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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the fiscal year ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the transition period from _____ to _______
Commission file number 1-6081
COMFORCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-23262248
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2001 Marcus Avenue Lake Success, New York 11042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 328-7300
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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 X No
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 27, 1997: $76,662,564
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 March 27, 1997
- ---------------------------- -----------------------------
Common stock, $.01 par value 12,819,649
Documents Incorporated by Reference: The information required under Part III of
Form 10-K will be included in Registrant's Proxy Statement to be filed with the
Commission on or before April 30, 1997, which information is incorporated by
reference herein.
PART I
ITEM 1. BUSINESS
General
COMFORCE Corporation (the "Company" or "COMFORCE") is a provider of
staffing, consulting and outsourcing solutions focused on the high technology
needs of businesses. The Company provides services to over 725 customers through
a highly-skilled labor force that includes computer programmers, engineers,
technicians, scientists and researchers. The Company's customers include
telecommunication equipment manufacturers, telecommunication service providers
(wireline and wireless), computer software and hardware manufacturers, aerospace
and avionics firms, utilities and national research laboratories such as Los
Alamos National Laboratory, Sandia National Laboratory and Lawrence Livermore
National Laboratory.
The Company serves its customers in three principal sectors --
telecommunications, information technology and technical services -- which
represent approximately 20%, 25% and 55%, respectively, of current sales. In the
telecommunications sector, the Company provides staffing for wireline and
wireless communications systems development, satellite and earth station
deployment, network management and plant modernization. In the information
technology sector, the Company provides staffing for specific projects requiring
highly specialized skills such as applications programming and development,
client/server development, systems software architecture and design, systems
engineering and systems integration. In the technical services sector, the
Company provides staffing for national laboratory research in such areas as
environmental safety, alternative energy source development and laser
technology, and provides highly-skilled labor meeting diverse commercial needs
in the avionics and aerospace, architectural, automotive, energy and power,
pharmaceutical, marine and petrochemical fields.
The Company was incorporated in Illinois in 1954 and became a Delaware
corporation through its merger with a Delaware subsidiary in 1969. The Company
maintains its headquarters in Lake Success, NY and has 31 branch offices in 15
states across the United States to enable it to meet the needs of national as
well as local customers. The Company employs approximately 3,900 persons and
maintains a proprietary database of over 110,000 prospective employees with
expertise in the technical disciplines served by the Company.
Acquisition History
James L. Paterek, the Chairman of the Company, Christopher P. Franco, the
Chief Executive Officer of the Company, and Michael Ferrentino, the President of
the Company, guided the Company's entrance into the staffing business with the
October 1995 acquisition by the Company of all of the capital stock of Spectrum
Global Services, Inc. (formerly d/b/a YIELD Global and subsequently renamed
COMFORCE Telecom, Inc.) ("COMFORCE Telecom"). COMFORCE Telecom, a provider of
technical staffing services principally to the telecommunications sector, had
been formed in 1987 by Mr. Paterek and Mr. Ferrentino. In September 1995,
immediately prior to its entry into the technical staffing business, the Company
discontinued its then existing jewelry business (see "Discontinued
Operations--History of Discontinued Operations" in this Item 1). Since its
acquisition of COMFORCE Telecom, the Company has continued to expand its
presence in the technical staffing industry through its acquisition of six
additional technical staffing businesses. Following is a brief description of
the Company's acquisitions:
o COMFORCE Telecom: In October 1995, the Company acquired substantially all
of the capital stock of COMFORCE Telecom, a provider of technical staffing
services to the telecommunications sector. The price paid by the Company for the
COMFORCE Telecom stock and related acquisition costs was approximately $6.4
million, payable in $5.6 million cash and 500,000 shares of the Company's Common
Stock.
o Williams Communication Services, Inc.: In March 1996, the Company
acquired substantially all of the assets of Williams Communication Services,
Inc. ("Williams"), a regional provider of technical staffing services to the
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telecommunications sector. The purchase price for the assets of Williams was $2
million in cash, plus a four year contingent payout based on future earnings of
Williams payable in cash. The amount of the contingent payout cannot exceed $2
million, for a total purchase price not to exceed $4 million. The Company
acquired one branch office with the acquisition of Williams.
