| SPHERION CORP Item 1A RISK FACTORS We are affected by a wide range of factors which could materially affect future developments and performance |
| In addition to the factors affecting specific business operations identified in connection with the description of these operations and the financial results of these operations elsewhere in this report, the following are some of the factors that could affect our operations: We operate in highly competitive markets with low barriers to entry, and may be unable to compete successfully against existing or new competitors |
| We operate in highly competitive and fragmented markets in both of our operating segments |
| There are low barriers to entry by potential competitors at the local level |
| We face significant competition in the markets we serve and will continue to face significant competition in any geographic markets or industry sectors that we may enter |
| The majority of competitors are significantly smaller than us |
| However, certain of our competitors are larger, have greater marketing, technical and financial resources, and have stronger brand name recognition than us |
| As a result, some of our competitors may be in a better position to capitalize on new technologies and changes in customer requirements, and to devote more resources than we can to the development, promotion and sale of their service offerings |
| Some of our competitors can provide broader geographic coverage than us and this can limit our ability to service large customers who wish to consolidate services |
| There has been a significant increase in the number of customers consolidating their staffing services purchases with a single provider or with a small number of providers |
| The trend to consolidate purchases has in some cases made it more difficult for us to obtain or retain customers |
| In the first quarter of 2005, we were notified of a customer non-renewal representing approximately dlra75 million in annual revenues |
| We also face the risk that certain of our current and prospective customers may decide to provide similar services internally |
| Additionally, pricing pressures have intensified as customers have continued to competitively bid new contracts |
| This trend is expected to continue for the foreseeable future |
| As a result, we cannot assure you that we will not encounter increased competition in the future |
| Any significant economic downturn could result in lower revenues |
| Because demand for personnel services and recruitment services is sensitive to changes in the level of economic activity, our business may suffer during economic downturns |
| As economic activity slows down, companies tend to reduce their use of temporary employees and recruitment services before undertaking layoffs of their regular employees, resulting in decreased demand for our personnel |
| Also, as businesses reduce their hiring of permanent employees, revenues from our recruitment services is adversely affected |
| As a result, any significant economic downturn could have a material adverse effect on our business, financial condition or results of operations |
| During 2001 and 2002, the slowdown in the US economy significantly impacted the staffing market, which in turn reduced our revenues significantly |
| Economic conditions improved in 2004 and 2005; however, there is no assurance that this will continue in 2006 or that our revenues will increase |
| 10 ______________________________________________________________________ A significant reduction in demand from our customers may result in a material impact on the results of our operations |
| A material impact may also result from the loss of customers or a deterioration of their financial condition |
| We may experience a reduction in business from a significant customer or a number of customers from one of our operating segments, or we may lose such customers |
| We cannot guarantee that we will be able to retain long-term relationships or secure renewals of short-term relationships with our more substantial customers in the future |
| Our customers may experience a deterioration in their current financial condition or future prospects, or may experience a bankruptcy |
| A significant reduction in demand from our customers may result in an adverse impact on our business and results of operations in future periods |
| We may not achieve the intended effects of our business strategy |
| Our business strategy is primarily based on profitable growth in our North American operations |
| We are implementing steps to continue increasing our growth rates by concentrating in local markets with small and mid-sized clients through relationship selling, targeting new accounts by providing integrated services, and continuing to improve operating leverage |
| We also plan to grow within our Professional Services segment by providing more services to existing staffing group segment customers |
| If we are not successful in achieving these objectives with our customers, our revenues, costs and overall profitability could be negatively affected |
| If we are unable to leverage our investment in technology effectively, our productivity and costs’ competitiveness could be negatively affected |
| Our contracts contain termination provisions and pricing risks that could decrease our revenues, profitability and cash flow |
| Some of our customer contracts permit termination in the event our performance is not consistent with service levels specified in those contracts |
| Our customers’ ability to terminate contracts creates uncertain revenue streams |
| In addition, if customers are not satisfied with our level of performance, our reputation in the industry may suffer, which could materially and adversely affect our business, financial condition, results of operations and cash flow |
