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 June 28, 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 August 4, 2009Common Stock, $0.01 par value per share

17,387,646 shares








COMFORCE Corporation





INDEX








PageNumberPART I
FINANCIAL INFORMATION
3Item 1.
Financial Statements (unaudited)
3Condensed Consolidated Balance Sheets at June 28, 2009 and December 28, 2008
3Condensed Consolidated Statements of Income for the three and six months ended June 28, 2009 and June 29, 2008
4Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2009 and June 29, 2008
5Notes to Unaudited Condensed Consolidated Financial Statements
6Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14Item 3.
Quantitative and Qualitative Disclosures about Market Risk
22Item 4T.
Controls and Procedures
23PART II
OTHER INFORMATION
23Item 1.
Legal Proceedings
23Item 1A.
Risk Factors
24Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
24Item 3.
Defaults Upon Senior Securities
24Item 4.
Submission of Matters to a Vote of Security Holders
24Item 5.
Other Information
25Item 6.
Exhibits
25SIGNATURES
26





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

June 28, 2009


December 28, 2008Current assets:Cash and cash equivalents

$
5,679


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


119,540



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


8,452



8,941Prepaid expenses and other current assets


3,178



3,014Deferred income taxes, net


353



353Total current assets


137,202



159,208Property and equipment, net


9,582



10,057Deferred financing costs, net


134



213Goodwill


32,073



32,073Other assets, net


93



185Total assets

$
179,084


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

$
3,182


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


1,849



1,778Accrued expenses


104,832



131,441Total current liabilities


109,863



135,894Long-term debt


70,883



68,200Deferred taxes, net


1,110



1,074Other liabilities


212



401Total liabilities


182,068



205,569Commitments and contingenciesStockholders’ deficit:Common stock, $.01 par value; 100,000,000 shares authorized; 17,387,643 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 June 28, 2009 and December 28, 2008, with an aggregate liquidation preference of $9,080 at June 28, 2009 and $8,850 at December 28, 2008


4,304



4,304Series 2003B, 3,500 shares authorized; 513 shares issued and outstanding at June 28, 2009 and December 28, 2008, with an aggregate liquidation preference of $733 at June 28, 2009 and $714 at December 28, 2008


513



513Series 2004A, 15,000 shares authorized; 6,737 shares issued and outstanding at June 28, 2009 and December 28, 2008, with an aggregate liquidation preference of $9,043 at June 28, 2009 and $8,790 at December 28, 2008


10,264



10,264Additional paid-in capital


48,452



48,406Accumulated other comprehensive loss


(473
)


(522
)Accumulated deficit


(66,218
)


(66,972
)Total stockholders’ deficit


(2,984
)


(3,833
)Total liabilities and stockholders’ deficit

$
179,084


$
201,736




The 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


Six Months EndedJune 28, 2009


June 29, 2008


June 28, 2009


June 29, 2008Net sales of services

$
141,689


$
152,756


$
279,718


$
302,966Costs and expenses:Cost of services


121,479



128,365



238,889



254,767Selling, general and administrative expenses


18,246



19,632



37,020



39,251Depreciation and amortization


877



738



1,713



1,413Total costs and expenses


140,602



148,735



277,622



295,431Operating income


1,087



4,021



2,096



7,535Other income (expense):Interest expense


(441
)


(1,129
)


(1,085
)


(2,568
)Loss on debt extinguishment


-



(129
)


-



(129
)Other income (expense), net


465



106



392



(177
)24



(1,152
)


(693
)


(2,874
)Income before income taxes


1,111



2,869



1,403



4,661Provision for income taxes


513



1,270



649



2,070Net income

$
598


$
1,599


$
754


$
2,591Dividends on preferred stock


251



251



502



502Net income available to common stockholders

$
347


$
1,348


$
252


$
2,089Basic income per common share

$
0.02


$
0.08


$
0.01


$
0.12Diluted  income per common share

$
0.02


$
0.05


$
0.01


$
0.08Weighted average common shares outstanding, basic


17,388



17,388



17,388



17,388Weighted average common shares outstanding, diluted


28,355



32,853



17,401



32,628





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)




