expense


398



963



1,483



3,531Other expense (income), net


286



445



(106
)


622Loss on debt extinguishment


-



149



-



2786,129



7,045



18,071



21,177Income before income taxes

$
1,939


$
2,443


$
3,342


$
7,104





At September 27, 2009


At December 28, 2008Total assets:Human Capital Management Services

$
103,136


$
113,775Staff Augmentation


50,453



59,061Financial Outsourcing Services


7,877



8,941Corporate


16,788



19,959$
178,254


$
201,736







12


9.   COMPREHENSIVE INCOME




The components of comprehensive income are as follows (in thousands):




Three Months Ended


Nine Months EndedSeptember 27, 2009


September 28, 2008


September 27, 2009


September 28, 2008Net income

$
1,056


$
1,347


$
1,810


$
3,938Foreign currency translation adjustment, net of tax


146



90



195



189Total comprehensive income

$
1,202


$
1,437


$
2,005


$
4,127









10.   ACCRUED EXPENSES




Accrued expenses as of September 27, 2009 and December 28, 2008 consisted of (in thousands):




September 27, 2009


December 28, 2008Payroll, payroll taxes and sub-vendor payments

$
91,710


$
106,310Book overdrafts


4,968



13,497Other


10,548



11,634$
107,226


$
131,441







11.   LITIGATION AND OTHER 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 400 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 100 members representing over 120 potentially responsible parties for the purpose of responding to the United States and Illinois environmental protection agencies.




The Illinois EPA took control of the site and began to construct a cap on the site.  In 2008, the Company received a demand from the U.S. EPA for more than $2.0 million in past costs and a demand from the Illinois Environmental Protection Agency (“IEPA”) for over $14.0 million in IEPA's past costs for its partial work
on the cap.  The agencies are also demanding that the parties complete construction of the cap and investigate whether a groundwater remedy is required.  Cost estimates for that work have not yet been made and a final allocation of costs among the potentially responsible parties have not yet been made and a group has not yet, but will likely form to address these demands.  The Company's share is expected to be less than 1% of the total liability for these costs assuming that the
level of participation remains at least as high as it has been in the past.  The group believes that it has some defenses and challenges to the government's past cost claims and will likely try to negotiate a reduction in the amount of the claims.  Furthermore, 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.




13


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 nine months ended September 27, 2009 financial statements.




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.




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.




14


State Tax Audit:  The Company is currently undergoing a state tax examination related to certain business taxes.  The current state tax examination is ongoing and the Company has vigorously defended its filed tax return positions, which it continues to believe are
proper and supportable and, to date, the state has not proposed any tax audit assessments.  The Company has, however, incurred significant professional costs responding to the state examiners in connection with this examination over a period of approximately five years and has decided to seek to end the examination by proposing settlement terms.  While the ultimate resolution of this examination is uncertain, the Company recorded an additional accrual in cost of services in connection with
this matter in the second quarter of 2009 of approximately $920,000 and in the third quarter of 2009 of approximately $600,000.  These accruals were based upon the fact that the settlement offer now represents a probable and estimable liability, which was recorded based on the lowest end within a range of amounts as no amount within such range was more probable than any other in accordance with ASC Topic 450-20-05-5,Contingencies.  If
the Company is unable to resolve this matter on terms it deems satisfactory, it intends to continue to vigorously defend its position.  The ultimate resolution of this matter could result in additional impact to the Company's financial position, results of operations or cash flows, which impact could be material.




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.







ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




The discussion set forth below supplements the information found in the audited consolidated financial statements and related notes of COMFORCE Corporation (“COMFORCE”) and its wholly-owned subsidiaries, including COMFORCE Operating, Inc. (“COI”) (collectively, the “Company”).







Overview




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.







Recent Developments




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.  See note 5 to our condensed
consolidated financial statements and “Financial Condition, Liquidity and Capital Resources” in this Item 2 for a discussion of the terms of the PNC Credit Facility.




15


Some economists, including the Chairman of the Federal Reserve, maintain that the economic recession in the United States that began in December 2007 has ended.  However, employment in the United States continues to decline.  As reported by the Bureau of Labor Statistics (U.S. Department of Labor) in a report released
October 2, 2009, nonfarm payroll employment continued to decline in September (by 263,000), and the unemployment rate (9.8%) continued to trend up, with the largest job losses being in construction, manufacturing, retail trade and government. This report further stated that payroll employment had decreased by 7.6 million since the start of the recession in December 2007, and the unemployment rate has doubled during that time.  As previously reported, the staffing industry has been significantly and
adversely affected by current economic conditions and weak labor markets.