| Some of our contracts contain pricing provisions that allow customers to pay a set fee for our services regardless of whether our costs to perform these services exceed the amount of the set fee |
| Some of our contracts contain re-pricing provisions that can result in reductions of our fees for performing our services |
| In these situations, we could incur significant unforeseen costs or financial penalties in performance under the contracts |
| The termination of a customer contract or the deterioration of the financial condition or prospects of a customer may result in an impairment of the net book value of the assets we use in connection with that contract |
| Our failure or inability to perform under customer contracts could result in damage to our reputation and give rise to legal claims against us |
| Certain areas of our business require us to assume a greater level of responsibility for developing or maintaining processes on behalf of our customers |
| Many of these processes are critical to the operation of our customers’ businesses |
| Our failure or inability to complete these engagements satisfactorily could have a material adverse effect on our customers’ operations and consequently may give rise to claims against us for actual or consequential damages or otherwise damage our reputation |
| Any of these claims could have a material adverse effect on our business, financial condition or results of operations |
| The disposition of businesses previously sold, or in the process of being sold, may create contractual liabilities associated with indemnifications provided |
| We have disposed of several business units over the past four years |
| The disposition of these businesses usually requires that we indemnify the purchaser for liabilities that arose prior to the disposition 11 ______________________________________________________________________ date |
| These liabilities are typically related to audits of tax liabilities by local authorities and other pre-existing liabilities such as lease obligations |
| Additionally, in the contracts we make a number of representations and warranties and from time to time claims are made against us related to these items |
| During 2005, we recorded dlra5dtta7 million as part of discontinued operations for these matters |
| The fair value of these indemnifications are recorded at the time of the sale |
| Subsequently if any liabilities become known and are both probable and reasonably estimable, they are recorded as an expense |
| For some of the dispositions, we have or may have future claims which are not yet probable and reasonably estimable and have not been recorded as an expense |
| Future earnings from discontinued operations could be materially adversely affected if we are not successful in defending our positions with the purchasers of these discontinued operations |
| Additionally, if we are required to make cash payments for any of these liabilities, our financial condition could be materially adversely affected |
| Regulatory challenges to our tax filing positions could result in additional taxes |
| In 2002, we engaged in transactions that generally had the effect of accelerating certain future projected tax deductions and losses, resulting in an increase in the amount of net operating losses and capital losses available for carry back into prior tax years |
| As a result of these transactions, our tax refund for the 2002 filing year was increased by approximately dlra60 million |
| We believe that we have appropriately reported these transactions in our tax returns, and that we have established adequate reserves with respect to any tax liabilities that may arise in relation to these transactions should our position be successfully challenged by tax authorities |
| Government regulation may significantly increase our costs, including payroll-related costs and unemployment taxes |
| In conducting our business, we are required to pay a number of payroll and related costs and expenses, including unemployment taxes, workers’ compensation and medical insurance for our personnel |
| Unemployment insurance premiums paid by employers typically increase during periods of increased levels of unemployment |
| Workers’ compensation costs may increase in the future if states have raised benefit levels and liberalized allowable claims |
| Future earnings could be adversely affected if we are not able to increase the fees charged to customers to absorb the increased costs related to unemployment insurance or workers’ compensation benefits |
| Future earnings could also be adversely affected if state governments successfully challenge prior year unemployment experience ratings |
| We are subject to business risks associated with international operations in Canada, which could make our international operations significantly more costly |
| Operation in this market is subject to risks inherent in international business activities, including, · fluctuations in currency exchange rates; · varying economic and political conditions; · overlapping or differing tax structures; and · multiple regulations concerning pay rates, benefits, vacation, statutory holiday pay, workers’ compensation, union membership, termination pay and the termination of employment |
| We may be exposed to employment-related claims and costs that could have a material adverse affect on our business, financial condition and results of operations |
| We employ and place people in the workplaces of other businesses |
| Attendant risks of such activity that could increase our cost of doing business include: · possible claims of discrimination and harassment; 12 ______________________________________________________________________ · errors and omissions by the personnel we place, particularly for the acts of temporary professionals (eg, accountants, attorneys and information technology consultants); · misuse or misappropriation of customer funds or proprietary information; and · payment of workers’ compensation and other similar claims |
