Discontinued Operations

Effective August 3, 2014, Kforce sold to RCM Acquisition, Inc. (the “Purchaser”), under a Stock Purchase Agreement (the “HIM SPA”) dated August 4, 2014, all of the issued and outstanding stock of KHI, a wholly-owned subsidiary of Kforce Inc. and operator of the former HIM reporting segment, for a total cash purchase price of $119.0 million plus a post-closing working capital adjustment of $96 thousand.

In connection with the sale, Kforce entered into a Transition Services Agreement (the “HIM TSA”) with the Purchaser to provide certain post-closing transitional services for a period not to exceed 12 months. The fees for these services will be generally equivalent to Kforce’s cost, and additional services may be provided at negotiated rates. Although the services provided under the HIM TSA generate continuing cash flows between Kforce and the Purchaser, the amounts are not considered to be direct cash flows of the discontinued operation nor are they significant to the ongoing operations of either entity. Kforce has no contractual ability through the HIM TSA, HIM SPA or any other agreement to significantly influence the operating or financial policies of the Purchaser. As a result, Kforce has no significant continuing involvement in the operations of KHI and, as such, has classified the operating results of the former HIM reporting segment as discontinued operations.

In accordance with and defined within the HIM SPA, Kforce is obligated to indemnify the Purchaser for certain losses, as defined, in excess of $1.19 million, although this deductible does not apply to certain specified losses. Kforce’s obligations under the indemnification provisions of the HIM SPA, with the exception of certain items, ceased 18 months after the sale closed and are, in some cases, limited to an aggregate of $8.925 million; this only applies to certain specified losses. While it cannot be certain, Kforce believes any material exposure under the indemnification provisions is remote and, as a result, has not recorded a liability as of December 31, 2014.

The total financial results of HIM have been presented as discontinued operations in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss). The following summarizes the revenues and pretax profits of HIM for the three years ended December 31 (in thousands):



	YEARS ENDED DECEMBER 31,
	2014		2013		2012
Net service revenues	$	56,670	$	78,159	$	76,992
Income from discontinued operations, before income taxes	$	103,512	$	9,169	$	10,792

For the year ended December 31, 2014, the income from discontinued operations included a gain, net of transaction costs, on the sale of discontinued operations of $94.3 million pretax, or $56.1 million after tax. The transaction costs primarily included legal fees, stock-based compensation related to the acceleration of restricted stock, commissions and transaction bonuses in the form of cash and common stock, which, in the aggregate, totaled $11.0 million. Stock-based compensation related to acceleration of restricted stock and transaction bonuses paid in stock in lieu of cash was $2.4 million. Kforce utilized the proceeds from the sale of HIM initially to pay down the outstanding borrowings under our Credit Facility and ultimately to repurchase shares of common stock.

Certain of the assets and liabilities pertaining to the discontinued operations of HIM as of the closing date were sold to or assumed by the Purchaser, and deconsolidated from Kforce. The following table summarizes the carrying amounts of the major classes of assets and liabilities at December 31, 2013 related to the discontinued operation, including those not sold to or assumed by the Purchaser (in thousands):



	December 31, 2013
Assets:
Trade receivables	$	11,755
Goodwill	4,887
Prepaid expenses and other current assets	219
Fixed assets, net	162
Other assets, net	88
Total assets	17,111
Liabilities:
Accounts payable and other accrued liabilities	712
Accrued payroll costs	4,177
Other long-term liabilities	868
Total liabilities	5,757
Net assets	$	11,354

On March 17, 2012, Kforce entered into a Stock Purchase Agreement (the “KCR SPA”) to sell all of the issued and outstanding stock of KCR to inVentiv Health, Inc. (“inVentiv”). On March 31, 2012, the Firm closed the sale of KCR to the Purchaser for a total cash purchase price of $57.3 million, after giving effect to a $7.3 million post-closing working capital adjustment.

Kforce also entered into a Transition Services Agreement (the “KCR TSA”) with inVentiv to provide certain post-closing transitional services for a period not to exceed 18 months' time. Services provided by Kforce under the KCR TSA ceased during the three months ended June 30, 2013. The fees for a significant majority of these services were generally equivalent to Kforce’s cost.

In accordance with the KCR SPA, Kforce was obligated to indemnify inVentiv for certain losses, as defined, in excess of $375 thousand although this deductible did not apply to certain losses. Kforce’s obligations under the indemnification provisions of the KCR SPA, with the exception of certain items, ceased 18 months after the sale closed and were limited to an aggregate of $5.0 million, although this cap did not apply to certain losses. Kforce believes any exposure under the indemnification provisions is remote, particularly given that the 18 months time period for general indemnification claims has now passed, and, as a result, Kforce has not recorded a liability as of December 31, 2014. The financial results of KCR have been presented as discontinued operations in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss). The following summarizes the revenues and pretax profits of KCR for the year ended December 31, 2012 (in thousands):



	December 31, 2012
Net service revenues	$	29,808
Income from discontinued operations, before income taxes	$	39,735

In connection with the disposition of KCR, the Board exercised its discretion, as permitted within the Kforce Inc. 2006 Stock Incentive Plan, to accelerate the vesting, for tax planning purposes, of substantially all of the outstanding and unvested restricted stock and ALTI effective March 31, 2012. Kforce recognized a tax benefit from the acceleration of the vesting of restricted stock and ALTI. The acceleration resulted in the recognition of previously unrecognized compensation expense during the quarter ended March 31, 2012 of $31.3 million, which included $0.8 million of payroll taxes. This expense was classified in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss).

Income tax expense as a percentage of income from discontinued operations, before income taxes, for the year ended December 31, 2014, 2013 and 2012 was 40.6%, 40.1% and 43.7%, respectively.