The Federal Reserve continues to take measures to stabilize the U.S. financial system and encourage lending; however, credit markets continue to be significantly tighter than before the economic recession began.  As previously reported, in February 2009, the American Recovery and Reinvestment Act of 2009 was signed into law, which
provides up to $787 billion in broad based relief to stimulate economic activity, including $288 billion in tax relief, $148 billion for health care, $91 billion for education, $83 billion for worker benefits, job training and unemployment relief, and $81 billion in infrastructure development.  While many of these stimulus efforts have already had a favorable impact on the United States economy, some economists predict that additional funds will be needed to prevent a prolonging or a recurrence of the
recession.




Management has been closely monitoring the economic conditions and government responses.  The Company continues its efforts to contain or reduce its expenses.  The impact of the tight 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 will increase and due to the amendment we will incur additional costs and fees in that connection.  See note 5 to our condensed consolidated financial statements and “Financial Condition, Liquidity and Capital Resources” in this Item 2 for a discussion of the terms of the PNC Credit Facility.




See “Risk Factors--Global economic conditions have created turmoil in credit and labor markets that could have a significant adverse impact on our operations” in Item 1A of our annual report on Form 10-K.




Results of Operations


Three months ended September 27, 2009 compared to three months ended September 28, 2008.


Net sales of services for the three months ended September 27, 2009 were $139.7 million, which represents a 6.5% decrease from the $149.4 million in net sales of services recorded for the three months ended September 28, 2008.  Net sales of services in the Human Capital Management Services segment increased by $3.0 million or 3.0%
due primarily to the addition of new clients, partially offset by a decrease in services provided to existing clients, particularly in the services provided to clients that have been significantly affected by economic conditions (see “Recent Developments” in this Item 2).  In the Staff Augmentation segment, net sales of services decreased $12.2 million, or 23.7%, reflecting a decrease in clients’ demand for services in this segment.  Net sales of services in the Financial
Outsourcing Services segment decreased $454,000, or 46.0%, due to a reduction of clients it services and reduced volume at existing clients.




Cost of services for the three months ended September 27, 2009 was 85.7% of net sales of services as compared to 84.2% for the three months ended September 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 in the third
quarter of 2009 compared to the same period in 2008.  In addition, the Company recorded an additional accrual in third quarter of 2009 related to a state tax examination (see note 11 to our condensed consolidated financial statements).  Cost of services as a percentage of net sales of services in the Human Capital Management Services segment for the three months ended September 27, 2009 was 87.6% as compared to 86.8% for the same period in 2008.  In the Staff Augmentation segment,
cost of services as a percentage of net sales of services for the third quarter of 2009 was 82.2% as compared to 81.0% for the third quarter of 2008.




16


Selling, general and administrative expenses as a percentage of net sales of services were 11.7% for the three months ended September 27, 2009, compared to 12.5% for the three months ended September 28, 2008.  The $2.3 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.  Management has and continues to undertake initiatives to reduce selling, general and administrative expenses and has been successful in reducing costs as sales decreased.




Operating income for the three months ended September 27, 2009 was $2.6 million, or 1.9% of net sales, as compared to operating income of $4.0 million, or 2.7% of net sales, for the three months ended September 28, 2008.  The Company’s operating income as a percentage of sales for the third quarter of 2009 was lower than for
the 2008 period principally due to the 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 the Convertible Note and, prior to their redemption in 2008, the 12% Senior Notes.   Interest expense of $398,000 for the third quarter of 2009 was lower as compared to the interest expense of $1.0 million for
the third quarter of 2008.  This decrease in interest expense was principally due to the repurchase and redemption of $11.7 million of the Company’s 12% Senior Notes due December 1, 2010 (the “12% Senior Notes”) in 2008, and to significantly lower interest rates under the PNC Credit Facility.




As a result of its final redemption of 12% Senior Notes in August 2008, the Company recognized a loss on debt extinguishment of $149,000 in the third quarter of 2008, including the write-off of $44,000 of deferred financing costs.




Other expense, net, for the three months ended September 27, 2009 of $286,000 compared to $445,000 for the three months ended September 28, 2008, principally consists of losses on foreign currency exchanges.