| Although we maintain insurance coverage for general and professional liability, errors and omissions and employee theft, such insurance coverage may not be adequate in scope or amount to cover any such liability |
| A failure of any of our personnel to observe our policies and guidelines intended to reduce exposure to these risks could have a material adverse effect upon us |
| We cannot assure that we will not experience such problems in the future |
| We retain a portion of the risk under our workers’ compensation, general liability/professional liability, employment practices liability insurance programs and health insurance benefits programs |
| Changes in the estimates of these accruals are charged or credited to earnings in the period determined, and therefore a large fluctuation in any given quarter could materially adversely affect earnings in that period |
| We are dependent upon availability of qualified personnel, and may not be able to attract and retain sufficient numbers of qualified personnel necessary to succeed |
| We depend upon our ability to attract qualified personnel who possess the skills and experience necessary to meet the staffing requirements of our customers or to successfully bid for new customer projects |
| We must continually evaluate and upgrade our base of available qualified personnel to keep pace with changing customer needs and emerging technologies |
| Competition for individuals with proven professional or technical skills always exists |
| We could have difficulty attracting and retaining sufficient numbers of qualified personnel necessary for our business to succeed |
| We may lose our key personnel, and therefore, our business may suffer |
| Our operations are dependent on the continued efforts of our officers and executive management |
| In addition, we are dependent on the performance and productivity of our local managers and field personnel |
| Our ability to attract and retain business is significantly affected by local relationships and the quality of service rendered |
| The loss of those key officers and members of executive management who have acquired significant experience in our industry may cause a significant disruption to our business |
| Moreover, the loss of our key managers and field personnel may jeopardize existing customer relationships with businesses that continue to use our services based upon past relationships with these local managers and field personnel |
| The loss of such key personnel could materially adversely affect our operations, because it may result in an inability to establish and maintain customer relationships and otherwise operate our business |
| Managing or integrating any future acquisitions may strain our resources |
| In the future, we may acquire other businesses to expand our service offerings, broaden our customer base or expand our geographic presence |
| Acquisitions involve a number of additional risks, including the diversion of management’s attention from our existing operations, the failure to retain key personnel or customers of an acquired business, the assumption of unknown liabilities of the acquired business for which there are inadequate reserves, the potential impairment of acquired intangible assets and the ability to successfully integrate the business |
| We could experience financial or other setbacks if any of the businesses that we acquire have liabilities or problems of which we are not aware |
| Further, we cannot assure you that any future acquired businesses will generate anticipated revenues or earnings |
| As a result, the anticipated benefits from future acquisitions may not be achieved |
| 13 ______________________________________________________________________ Failure to meet certain covenant requirements under our revolving lines of credit could impact part or all of our availability to borrow under our revolving lines of credit |
| Our revolving lines of credit provide for certain affirmative and negative covenants which may limit the total availability under this line of credit based upon our ability to meet these covenants |
| These covenants include, but are not limited to: a fixed charge coverage ratio; limitations on capital expenditures, additional debt incurred, mergers, consolidations or sales; and transactions with subsidiaries and related parties |
| Failure to meet compliance with one or more of these covenants in the future could affect the amount of availability we have to borrow against and as a result, our liquidity and financial condition may be adversely affected |
| While we currently have not drawn on these revolving lines of credit, we may need to if we grow as planned |
| Any limitation on our ability to borrow in this situation could inhibit our growth |
| We are a defendant in a variety of litigation and other actions from time to time, which may have a material adverse effect on our business, financial condition and results of operations |
| We and our subsidiaries are regularly involved in a variety of litigation arising out of our business |
| Occasionally, this litigation can be material |
| We cannot assure you that our insurance will cover all claims that may be asserted against us |
| Should the ultimate judgments or settlements exceed our insurance coverage, they could have a material adverse effect on our results of operations, financial position and cash flows |
| We also cannot assure you that we will be able to obtain appropriate types or levels of insurance in the future or that adequate replacement policies will be available on |