Six Months EndedJune 28, 2009


June 29, 2008Cash flows from operating activities:Net income

$
754


$
2,591Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization of property and equipment


1,713



1,413Amortization of deferred financing fees


79



91Net provision (recoveries) for bad debts


24



(27
)Interest expense paid by the issuance of convertible notes


71



66Loss on repurchase of Senior Notes


-



129Share-based payment compensation expense


46



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


22,012



(3,248
)Prepaid expenses and other current assets


(95
)


1,513Accounts payable and accrued expenses


(26,505
)


521Income tax receivable


23



8Net cash (used in) provided by operating activities


(1,878
)


3,122Cash flows from investing activities:Purchases of property and equipment


(1,238
)


(2,900
)Net cash used in investing activities


(1,238
)


(2,900
)Cash flows from financing activities:Net repayments under capital lease obligations


(125
)


(115
)Net borrowings under line of credit agreements


2,683



4,451Repurchases of Senior Notes


-



(6,563
)Net cash provided by (used in) financing activities


2,558



(2,227
)Net decrease in cash and cash equivalents


(558
)


(2,005
)Effect of exchange rates on cash


100



109Cash and cash equivalents at beginning of period


6,137



6,654Cash and cash equivalents at end of period

$
5,679


$
4,758Supplemental disclosures:Cash paid for:Interest

$
964


$
2,263Income taxes


933



330




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 six month periods ended June 28, 2009 are not necessarily indicative of the results of operations that might be expected for the entire year.  In accordance with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 165, Subsequent Events (see note 4 below), we have evaluated all events or transactions
for recognition or disclosure through August 6, 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




During the second quarter of 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 six months ended June 29, 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 six months ended June 28, 2009 and $0.93 during the six months ended June 29, 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 six month periods are listed in the table below:




Six Month EndedJune 28, 2009


June 29, 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 Staff Accounting 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 Statement of Financial Accounting Standards (“SFAS”) 141-R, Business Combinations (“SFAS 141-R”).  This statement was adopted on December 29, 2008, and applies
prospectively to business combinations for which the acquisition date is on or after December 29, 2008.  SFAS 141-R 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 SFAS 141-R 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 FAS No. 160, Noncontrolling Interest in Consolidated Financial Statements (“FAS 160”). FAS 160 re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and requires the classification of minority
interests as a component of equity. Under FAS 160, a change in control will be measured at fair value, with any gain or loss recognized in earnings. The effective date for FAS 160 was December 29, 2008 for the Company.  We currently do not have minority interests in our consolidated subsidiaries and the adoption of FAS 160 had no impact on our financial position or results of operations.




On December 31, 2007, we adopted certain provisions of SFAS No. 157, Fair Value Measurements(“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and
expands disclosures about fair value measurements. SFAS 157 applies when another standard requires or permits assets or liabilities to be measured at fair value.  Accordingly, SFAS 157 does not require any new fair value measurements. On December 29, 2008, we adopted the remaining provisions of SFAS 157 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 SFAS 157 did not materially impact our consolidated financial
statements.




In April 2009, the FASB issued FASB Staff Position No. 107-1 and Accounting Principles Board Opinion No. 28-1, Interim Disclosure about Fair Value of Financial Instruments (“FSP 107-1/APB 28-1”). FSP 107-1/APB 28-1 requires interim disclosures regarding the fair values
of financial instruments that are within the scope of FASB No. 107, Disclosures about the Fair Value of Financial Instruments.  Additionally, FSP 107-1/APB 28-1 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. FSP 107-1/APB 28-1 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 FSP 107-1/APB 28-1 are included in note 6 below.




7


In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”).  SFAS 165 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. SFAS 165 became effective for the Company as of June 28, 2009.




In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 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.   SFAS 168 explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants.  The Company does not expect the adoption of SFAS 168 to have a material effect on the Company’s condensed consolidated
financial statements. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.




5.   DEBT




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




June 28, 2009


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

$
1,849


$
1,778Revolving line of credit, due July 24, 2010, with interest payable at prime and/or LIBOR plus 1.5% with weighted average rates of  2.0% at June 28, 2009 and 3.4% at December 28, 2008


70,883



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

$
72,732


$
69,978








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





2010

$
70,883Total

$
70,883





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).