The income tax provision for the three months ended September 27, 2009 was $883,000 (a rate of 45.5%) on income before income taxes of $1.9 million.  The income tax provision for the three months ended September 28, 2008 was $1.1 million (a rate of 44.9%) on income before income taxes of $2.4 million.




The Company’s total unrecognized tax benefit as of September 27, 2009 was approximately $905,000, which, if recognized, would affect the Company’s effective tax rate.  For the three months ended September 27, 2009, the Company had approximately $9,500 of accrued interest and penalties reflected in the tax provision.




Nine months ended September 27, 2009 compared to nine months ended September 28, 2008.


Net sales of services for the nine months ended September 27, 2009 were $419.4 million, which represents a 7.3% decrease from the $452.4 million in net sales of services recorded for the nine months ended September 28, 2008.  Net sales of services in the Human Capital Management Services segment decreased by $2.2 million, or 0.8%
due primarily to a decrease in services provided to existing clients, particularly in the services provided to clients that have been significantly affected by economic conditions.  This decrease in services provided to existing clients was partially offset by an increase of services provided to new clients.  While management believes that over the past decade there has been a historical trend for companies to rely increasingly on providers of human capital management services, such as those
provided by the Company’s PrO Unlimited subsidiary, the current economic environment has impacted this trend (see “Recent Developments” in this Item 2).  In the Staff Augmentation segment, net sales of services decreased $29.6 million, or 18.6%, reflecting a decrease in clients’ demand for services in this segment.  Net sales of services in the Financial Outsourcing Services segment decreased $1.1 million, or 42.3%, due to a reduction of clients it services and reduced
volume at existing clients.




Cost of services for the nine months ended September 27, 2009 was 85.5% of net sales of services as compared to 84.1% for the nine months ended September 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 the first nine months of 2009 compared to the same period in




17


2008.  In addition, the Company recorded accruals in the second and third quarters of 2009 related to a state tax examination (see note 11 to our condensed consolidated financial statements).  Cost of services as a percentage of net sales of services in the Human Capital Management Services segment for the nine months ended
September 27, 2009 was 87.5% as compared to 86.9% for the same period in 2008.  In the Staff Augmentation segment, cost of services as a percentage of net sales of services for the first nine months of 2009 was 82.2% as compared to 80.5% for the first nine months of 2008.




Selling, general and administrative expenses as a percentage of net sales of services were 12.7% for the nine months ended September 27, 2009, compared to 12.8% for the nine months ended September 28, 2008.  The $4.6 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 pipeline litigation (see note 11 to our condensed consolidated financial statements).  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.




Operating income for the nine months ended September 27, 2009 was $4.7 million, or 1.1% of net sales, as compared to operating income of $11.5 million, or 2.5% of net sales, for the nine months ended September 28, 2008.  The Company’s operating income as a percentage of sales for the first nine months of 2009 was lower than
for the 2008 period principally due to the 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, the Convertible Note and, prior to their redemption in 2008, the 12% Senior Notes.  Interest expense of $1.5 million for the first nine months of 2009 was lower as compared to the interest expense of $3.5 million for
the first nine months of 2008.  This decrease in interest expense was principally due to the repurchase and redemption of $11.7 million of the 12% Senior Notes in 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 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 nine months ended September 28, 2008, including the write-off of $108,000 of deferred financing
costs.




Other income, net, for the nine months ended September 27, 2009 of $106,000 compared to other expense, net of $622,000 for the nine months ended September 28, 2008, principally consists of gains and losses, respectively, on foreign currency exchanges.




The income tax provision for the nine months ended September 27, 2009 was $1.5 million (a rate of 45.8%) on income before income taxes of $3.3 million.  The income tax provision for the nine months ended September 28, 2008 was $3.2 million (a rate of 44.6%) on income before income taxes of $7.1 million.




The Company’s total unrecognized tax benefit as of September 27, 2009 was approximately $905,000, which, if recognized, would affect the Company’s effective tax rate.  For the nine months ended September 27, 2009, the Company had approximately $26,000 of accrued interest and penalties reflected in the tax provision.







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 in all segments of our business during the first nine months of 2009 as compared to the same period in 2008.  Although some economists suggest that the current economic climate
in the United States is improving, employment in the United States continues to decline.  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:




18


·
decreasing the demand for contingent staff, although the pool of employee candidates should increase;




·
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 on unused availability.  In negotiating
the extension of the PNC Credit Facility, 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 October 18, 2009, under the PNC Credit Facility (with maximum availability of $95.0 million), we had outstanding $63.5 million principal amount under the PNC Credit Facility with remaining availability of up to $25.1 million based upon the borrowing base, as defined under the PNC Credit Facility agreement, to fund operations.  At
September 27, 2009 (with maximum availability under the facility of $110.0 million), we had outstanding $65.2 million principal amount under the PNC Credit Facility with remaining availability of up to $18.5 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 September 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 September 27, 2009.




