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CRRS > SEC Filings for CRRS > Form 10-K on 21-Dec-2012All Recent SEC Filings

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Form 10-K for CORPORATE RESOURCE SERVICES, INC.


21-Dec-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our financial statements and related notes. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. "Risk Factors."

Results of Operations

The Company's subsidiaries completed the following acquisitions in Fiscal Years 2011 and 2012:

? ICG Inc. through a public foreclosure sale, on December 14, 2010;

? Diamond Staffing acquired Tri-Diamond on January 31, 2011; and

? TS Staffing acquired TSS Corp. on November 21, 2011.

Accordingly, the results of ICG Inc. are included in the results of operations for fiscal year 2011 beginning on December 14, 2010. The acquisitions of Tri-Diamond and TSS Corp. have been accounted for as a pooling of interests by a related party, and as a result, our results of operations were restated to include their respective results of operations as if the acquisition had occurred on October 1, 2010.

Fiscal year ended September 28, 2012 compared to fiscal year ended September 30, 2011

Revenues

For the year ended September 28, 2012, our revenues increased by $100.9 million or 18.7% to $639.8 million as compared to $538.9 million for the year ended September 30, 2011, which we restated to include $193.7 million in revenues from TSS Corp. This increase includes a full year of revenues from a managed services customer we added during Fiscal Year 2011 that added $14.9 million in Fiscal Year 2012 revenues. Part of the increase is attributable to acquisitions that we made since the beginning of Fiscal Year 2011 that added $14.4 million in revenues and other strategic relationships that we entered into that added $6.3 million in revenues. The remaining increase of $65.3 million is a result of other new clients and demand from our existing customers that is consistent with national staffing industry trends. We expect that our sales force will continue to grow revenues from existing and new customers consistent with national staffing in the future and that we will be able to supplement this growth with strategic acquisition opportunities as they arise and by increasing the number of value-added services we offer to the marketplace.

Direct cost of producing revenues

TS Employment provides professional employer services to the Company. Professional employer services rendered include the provision of payroll services, benefits and workers' compensation insurance coverage. These arrangements allow us to mitigate certain insurance risks and obtain employee benefits at more advantageous rates. The costs of the professional employer services are included in direct cost of services.

For Fiscal Year 2012, our direct cost of services increased by $99.1 million or 21.3% to $565.0 million, as compared to $465.9 million for Fiscal Year 2011, which we restated to include $174.1 million in direct costs of producing revenues from TSS Corp. Prior to its


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acquisition, TS Staffing's predecessor, TSS Corp., was an affiliate of Tri-State and self-administered its payroll services, benefits and workers compensation insurance, resulting in a reallocation of certain costs between the cost of producing revenues and selling, general and administrative expenses.

The increase in our cost of producing revenues in Fiscal Year 2012 was primarily driven by the 18.7% increase in revenues. As a percentage of revenue, our cost of producing revenues increased 1.8%, from 86.5% to 88.3%, primarily as a result of competitive pricing pressure and the Company's stronger relative growth in the light industrial businesses, which traditionally generates lower gross margins. These increases were partially offset by a reduction in the administrative fee TS Employment charges us. We expect this reduction to yield annual savings of approximately $2.0 million in Fiscal Year 2013 and future years. As our volume of business increases, we may be able to realize further reductions to the administrative fee. These factors combined to cause the consolidated cost of producing revenues to grow at a greater rate than the associated revenues.

Gross profit

For Fiscal Year 2012, our gross profit increased by $1.8 million or 2.4% to $74.8 million as compared to $73.0 million in the comparable period in 2011, which was restated to include $19.6 million in gross profit from TSS Corp. As a percentage of revenue, gross profit decreased 1.8% from 13.5% in Fiscal Year 2011 to 11.7% in Fiscal Year 2012. In the fourth quarter of Fiscal Year 2012, we implemented initiatives intended to increase our gross profit, including the expansion of value added services and pricing reviews of all customers, but expect competitive pricing pressure to continue to affect our business for the foreseeable future.

Selling, general and administrative expenses

For Fiscal Year 2012, selling, general and administrative expenses increased by $4.0 million or 5.9% to $70.7 million, or 11.0% of revenues, as compared to $66.7 million, or 12.4% of revenues for Fiscal Year 2011, which was restated to include $16.5 million from TSS Corp. The increase was primarily due to increased selling and support expenses related to our increase in revenues, primarily commissions and new employees added to support the revenue growth as well as higher corporate administration costs.