o RRA, Inc., Project Staffing Support Team, Inc. and DataTech Technical
Services, Inc.: In May 1996, the Company acquired all of the stock of Project
Staffing Support Team, Inc. and substantially all the assets of RRA, Inc. and
DataTech Technical Services, Inc. (collectively, "RRA") for a purchase price of
$5.1 million, payable in cash, plus a three year contingent payout based on
future earnings of RRA payable in cash. The amount of the contingent payout
cannot exceed $650,000, for a total purchase price not to exceed $5.75 million.
RRA provides specialists for supplemental staffing assignments as well as
outsourcing and vendor-on-premises programs, primarily in the technical services
sector. The Company added nine branch offices with the acquisition of RRA.
o Force Five, Inc.: Effective as of July 31, 1996, the Company purchased
all of the stock of Force Five, Inc. ("Force Five") for a purchase price of $2
million, payable in $1.5 million cash and 27,398 shares of the Company's Common
Stock, plus a three year contingent payout based on future earnings of Force
Five payable in cash. The amount of the contingent payout cannot exceed $2
million, for a total purchase price not to exceed $4 million. Force Five
provides information technology consulting services to leading companies
nationwide. The acquisition of Force Five added one branch office to the
Company.
o AZATAR Computer Systems, Inc.: In November 1996, the Company acquired all
of the stock of AZATAR Computer Systems, Inc. ("AZATAR"), a provider of
information technology ("IT") services, for a purchase price of $5.15 million,
payable in $1.03 million cash and 243,211 shares of the Company's Common Stock,
plus a three year contingent payout based on future earnings of AZATAR payable
in stock. The maximum amount of the contingent payout in any year cannot exceed
$400,000, which, if earned in full, would bring the total purchase price to
$6.35 million. The number of shares to be issued as contingent payouts is based
upon the average closing sales price of the Common Stock for the 10 business
days immediately preceding December 31st of each earnout year. The Company added
two branch offices with the acquisition of AZATAR.
o Continental Field Services Corporation and Progressive Telecom, Inc.: In
November 1996, the Company acquired substantially all of the assets of
Continental Field Services Corporation and its affiliate, Progressive Telecom,
Inc. (collectively, "Continental"), providers of technical staffing services to
the telecommunications sector, for a purchase price of $5 million, payable in
$4.4 million cash and 36,800 shares of the Company's Common Stock, plus a three
year contingent payout based on future earnings of Continental payable in cash
in an aggregate amount not to exceed $1.02 million, for a total purchase price
not to exceed $6.02 million. The Company added two branch offices with this
acquisition.
o RHO Company Incorporated: In February 1997, the Company acquired all of
the stock of RHO Company Incorporated ("RHO") for $14.8 million payable in cash,
plus a contingent payout to be paid over two or three years based on future
earnings of RHO payable in stock in an aggregate amount not to exceed $3.3
million. The maximum amount of the contingent payout in any year cannot exceed
$1.67 million, which, if earned in full, would bring the total purchase price to
$18.1 million. The maximum number of shares issuable under the terms of the
contingent payout is 386,249 shares. RHO provides specialists for its customers
primarily in the technical services and IT sectors. The acquisition of RHO added
nine branch offices.
Strategy
The Company's objective is to be the leading provider of technical
staffing, consulting and outsourcing solutions for the high technology needs of
businesses. The Company will seek to achieve its objective by pursuing the
strategy set forth below. However, various factors, including those described
under "Forward Looking Statements" in this Item 1, could cause the Company to be
unable to continue to pursue such strategy or otherwise cause it to fail to
realize its objective.
See "Forward Looking Statements" in this Item 1.