Payments due by fiscal year (in thousands)2009


2010


2011


2012


ThereafterOperating Leases

$
755


$
1,936


$
1,247


$
750


$
93Employment Agreements


247



-



-



-



-PNC Credit Facility(1)- principal repayments


-



-



-



65,198



-Convertible Note(1) - principal repayments


1,849



-



-



-



-Total

$
2,851


$
1,936


$
1,247


$
65,948


$
93





(1)   See note 5 to our condensed consolidated financial statements.  The payment for the PNC Credit Facility is shown in the 2012 column and is not reflected in the 2010 column since the PNC Credit Facility was extended, as described below.





19


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 a 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 aseurodollar 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 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.




The Company also had standby letters of credit outstanding under the PNC Credit Facility at September 27, 2009 in the aggregate amount of $3.8 million, principally as security for the Company’s obligations under its workers compensation insurance policies.




As reported in the accompanying cash flow statement, during the first nine months of 2009, our primary source of funds was $2.5 million provided by operating activities due primarily to the profitability of the Company which was partially offset by $3.2 million used in financing activities.  We also used cash of $1.8 million in
investing activities due to the purchases of property and equipment.




At September 27, 2009, we had outstanding $65.2 million principal amount under the PNC Credit Facility bearing interest at a weighted average rate of 1.9% per annum.




20


At September 27, 2009, we also had outstanding $1.8 million principal amount of the Convertible Note bearing interest at 8% per annum.  The Company intends to repay the Convertible Note in full in cash at its maturity on December 2, 2009 using funds available under the PNC Credit Facility.  See note 5 to our condensed
consolidated financial statements and “Financial Condition, Liquidity and Capital Resources” in this Item 2 for a discussion of the terms of the PNC Credit Facility.




Our Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of 7.5% per annum and, at September 27, 2009 there were cumulated, unpaid and undeclared dividends of $3.1 million on the Series 2003A Preferred Stock, $231,000 on the Series 2003B Preferred Stock and $2.4 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 15.5 million shares at September 27, 2009 (as compared to 14.7 million shares at September 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 September 27, 2009 and expects to remain in compliance for the next 12 months.




The Company is currently undergoing audits for certain state and local tax returns, including the state tax examination related to certain business taxes described in note 11 to our condensed consolidated financial statements for which the Company recorded accruals in the second and third quarters of 2009.   Except for the
examination described in note 11, the possible effects of these 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 11 to our condensed consolidated financial statements).




Critical Accounting Policies and Estimates





As disclosed in the annual report on Form 10-K for the year ended December 28, 2008, the discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States.  The
preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements.  These judgments can be subjective and complex, and consequently actual results could differ from those estimates.  Our most critical accounting policies relate to revenue recognition, allowance for doubtful accounts, accrued workers compensation liability, goodwill impairment, and income
taxes.  Since December 28, 2008, there have been no changes in our critical accounting policies and no other significant changes to the methods used in the assumptions and estimates related to them.






New Accounting Pronouncements




In December 2007, the Financial Accounting Standards Board (the “FASB”) issued guidance now codified as ASC Topic  805,  Business Combinations(“ASC  805”).  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 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 805 will have on our
consolidated financial statements will depend on the nature, terms, and size of any such business combinations, if any.




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In December 2007, the FASB issued guidance now codified as ASC Topic 810, Noncontrolling Interest in Consolidated Financial Statements (“ASC  810”).  ASC 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 810, a change in control will be measured at fair value, with any gain or loss recognized in earnings.  The effective date for ASC 810 was December 29, 2008 for the Company.  We currently do not have minority interests in our consolidated subsidiaries and the adoption of ASC 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 820”).  ASC 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 820 applies when another standard requires or permits assets or liabilities to be measured at fair value.  Accordingly, ASC 820 does not require any new fair value measurements. On December 29, 2008, we adopted the remaining provisions of ASC 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 820 did not materially impact our consolidated
financial statements.