Due to revenue growth, we have been able to better leverage our fixed costs as a percentage of revenues as indicated by the year-over-year decrease in selling, general and administrative costs as a percentage of revenues. In addition, during Fiscal Year 2012, we undertook initiatives to reduce selling, general and administrative costs through consolidation of select offices and administrative functions. We expect that the completion of fully integrating our acquired operations as well as the continued dilution of fixed costs as a percentage of revenues through growth and to continue reduce selling, general and administrative costs as a percentage of revenues in Fiscal Year 2013 and beyond.

Depreciation and amortization

For the Fiscal Year ended September 28, 2012, depreciation and amortization expenses decreased by $558,000 to $1.9 million as compared to $2.5 million in the year ended September 30, 2011, which was restated to include $397,000 from TSS Corp. The variability in the timing of acquisitions will continue to cause fluctuation to the amortization of acquisition-related long-lived assets.

Income from operations

The factors described above resulted in a decrease in income from operations of $1.7 million from $3.8 million for the year ended September 30, 2011, restated to include income of $2.7 million from TSS Corp., to income of $2.1 million for the year ended September 28, 2012.

Interest expense

Interest expense includes the net discounts associated with the sales of accounts receivable, as well as interest on debt associated with acquired companies and financing our operations. For the twelve months of Fiscal Year 2012, interest expense increased $1.1 million to $4.1 million as compared to $3.0 million in Fiscal Year 2011, which was restated to include $773,000 of interest expense from TSS Corp. The remaining increase was due to a higher volume of accounts receivable financing during the year ended September 28, 2012. Substantial efforts have been and continue to be made to reduce outstanding balances on our sold accounts receivables, which in effect, will reduce the interest charged on those balances. In addition, we recorded $925,000 of related party interest in Fiscal Year 2012 as interest on related party balances.

Acquisitions related expense

We incurred acquisition expenses of $489,000 and $731,000 for the fiscal years ended September 28, 2012 and September 30, 2011, respectively. Expenses in Fiscal Year 2012 were related to the acquisitions of TS Staffing and other smaller acquisitions while expenses incurred in Fiscal Year 2011 were related to the acquisitions of ICG Inc., Tri-Diamond and other smaller acquisitions. These expenses consisted primarily of legal and accounting fees.


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Net gain on revaluation of ICG Inc.

As a result of the resignation of a sales executive from ICG Inc. and 14 other sales, administration and operations personnel resigning in January 2012, we recognized various non-operating gains and losses, netting to a gain of $537,000 for the year ended September 28, 2012. The gain was primarily due to a gain on the remeasurement of long term debt, offset by related goodwill and intangible asset impairment charges of $398,000 and $181,000, respectively.

Other expense (income)

Other expense in Fiscal Year 2012 was $544,000, while in Fiscal Year 2011 we recorded other income of $87,000. In Fiscal Year 2012, we incurred a charge of $543,000 to establish an allowance for the potential uncollectibility of indemnifiable costs associated with CRD's acquisition of certain assets of GT Systems. These costs primarily relate to the period prior to CRD's acquisition of GT Systems on April 5, 2010. Other income in Fiscal Year 2011was attributable to CRD for amounts earned under a service and collections agreement with Rosenthal & Rosenthal, Inc. ("Rosenthal"), whereby the Company provided services to assist Rosenthal in collecting their outstanding receivables.

Net income (loss)

The factors described above resulted in a net loss of $3.4 million for Fiscal Year 2012 as compared to income of $114,000 for Fiscal Year 2011, restated to include a gain of $2.0 million from TS Staffing for the Fiscal Year 2011.

Liquidity and Capital Resources

Cash Flows

We have relied on the sale of our trade receivables prior to collection, funding from related parties and, periodically, proceeds from short term borrowings and issuance of our common stock to satisfy our working capital requirements and to fund acquisitions. Management believes that the funding from related parties has advantages to the Company, including a quick response to funding requirements and a lack of restrictive covenants. Management anticipates that the Company will continue to rely on related parties for its short-term financing needs, as well as other sources of funding. In the future, we may need to raise additional funds through debt or equity financings to satisfy our working capital needs, or to take advantage of business opportunities, including growth of our existing business and acquisitions. To the extent that funds are not available to meet our operating needs, we may have to seek additional reductions in operating expenditures and/or increases in operating efficiencies.