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Focus on High Technology Markets. In the telecommunications, IT and
technical service sectors which the Company serves, dynamic technology needs of
businesses can effectively be met through the use of staffing, consulting and
outsourcing services. These services permit a company to access personnel with
experience in the most current technologies. The Company intends to focus on
servicing high technology markets because management believes that providing
staffing in the high technology sectors offers greater growth opportunities over
providing staffing in the lower-skilled labor sectors, including a higher growth
in demand for services, lower turnover rates, generally higher profit margins
and more stable customer and employee relationships. In the rapidly emerging
high technology fields such as PCS network development and information
technology, the Company's employees continually develop new marketable skills by
working on projects that make use of the most advanced technology. As a result,
these skills developed by the Company's staffing personnel while on an
assignment continually expand the Company's ability to service more diverse and
emerging technologies.
Pursue Acquisitions as Key Element of Growth. A key element of the
Company's expansion strategy is to continue acquiring staffing and consulting
companies with profitable track records and recognized local or regional
presence in order to expand the Company's geographic service base, diversify its
capabilities in the high technology sectors, strengthen its existing expertise
and expand its proprietary database of highly skilled technical talent.
Management believes that such acquisitions will enable the Company to more
rapidly achieve significant economies of scale and maintain greater financial
resources which will allow it to secure larger contracts and enhance its
leverage for negotiating contracts. Management believes that its decentralized
management philosophy and operating strategies will make it an attractive
acquiror to the owners of regional and local staffing businesses.
Expand Geographic Presence. The Company will seek to increase revenues and
enhance earnings stability by continuing to expand geographically in the United
States and internationally. The Company services its customers through a network
of 31 branch offices located in 15 states across the United States and its
corporate headquarters located in Lake Success, New York. Management believes
that further increasing its geographic diversity will better enable it to
increase its customer base, weather regional economic and business cycles and
provide an advantage when pursuing contracts with national accounts,
particularly for customers with a national or international presence and a wide
variety of staffing needs.
Develop Innovative Staffing Solutions. Management continually seeks to
develop new staffing solutions that provide its customers with maximum value and
flexibility. By offering innovative and flexible service packages to customers,
management believes it will be better able to attract new customers as well as
increase sales to existing customers. Two examples of innovative staffing
solutions are the Company's RightSourcing(sm) and COMFORCE Homework(sm)
programs. Through its RightSourcing(sm) program, the Company evaluates the
performance level of a particular department, function or project and recommends
ways to increase cost-effectiveness and workforce efficiency through specific
staffing strategies. The COMFORCE Homework(sm) program, which is currently under
development, will allow the Company's highly-skilled professionals to
"telecommute," thus eliminating geographic barriers to meeting its customers'
needs. The Company currently provides this service to customers on a limited
basis.
Capitalize on Operational Efficiencies. In the technical staffing industry,
administrative, accounting and other "back office" operations are often provided
on a centralized basis. The Company believes that its management information
systems responsible for these functions are capable of supporting additional
levels of business in the future at low incremental costs. The Company believes
that the administrative functions of acquired businesses can be integrated into
those of the Company without proportionally increasing overhead expenses,
resulting in increased profitability, improved operating efficiencies.
Market Opportunities
In seeking to achieve its objective of becoming the leading provider of
technical staffing, consulting and outsourcing solutions for the high technology
needs of businesses, the Company will seek to take advantage of the market
opportunities outlined below. However, various factors, including those
described under "Forward Looking Statements" in this Item 1, could cause such
market opportunities to cease to be available or otherwise cause the Company to
fail to realize its objective. See "Forward Looking Statements" in this Item 1.
4
The Growing Market for Staffing, Consulting and Outsourcing Services. The
staffing services industry, once used predominately as a short-term solution for
peak production periods and to temporarily replace workers absent due to
illness, vacation, or abrupt termination, has evolved into a permanent and
significant component of the staffing plans of many corporations. Corporate
restructuring, downsizing, increased government regulations governing employee
relations, advances in technology, and the desire by many companies to shift
employee costs from a fixed to a variable expense have resulted in the use of a
wide range of staffing alternatives by businesses. In addition, the reluctance
of corporations to risk liability upon the discharge of employees has led to an
increase in companies using staffing services as a means of evaluating the
qualifications of personnel before hiring them on a full-time basis. In
addition, entrants into the labor force increasingly look to such assignments as
a way to build experience, make contacts, and get valuable exposure to a variety
of work settings, and as a vehicle to gain full-time employment.