In April 2009, the FASB issued ASC Topic 825,Financial Instruments (“ASC 825”).  ASC 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 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 825 does not change the accounting treatment for these financial instruments and is effective for interim reporting periods ending after June 15, 2009.   The additional disclosures required by ASC 825 are included
in note 6 to our condensed consolidated financial statements.




In May 2009, the FASB issued guidance now codified as ASC Topic 855, Subsequent Events (“ASC 855”).   ASC 855 establishes general standards of accounting for disclosing events that occur after the balance sheet date but before financial statements are
issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued.  ASC 855 became effective for the Company as of June 28, 2009.




In June 2009, the FASB issued guidance now codified as ASC Topic 105, Generally Accepted Accounting Principles (“ASC 105”).  ASC 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 105 explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants.   ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company adopted ASC 105 in the third quarter of 2009.  This
pronouncement had no effect on the Company’s condensed 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.




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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 2, 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 2).  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 costs or business taxes 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;




·
unfavorable developments in our business may result in the necessity of writing off goodwill in future periods;




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·
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 our annual report on Form 10-K for the year ended December 28, 2008.







ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




At September 27, 2009, we had $65.2 million outstanding under the PNC Credit Facility bearing variable rate interest at the weighted average interest rate of 1.88% per annum as compared to $68.2 million outstanding at December 28, 2008 at a weighted average interest rate of 3.35% per annum.  Despite the turmoil in the United States
and global credit markets, we experienced a reduced weighted average rate for borrowings under the PNC Credit Facility due to a reduction in LIBOR.  However, the weighted average interest rate of 1.88% per annum in effect at September 27, 2009 reflects the terms of the PNC Facility prior to its amendment in November 2009 (see note 5 to our condensed consolidated financial statements).  Had the amendment to the PNC Credit Facility been in effect at September 27, 2009, the $65.2 million
outstanding under the facility bearing variable rate interest would have had a weighted average interest rate of 4.31% per annum.  Assuming the rate increase under the terms of the amended facility and a further 10% rate increase, the impact to the Company in annualized interest expense would be approximately $1.9 million.




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, 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.




A portion of the Company’s borrowings are fixed rate obligations, including $1.8 million principal amount of the Convertible Note bearing interest at a fixed rate of 8% per annum.  The estimated fair value of these debt obligations at September 27, 2009 was $1.8 million for the Convertible Note.  Management of the
Company does not believe that a 25% increase in interest rates would have a material impact on the fair value of these fixed rate obligations.  The Company intends to repay the Convertible Note in full in cash at its maturity on December 2, 2009.







ITEM 4T.CONTROLS AND PROCEDURES




Our management has 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 (the “Exchange Act”) as of September 27, 2009 based upon the procedures
required under paragraph (b) of Rule 13a-15 under the Exchange Act.   On the basis of this evaluation, our management has concluded that as of September 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.




There has been no change in the Company’s internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act that occurred during the nine months ended September 27, 2009 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.




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PART II - OTHER INFORMATION




ITEM 1.LEGAL PROCEEDINGS.




Since the date of the filing of the Company’s annual report on Form 10-K for the year ended December 28, 2008, there have been no material new legal proceedings involving the Company or any material developments to the proceedings described in such Form 10-K, except as follows:




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 the nine months ended September 27, 2009.




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.




See also note 11 of our condensed consolidated financial statements for a description of a state tax examination related to certain business taxes for which a loss contingency has been recorded but which does not constitute a legal proceeding.









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ITEM 1A.   RISK FACTORS.




Since the date of the filing of the Company’s annual report on Form 10-K for the year ended December 28, 2008, there have been no material changes to the risk factors described under Item 1A in such Form 10-K, except that the risks describing our possible inability to repay or refinance the PNC Credit Facility at its maturity have significantly
less immediacy given the successful extension of the maturity date of the PNC Credit Facility from July 2010 to November 2012.  See note 5 to our condensed consolidated financial statements and “Financial Condition, Liquidity and Capital Resources” in Item 2 of Part I of this report for a discussion of the terms of the PNC Credit Facility.







ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.




Not applicable.







ITEM 3.DEFAULTS UPON SENIOR SECURITIES.




Not applicable.






ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.




None.






ITEM 5.OTHER INFORMATION.




None.







ITEM 6.EXHIBITS.




10.1
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).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.










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SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.






COMFORCE Corporation/s/ Harry V. MaccarroneHarry V. MaccarroneExecutive Vice President and Chief Financial OfficerDate:  November 5, 2009















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