In Fiscal Year 2012 and 2011, net cash provided by financing activities of $6.2 million and $4.5 million, respectively, were offset by net cash used by operating activities of $5.3 million and $4.4 million, respectively. We also used cash for investing activities of $847,000 and $405,000 for the years ended September 28, 2012 and September 30, 2011, respectively. While our losses increased by $3.5 million in Fiscal Year 2012 over Fiscal Year 2011, our improved working capital management minimized our cash used by operating activities and the funding from related parties, which increased by $1.4 million to $9.8 million in Fiscal Year 2012 from $8.4 million in Fiscal Year 2011.
Additionally, in Fiscal Year 2012, a related party converted $14.1 million of a loan into our common stock.

We believe that improving cash flows from operating activities through improved profitability, improved efficiency in the sale of our trade receivables and other working capital management will enable us to finance our growth through acquisitions or other initiatives.

Working Capital

Our current liabilities exceeded our current assets by $0.6 million and $9.9 million as of September 28, 2012 and September 30, 2011, respectively. The improvement of $9.3 million was primarily due to the conversion of a $14.1 million loan payable to a related party into common stock. We also continue to engage in several activities to further increase current assets and/or decrease current liabilities, including seeking additional reductions in operating expenditures and increases in operating efficiencies. In order to service our debt, maintain our current level of operations, as well as fund the increased costs of being a reporting company and our growth initiatives, we must be able to generate or obtain sufficient amounts of cash flow and working capital. Our management has engaged, and continues to engage, in activities to accomplish these objectives, including focusing on increased profitability, raising new outside capital and consummating debt to equity conversions.

Based on the above activities and our current expectations, we believe that we have adequate resources to meet our operating needs through September 27, 2013.
Our subsidiaries, other than ICG Inc. and Accountabilities, are currently participating in a trade accounts receivable purchase agreement with Wells Fargo. Accountabilities participated in this Wells Fargo agreement until June 13, 2011, when it entered in a similar trade accounts receivable purchase agreement with Amerisource. ICG Inc. entered into a similar agreement with Amerisource in October 2011. Under the Wells Fargo agreement, the maximum amount of trade receivables that can


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be sold by our participating subsidiaries and affiliates in the aggregate is $67.5 million. As collections reduce previously sold receivables, the subsidiaries may replenish these with new receivables. As of September 28, 2012 and September 30, 2011, trade receivables of $60.4 million and $39.1 million, restated to include $13.4 million from TS Staffing, had been sold and remained outstanding, and amounts due from Wells Fargo for collected reserves totaled $6.2 million and $4.8 million, restated to include $1.6 million of TSS Corp. receivables, respectively. Interest charged on the amount of receivables sold prior to collection is charged at an annual rate of prime plus 1.5% or 2.5%. Receivables sold may not include amounts that are over 90 days past due.

Under the terms of the Wells Fargo agreements, with the exception of CRD permanent placement receivables, Wells Fargo advances 90% of the assigned receivables' value upon sale, and the remaining 10% upon final collection. Under the terms of CRD's agreement, the financial institution advances 65% of value of the assigned CRD permanent placement receivables' value upon sale, and the remaining 35% upon final collection. The aggregate amount of trade receivables from the permanent placement business that CRD may sell to Wells Fargo at any one time is $1,250,000. Interest expense charged under the Wells Fargo trade accounts receivable purchase agreement is included in interest expense in the accompanying statements of operations and amounted to $2.9 million for the year ended September 28, 2012 compared to $2.5 million was for the year ended September 30, 2011, which included $228,000 from Accountabilities for interest and $40,000 for termination fees and restated to include $773,000 for TSS Corp. Tri-State and Robert Cassera, which together with affiliated persons owned approximately 91.3% of our outstanding shares of common stock as of the date hereof, have guaranteed our obligations to Wells Fargo.

The trade accounts receivable purchase agreement between Accountabilities and ICG Inc. and Amerisource each have a term of two years and maximum borrowing amount of $7.5 million and $4.5 million, respectively, as of the date hereof, with an advance rate of 90%. The agreements provide for an interest rate of the prime rate plus 1% (with a minimum rate of 6% per annum) and a monthly collateral management fee of 0.65% of the average daily outstanding borrowings. At September 28, 2012 and September 30, 2011, there were $8.5 million and $5.3 million of trade accounts receivable sold that remained outstanding, respectively. In addition, there were $1.8 million and $661,000 due from Amerisource for the fiscal years ended September 28, 2012 and September 30, 2011, respectively. The Company paid Amerisource $1.2 million and $173,000 in interest for the years ended September 28, 2012 and September 30, 2011, respectively.