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.  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.




8


Revolving Line of Credit:  At June 28, 2009, COMFORCE, COI and various of their operating subsidiaries, as co-borrowers and guarantors, were parties to a $110.0 million Revolving Credit and Security
Agreement (the “PNC Credit Facility”) with PNC Bank, National Association, as a lender and administrative agent (“PNC”), and other financial institutions participating as lenders to provide for a revolving line of credit with available borrowings based, generally, on 87.0% of the Company’s accounts receivable aged 90 days or less, subject to specified limitations and exceptions.




Borrowings under the PNC Credit Facility bear interest, at the Company’s option, at a per annum rate equal to either (i) the greater of the federal funds rate plus 0.5% or the base commercial lending rate of PNC as announced from time to time, or (ii) LIBOR plus a specified margin, determined as follows:




Fixed charge coverage ratio*

Margin (%)greater than 1.75:1.00


1.50greater than 1.50:1.00 to 1.75:1.00


1.75greater than 1.30:1.00 to 1.50:1.00


2.00greater than 1.05:1.00 to 1.30:1.00


2.25equal to or less than 1.05:1.00


2.50*as defined in the PNC Credit Facility loan documents








The PNC Credit Facility also provides for a commitment fee of 0.25% of the unused portion of the facility. The obligations under the PNC Credit Facility are collateralized by a pledge of the capital stock of certain operating subsidiaries of the Company and by security interests in substantially all of the assets of the Company.  The
PNC Credit Facility contains various financial and other covenants and conditions, including, but not limited to, a prohibition on paying cash dividends and limitations on engaging in affiliate transactions, making acquisitions and incurring additional indebtedness.  The PNC Credit Facility also limits capital expenditures to $6.0 million annually.




Under the PNC Credit Facility, the Company had outstanding $4.2 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 $15.1 million as of June 28, 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 June 28, 2009.  The Company has had discussions with PNC to extend the PNC Credit Facility beyond its current maturity date of July 24, 2010.  No assurance can be given that the Company will resolve such discussions on a satisfactory basis.  If we are unable to satisfactorily resolve such discussions with PNC or otherwise find a source of capital to repay or refinance this obligation, we will
be unable to repay the PNC Credit Facility at maturity, which would have a material adverse effect on our financial condition.  The credit markets have tightened significantly since the second quarter of 2008, and we expect our borrowing costs to increase in future periods.  We cannot predict whether capital will be available to us with interest rates and on terms acceptable to us, if at all, when the PNC Credit Facility matures.




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 and to the relative short-term maturity date (see note 5 above).




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 June 28, 2009.




9


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):




Three Months Ended


Six Months EndedJune 28, 2009


June 29, 2008


June 28, 2009


June 29, 2008Basic income per common share:Net income

$
598


$
1,599


$
754


$
2,591Dividends on preferred stock:Series 2003A


115



115



230



230Series 2003B


10



10



19



19Series 2004A


126



126



253



253251



251



502



502Income available to common stockholders

$
347


$
1,348


$
252


$
2,089Weighted average common shares outstanding


17,388



17,388



17,388



17,388Basic income per common share

$
0.02


$
0.08


$
0.01


$
0.12Diluted income per common share:Income available to common stockholders

$
347


$
1,348


$
252


$
2,089Dividends on preferred stock:Series 2003A


115



115



-



230Series 2003B


10



10



-



19Series 2004A


-



126



-



253125



251



-



502After tax equivalent of interest expense on 8% Subordinated Convertible Note


20



20



-



40Income for purposes of computing diluted income per common share

$
492


$
1,619


$
252


$
2,631Weighted average common shares outstanding


17,388



17,388



17,388



17,388Dilutive stock options


13



155



13



151Assumed conversion of 8% Subordinated Convertible Note


1,074



993



-



974Assumed conversion of Preferred Stock:Series 2003A


8,538



8,099



-



7,989Series 2003B


1,342



1,271



-



1,253Series 2004A


-



4,947



-



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


28,355



32,853



17,401



32,628Diluted income per common share

$
0.02


$
0.05


$
0.01


$
0.08






10




In addition, options and warrants to purchase 2.1 million and 1.4 million shares of common stock were outstanding as of the end of the second 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.




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 six months ended June 28, 2009 and June 29, 2008, and items which reconcile segment operating contribution to COMFORCE’s reported income before income taxes (in thousands):




Three Months Ended


Six Months EndedJune 28, 2009


June 29, 2008


June 28, 2009


June 29, 2008Net sales of services:Human Capital Management Services

$
97,361


$
97,280


$
188,109


$
193,289Staff Augmentation


43,829



54,576



90,630



108,043Financial Outsourcing Services


499



900



979



1,634$
141,689


$
152,756


$
279,718


$
302,966Operating contribution:Human Capital Management Services

$
3,926


$
4,086


$
7,115


$
7,706Staff Augmentation


2,198



4,916



5,311



9,554Financial Outsourcing Services


479



844



919



1,5336,603



9,846



13,345



18,793Consolidated expenses:Corporate general and administrative expenses


4,639



5,087



9,536



9,845Depreciation and amortization


877



738



1,713



1,413Interest expense


441



1,129



1,085



2,568Other (income) expense, net


(465
)


(106
)


(392
)


177Loss on debt extinguishment


-



129



-



1295,492



6,977



11,942



14,132Income before income taxes

$
1,111


$
2,869


$
1,403


$
4,661




11


At June 28, 2009


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

$
99,893


$
113,775Staff Augmentation


51,720



59,061Financial Outsourcing Services


8,452



8,941Corporate


19,019



19,959$
179,084


$
201,736







9.   COMPREHENSIVE INCOME




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




Three Months Ended


Six Months EndedJune 28, 2009


June 29, 2008


June 28, 2009


June 29, 2008Net income

$
598


$
1,599


$
754


$
2,591Foreign currency translation adjustment, net of tax


98



(67
)


49



99Total comprehensive income

$
696


$
1,532


$
803


$
2,690






10.   ACCRUED EXPENSES




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




June 28, 2009


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

$
88,472


$
106,310Book overdrafts


6,192



13,497Other


10,168



11,634$
104,832


$
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.




12


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.




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, the Company agreed to bear $325,000 of expenses associated with these matters and accrued this amount as an expense in the June 28, 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 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.”




13


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 or, if made, that
they will be enforced against it.  Although the Agency has agreed to reimburse us with respect to any such wage tax liabilities, any amounts assessed against CTS for wage tax liabilities could potentially exceed the amount available to us from our own resources or under the PNC Credit Facility.  In such event, it is anticipated that the Company would request PNC to make a special advance or request the Agency to pre-fund these liabilities.




State Tax Audit:  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 adjustments.  The Company has, however, incurred significant professional costs responding to the state examiners in connection 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 has recorded an additional accrual in cost of services in connection with
this matter in the second quarter of 2009 of approximately $920,000.  Such accrual was 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 FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss(“FIN 14”).  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.  To the extent the Company grows, these receivables will increase and there will be greater need for borrowing availability under the PNC Credit Facility.  At July 19, 2009, the Company had outstanding $64.6 million principal amount under
the PNC Credit Facility with remaining availability




14


of up to $15.8 million, based upon the borrowing base as defined in the loan agreement, to fund operations.  The Company has had discussions with PNC to extend the PNC Credit Facility beyond its current maturity date of July 24, 2010.  No assurance can be given that the Company will resolve such discussions on a satisfactory
basis.  If we are unable to satisfactorily resolve such discussions with PNC or otherwise find a source of capital to repay or refinance this obligation, we will be unable to repay the PNC Credit Facility at maturity, which would have a material adverse effect on our financial condition.  The credit markets have tightened significantly since the second quarter of 2008, and, based on our discussions to date with PNC and other potential lenders, we expect that there will be a significant increase
in borrowing costs under any extended or new credit facility.  We cannot predict whether capital will be available to us with interest rates and on terms acceptable to us, if at all, when the PNC Credit Facility matures.