Debt

Long-term debt at September 28, 2012 and September 30, 2011 is summarized as
follows:






                                                                        September 28,      September 30,
                                                                            2012               2011
Long-term debt:
ICG Inc. acquisition (i)                                               $    1,538,000     $    2,938,000
ICG Inc. revolving credit facility and term loan (ii)                                -         1,790,000
CRD acquisition (iii)                                                         552,000          1,034,000
Debt from Diamond Staffing purchases (iv)                                   1,463,000            377,000
Other debt                                                                     50,000             50,000
Total                                                                       3,603,000          6,189,000
Less current maturities                                                     1,347,000          3,850,000
Non-current portion                                                         2,256,000          2,339,000

Related party long-term debt:
CRD acquisition (v)                                                           750,000            750,000
18% unsecured convertible note (vi)                                                  -           100,000
Demand loans (vii)                                                              8,000              8,000
Total                                                                         758,000            858,000
Less current maturities                                                       758,000            858,000
Non-current portion                                                                  -                  -

Total long-term debt                                                        4,361,000          7,047,000
Less current maturities                                                     2,105,000          4,708,000
Total non-current portion                                              $    2,256,000     $    2,339,000

For an explanation of footnotes (i) through (vii) above, please see Note 7 to our financial statements beginning on page 19 of this Annual Report on Form 10-K.


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Sales of Common Stock

In January 2011, we issued 29,411,765 shares of common stock to TSS Corp. in connection with the acquisition of Tri-Diamond.

During the second quarter of 2011, we granted 750,000 shares of common stock, and 555,000 restricted stock units in connection with the appointment of two executive officers of the Company, and 122,500 shares of common stock to three other employees of the Company.

On November 21, 2011, we issued 34,839,159 shares of common stock to Robert Cassera, the sole stockholder of TS Staffing and member of the Board, to complete the TS Staffing Acquisition. An additional 38,001,402 shares of common stock were issued in exchange for an equal number of shares that were held by TS Staffing immediately prior to the TS Staffing Acquisition. The shares previously held by TS Staffing were cancelled upon completion of the TS Staffing Acquisition.

On March 30, 2012 and July 30, 2012 we converted $12.0 million and $2.1 million of the Company debt with TS Employment into 25,962,788 and 4,543,488 shares of our common stock, respectively. The number of shares issued to TS Employment under these conversion agreements was calculated based upon an independent valuation of our common stock at $0.4622 per share.

During the fourth quarter of Fiscal Year 2012, we granted 300,000 shares of common stock to an executive officer of the Company pursuant to the terms of his employment agreement.

Critical Accounting Policies

The preceding discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and the rules of the SEC. The preparation of these financial statements 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.

The following represents a summary of the critical accounting policies, which our management believes are the most important to the portrayal of our financial condition and results of operations and involve inherently uncertain issues that require management's most difficult, subjective or complex judgments.

Revenue Recognition. We recognize staffing and consulting revenues when services are rendered. Permanent placement revenue is recognized when the candidate commences employment, net of an allowance for those not expected to remain with clients through a 90-day guarantee period, wherein we are obligated to find a suitable replacement.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from our clients failing to make required payments for services rendered. Our management estimates this allowance based upon knowledge of the financial condition of our clients, review of historical receivable and reserve trends and other pertinent information. If the financial condition of any of our clients deteriorates or there is an unfavorable trend in aggregate receivable collections, additional allowances may be required.

Intangible Assets. Goodwill and other intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. We perform an annual impairment analysis to test for impairment. No impairment was indicated by our latest impairment analysis. Intangible assets with finite lives are subject to amortization over the period they are expected to benefit and impairment reviews are performed when there is an indication that the asset might be impaired. See Note 4 to the Consolidated Financial Statements.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. We adopted this new guidance beginning July 1, 2012. Adoption of this new guidance did not have a material impact on our financial statements.


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Contractual Obligations

A summary of the Company's obligations and commitments as of September 28, 2012 is as follows:

                             Less Than                                       More Than 5
                              1 Year         1-3 Years       3-5 Years          Years            Total
Due to financial
institutions on sales of
receivables                $ 68,612,000     $          -    $          -    $           -    $ 68,612,000
Operating leases              2,002,000       2,812,000         997,000           20,000        5,831,000
Loan payable - related
party                         7,711,000                -               -                -       7,711,000
Long-term debt                1,424,000         813,000         719,000          647,000        3,603,000
Employment Agreements         1,275,000                -               -                -       1,275,000
Related party long-term
debt                            758,000                -               -                -         758,000
Contractual
obligations-job search
engines                         444,000         177,000                -                -         621,000
Total                      $ 82,226,000     $ 3,802,000     $ 1,716,000     $    667,000     $ 88,411,000

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