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




Current United States and worldwide economic conditions have resulted in an extraordinary tightening of credit markets.  These economic conditions have been characterized in news reports as a global economic crisis that has been marked by dramatic and rapid shifts in market conditions and government responses, and they have resulted
in unprecedented intervention in financial institutions and markets by governments throughout the world.  Although many economists originally characterized this crisis as limited to the subprime mortgage markets, the current adverse conditions have quickly spread to broader financial, manufacturing and labor markets.   As reported by the Bureau of Labor Statistics (U.S. Department of Labor) in a report released July 2, 2009, nonfarm payroll employment continued to decline (by 467,000)
in June 2009, with the unemployment rate rising to 9.5% from 8.5% in March 2009.  This report further stated that payroll employment had decreased by 7.2 million since the start of the recession in December 2007, and the unemployment rate has risen by 4.6% since that time.  The staffing industry has been significantly and adversely affected by current economic conditions and weak labor markets.




In October 2008, the Emergency Economic Stabilization Act of 2008 was enacted. Under this act, up to $700 billion has been made available to stabilize U.S. banks and enable the government to purchase devalued financial instruments held by banks and other financial institutions.  The Federal Reserve continues to take other measures
to stabilize the U.S. financial system and encourage lending.  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.




Management has been closely monitoring the economic conditions and government responses.  The Company has also implemented new procedures to contain or reduce its expenses.  The impact of the tight credit markets on our interest expense through the second quarter of 2009 was limited, but we expect our interest expense
in future periods to increase unless the credit markets improve significantly.  While the current economic conditions did not have a significant impact on our operations through the end of 2008, we have observed a weakening in the labor markets that has resulted in declines in revenues in all segments of our business during first six months of 2009 as compared to the same period in 2008.  Furthermore, some of our clients have announced reductions in workforce, including contingent labor, which
may cause some of the vendors we manage as part of our Human Capital Management Services and RightSourcing Services programs to reduce or discontinue operations, which would further impact our management of these programs.  We continue to experience the impact of these conditions as of the date of this filing.




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.




15


Results of Operations




Three Months ended June 28, 2009 compared to June 29, 2008


Net sales of services for the three months ended June 28, 2009 were $141.7 million, which represents a 7.2% decrease from the $152.8 million in net sales of services recorded for the three months ended June 29, 2008.  Net sales of services in the Human Capital Management Services segment increased by $81,000  or 0.1% 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.  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 “Overview and Recent Developments” in this Item 2).  In the Staff Augmentation segment, net sales of services decreased $10.7 million, or 19.7%, reflecting a decrease in clients’ demand for services in this segment.  Net sales of services in the Financial Outsourcing Services segment decreased $401,000, or 44.6%, due to a reduction of clients it services and reduced volume at existing clients.




Cost of services for the three months ended June 28, 2009 was 85.7% of net sales of services as compared to 84.0% for the three months ended June 29, 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 second quarter of 2009 compared to the same period in 2008.  In addition, the  Company recorded an additional accrual in the second 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 June 28, 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 second quarter of 2009 was 82.7% as compared to 80.4% for the second quarter of 2008.




Selling, general and administrative expenses as a percentage of net sales of services were 12.9% for the three months ended June 28, 2009, compared to 12.9% for the three months ended June 29, 2008.  The $1.4 million decrease in selling, general and administrative expenses is primarily due to lower personnel costs in the Human Capital
Management Services and Staff Augmentation segments and lower corporate expenses, principally as a result of the decrease of net sales of services discussed.  This decrease was partially offset by the $325,000 litigation settlement relating to the Pipeline case (see note 11 to our condensed consolidated financial statements).  Due to lower sales, as discussed above, management has and continues to undertake initiatives to reduce selling, general and administrative expenses and has been successful
in controlling costs as sales decreased.




Operating income for the three months ended June 28, 2009 was $1.1 million, or 0.8% of net sales, as compared to operating income of $4.0 million, or 2.6% of net sales, for the three months ended June 29, 2008.  The Company’s operating income as a percentage of sales for the second 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, the Convertible Note and, prior to their redemption, the 12% Senior Notes. Interest expense of $441,000 for the second quarter of 2009 was lower as compared to the interest expense of $1.1 million for the second 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 “Senior Notes”) in 2008, and to significantly lower interest rates under the PNC Credit Facility.




The Company recognized a loss on debt extinguishment for the three months ended June 29, 2008 of $129,000, including the write-off of $64,000 of deferred financing costs, as a result of the repurchase of $6.5 million of Senior Notes.




Other income, net, for the three months ended June 28, 2009 of $465,000 compared to $106,000 for the three months ended June 29, 2008, principally consists of gains on foreign currency exchanges.




16


The income tax provision for the three months ended June 28, 2009 was $513,000 (a rate of 46.2%) on income before income taxes of $1.1 million.  The income tax provision for the three months ended June 29, 2008 was $1.3 million (a rate of 44.3%) on income before income taxes of $2.9 million.




The Company’s total unrecognized tax benefit as of June 28, 2009 was approximately $828,000, which, if recognized, would affect the Company’s effective tax rate.  For the three months ended June 28, 2009, the Company had approximately $9,200 of accrued interest and penalties reflected in the tax provision.




Six Months ended June 28, 2009 compared to June 29, 2008


Net sales of services for the six months ended June 28, 2009 were $279.7 million, which represents a 7.7% decrease from the $303.0 million in net sales of services recorded for the six months ended June 29, 2008.  Net sales of services in the Human Capital Management Services segment decreased by $5.2 million, or 2.7% 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 “Overview and Recent Developments” in this Item 2).  Management has also observed that, during 2008 and the first half of 2009, PrO’s clients generally did not seek to expand the scope of services they engaged PrO to perform.   In the Staff Augmentation segment, net sales of services decreased $17.4 million, or 16.1%, reflecting a decrease in clients’ demand
for services in this segment.  Net sales of services in the Financial Outsourcing Services segment decreased $655,000, or 40.1%, due to a reduction of clients it services and reduced volume at existing clients.




Cost of services for the six months ended June 28, 2009 was 85.4% of net sales of services as compared to 84.1% for the six months ended June 29, 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 six months of 2009 compared to the same period in 2008.  In addition, the Company recorded an additional accrual in the second 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 six months ended June 28, 2009 was 87.4% 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 six months of 2009 was 82.2% as compared to 80.3% for the first six months of 2008.




Selling, general and administrative expenses as a percentage of net sales of services were 13.2% for the six months ended June 28, 2009, compared to 13.0% for the six months ended June 29, 2008.  The $2.2 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.  However, selling, general and administrative expenses as a percentage of net sales of services increased slightly in the first six months of 2009 as compared to the same period in 2008 because net sales declined at a faster rate than these expenses were reduced.




Operating income for the six months ended June 28, 2009 was $2.1 million, or 0.7% of net sales, as compared to operating income of $7.5 million, or 2.5% of net sales, for the six months ended June 29, 2008.  The Company’s operating income as a percentage of sales for the first six 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, the 12% Senior Notes. Interest expense of $1.1 million for the first six months of 2009 was lower as compared to the interest expense of $2.6 million for the first six months
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 “Senior Notes”) in 2008, and to lower interest rates under the PNC Credit Facility.




17




The Company recognized a loss on debt extinguishment for the six months ended June 29, 2008 of $129,000, including the write-off of $64,000 of deferred financing costs, as a result of the repurchase of $6.5 million of Senior Notes.




Other income, net, for the six months ended June 28, 2009 of $392,000 compared to other expense, net of $177,000 for the six months ended June 29, 2008, principally consists of gains and losses, respectively, on foreign currency exchanges.




The income tax provision for the six months ended June 28, 2009 was $649,000 (a rate of 46.3%) on income before income taxes of $1.4 million.  The income tax provision for the six months ended June 29, 2008 was $2.1 million (a rate of 44.4%) on income before income taxes of $4.7 million.




The Company’s total unrecognized tax benefit as of June 28, 2009 was approximately $828,000, which, if recognized, would affect the Company’s effective tax rate.  For the six months ended June 28, 2009, the Company had approximately $16,500 of accrued interest and penalties reflected in the tax provision.




Financial Condition, Liquidity and Capital Resources




As described in “Overview and Recent Developments” in this Item 2, management has observed weakening of the labor markets and a tightening of the credit markets coupled with an increase in interest rates.  These conditions, which are interrelated, could affect our liquidity in future periods in a number of ways, including
by:




·
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; and




·
increasing our interest expense and, if conditions persist or deteriorate, making it more difficult for us to refinance or extend the PNC Credit Facility at its maturity on July 24, 2010.




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.  At July 19, 2009, the Company had outstanding $64.6 million principal amount under
the PNC Credit Facility with remaining availability of up to $15.8 million based upon the borrowing base, as defined under the PNC Credit Facility agreement, to fund operations.




Off-Balance Sheet and Contractual Obligations: As of June 28, 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 following table represents contractual commitments
associated with operating lease agreements, employment agreements and principal repayments on debt obligations (excluding interest):






18




Payments due by fiscal year (in thousands)2009


2010


2011


2012


ThereafterOperating Leases

$
1,491


$
1,873


$
1,181


$
699


$
22Employment Agreements


494



-



-



-



-PNC Credit Facility(1)- principal repayments


-



70,883



-



-



-Convertible Note(1) - principal repayments


1,849



-



-



-



-Total

$
3,834


$
72,756


$
1,181


$
699


$
22





(1)   See note 5 to our condensed consolidated financial statements.





COMFORCE, COI and various of their operating subsidiaries, as co-borrowers and guarantors, are parties to the $110.0 million PNC Credit Facility with PNC, as a lender and administrative agent, and other financial institutions participating as lenders to provide for a revolving line of credit with available borrowings based, generally, on
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 eight amendments.




The obligations under the PNC Credit Facility are collateralized by a pledge of the capital stock of certain key operating subsidiaries of the Company and by security interests in substantially all of the assets of the Company. The PNC Credit Facility contains various financial and other covenants and conditions, including, but not limited
to, a prohibition on paying cash dividends and limitations on engaging in affiliate transactions, making acquisitions and incurring additional indebtedness.  The maturity date of the PNC Credit Facility is July 24, 2010.




The Company also had standby letters of credit outstanding under the PNC Credit Facility at June 28, 2009 in the aggregate amount of $4.2 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 half of 2009, our primary source of funds was $2.6 million provided by financing activities, which, as a result of our lower profitability, was less than the $1.9 million used in operating activities.  We also used cash of $1.2 million in investing activities
due to the purchases of property and equipment.




At June 28, 2009, we had outstanding $70.9 million principal amount under the PNC Credit Facility bearing interest at a weighted average rate of 2.0% per annum.  At such date, we had remaining availability of up to $15.1 million based upon the borrowing base, as defined in the agreement, under the PNC Credit Facility.




At June 28, 2009, we also had outstanding $1.8 million principal amount of Convertible Notes bearing interest at 8% per annum.




Our Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of 7.5% per annum and, at June 28, 2009 there were cumulated, unpaid and undeclared dividends of $2.9 million on the Series 2003A Preferred Stock, $221,000 on the Series 2003B Preferred Stock and $2.3 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 15.3 million shares at June 28, 2009 (as compared to 14.5 million shares at June 29, 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 June 28, 2009 and expects to remain in compliance for the next 12 months.  The Company has had discussions with PNC to extend the PNC Credit Facility beyond its current maturity date of July 24, 2010. No assurance can be given that the Company will resolve such discussions on a satisfactory basis.




19


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 has recorded an additional accrual in the second quarter of 2009.   Except for
the examination described in note 11, the results 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 Statement of Financial Accounting Standards (“SFAS”) 141-R, Business Combinations (“SFAS 141-R”).  This statement was adopted on December 29, 2008, and applies
prospectively to business combinations for which the acquisition date is on or after December 29, 2008.  SFAS 141-R 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 SFAS 141-R 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 FAS No. 160, Noncontrolling Interest in Consolidated Financial Statements (“FAS 160”). FAS 160 re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and requires the classification of minority
interests as a component of equity. Under FAS 160, a change in control will be measured at fair value, with any gain or loss recognized in earnings. The effective date for FAS 160 was December 29, 2008 for the Company.  We currently do not have minority interests in our consolidated subsidiaries and the adoption of FAS 160 had no impact on our financial position or results of operations.




On December 31, 2007, we adopted certain provisions of SFAS No. 157, Fair Value Measurements(“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and
expands disclosures about fair value measurements. SFAS 157 applies when another standard requires or permits assets or liabilities to be measured at fair value.  Accordingly, SFAS 157 does not require any new fair value measurements. On December 29, 2008, we adopted the remaining provisions of SFAS 157 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 SFAS 157 did not materially impact our consolidated financial
statements.









20


In April 2009, the FASB issued FASB Staff Position No. 107-1 and Accounting Principles Board Opinion No. 28-1, Interim Disclosure about Fair Value of Financial Instruments (“FSP 107-1/APB 28-1”). FSP 107-1/APB 28-1 requires interim disclosures regarding the fair values
of financial instruments that are within the scope of FASB No. 107, Disclosures about the Fair Value of Financial Instruments.  Additionally, FSP 107-1/APB 28-1 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. FSP 107-1/APB 28-1 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 FSP 107-1/APB 28-1 are included in note 6 below.




In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”).  SFAS 165 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. SFAS 165 became effective for the Company as of June 28, 2009.




In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 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.   SFAS 168 explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants.  The Company does not expect the adoption of SFAS 168 to have a material effect on the Company’s condensed consolidated
financial statements. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.




Seasonality




In the Human Capital Management Services segment, PrO Unlimited does not observe significant seasonal variations in its business.  In the Staff Augmentation segment, demand for services has historically been lower during the second half of the fourth quarter through the following second quarter, and, generally shows gradual improvement
until the second half of the fourth quarter.  The Company’s quarterly operating results are, however, affected by the number of billing days in the quarter.  Management has noted that the observance of seasonal trends has been limited in the current economic climate.




Forward Looking Statements




We have made statements under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under this Item 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 “Overview and 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.




21


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 and make it more difficult and costly for us to refinance or extend the PNC Credit Facility at its maturity on July 24, 2010;




·
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;




·
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 June 28, 2009, we had $70.9 million outstanding under the PNC Credit Facility bearing variable rate interest at the weighted average rate of 2.0% per annum as compared to $68.2 million outstanding at December 28,




22




2008 at a weighted average rate of 3.4% per annum.  Despite the turmoil in the U.S. and global credit markets, we have experienced a reduced weighted average rate for borrowings under the PNC Credit Facility due to a reduction in LIBOR.  Assuming an immediate 100% increase in the weighted average interest rate of 2.0% on
variable rate obligations of $70.9 million, the impact to the Company in annualized interest expense would be approximately $1.4 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 Convertible Notes bearing interest at a fixed rate of 8% per annum.  The estimated fair value of these debt obligations at June 28, 2009 was $1.8 million for the Convertible Notes.  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.




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 June 28, 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 June 28, 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 six months ended June 28, 2009 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.







PART II - OTHER INFORMATION




ITEM 1.   LEGAL PROCEEDINGS.




Since the date of the filing of the Company’s annual report on Form 10-K for the year ended December 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.






23




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, the Company agreed to bear $325,000 of expenses associated with these matters and has accrued this amount as an expense in the June 28, 2009 financial statements.




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 adjustments.  The Company has, however, incurred significant professional costs responding to the state examiners in connection 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 has recorded an additional accrual in cost of services in connection with
this matter in the second quarter of 2009 of approximately $920,000.  Such accrual was 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 FIN 14.  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.




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.




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.




On June 10, 2009, the annual meeting of the stockholders of the Company was held.  At this meeting, the stockholders voted (1) to elect directors for a term of one year, and (2) to ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 27, 2009.




In the election of directors, the following individuals were elected to the board of directors upon the vote shown below.




24







Nominee

For


WithheldJohn C. Fanning


13,872,992



228,648Harry V. Maccarrone


13,843,104



258,536Rosemary Maniscalco


13,878,092



223,548Kenneth J. Daley


13,868,270



233,370Daniel Raynor


13,869,117



232,523Gordon Robinett


13,845,465



256,175Pierce J. Flynn


13,868,262



233,378







The proposal to ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm was approved.   The votes were cast as follows:




For

Against

Abstentions14,034,928

47,993

18,717







ITEM 5.   OTHER INFORMATION.




None.




ITEM 6.   EXHIBITS.




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.







25





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:  August 6, 2009