Organizations have also begun using flexible staffing to reduce
administrative overhead by strategically outsourcing operations that are not
part of their core business functions, such as recruiting, training and benefits
administration. By utilizing employees from personnel providers, businesses are
able to avoid the management and administrative costs incurred when full-time
personnel are employed. An ancillary benefit of staffing services, particularly
for smaller businesses, is the shifting of certain employment costs and risks
(e.g., workers' compensation and unemployment insurance) to the personnel
provider, which can spread the costs and risks over a larger pool of employees.
Opportunities for Consolidation in a Fragmented Industry. The Company
believes that the staffing industry is highly fragmented and is currently
experiencing a trend toward consolidation primarily due to the increasing demand
by large companies for centralized staffing services and the difficulties faced
by many smaller staffing companies in today's staffing services market. The
growth of national and regional accounts resulting from the centralization of
staffing decisions by national and regional companies has increased the
importance of staffing companies being able to offer a wide range of services
over a broad geographic area. In addition, many smaller staffing companies are
experiencing increased difficulties due to factors such as significant working
capital requirements, limited management resources and an increasingly
competitive environment.
Telecommunications Sector and the Growth of PCS. As businesses globalize
and advance technologically, the demand for telecommunications-related services
has increased. The Company believes that the recent enactment of the
Telecommunications Act of 1996, which deregulates substantial portions of the
telecommunications industry, has been the impetus for the recent and expected
future growth in the industry.
The growth of the telecommunications industry is being fueled also by the
rising demand for wireless telecommunications services which have increased
dramatically since their commercial introduction in 1984. This demand is largely
attributable to the widespread availability and increasing affordability of
mobile telephone, paging and other emerging wireless telecommunications
services. Technological advances and a regulatory environment more favorable to
competition have also served to stimulate market growth.
The Company believes that the demand for wireless telecommunications will
continue to grow dramatically and that personal communications services ("PCS")
will capture a significant share of the wireless market. PCS is a wireless
digital system which translates telephone calls into computer language before
transmitting. Spurred by federal deregulation and the auction of $18 billion of
PCS licenses in early 1996, regional and national PCS companies are making
substantial investments to bring their PCS networks into operation as quickly as
possible. The Company believes the installation of these networks, which is
labor-intensive and requires specialized technical personnel, will significantly
increase the demand for staffing and outsourcing services.
Information Technology Sector and the Year 2000 Challenge. The demand for
qualified personnel is increasing significantly in computer-related disciplines
such as technical project support, software development and documentation,
systems and database management, and desktop publishing. As a result,
information technology services is one of the most rapidly growing sectors of
the staffing services industry.
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Management believes that the demand for IT services will continue to grow,
principally as a result of accelerating technological advances requiring highly
specialized expertise and the need for enterprise-wide integration of computer
systems. The continuing transition, particularly by large corporations, from
legacy systems to computer networks using client/server architecture is a key
factor contributing to the demand for technical staffing services. Rapid
technological change makes it increasingly difficult and expensive for
businesses to employ full-time technicians with the leading edge expertise
needed to maintain and upgrade advanced and complex computer systems. Companies
are increasingly relying on outsourcing and staffing services to maintain and
upgrade their systems and to train full-time employees in the use and support of
their systems.
The Company believes that the substantial increase in the use of
sophisticated information technologies has coincided with economic factors that
have led to reductions in corporate work forces and a return by businesses to a
focus on their core competencies. Faced with the challenge of implementing and
operating more complex information systems with substantially smaller corporate
staffs, businesses are increasingly using specialty staffing services companies
to augment their information technology operations. At the same time, an
increasing number of technical professionals are choosing to operate as
consultants, motivated by a desire for more flexible work schedules and an
opportunity to work with emerging and challenging technologies in a variety of
industries and work environments. Such consultants generally are able to
maintain compensation levels comparable to or higher than those of similarly
skilled, full-time employees. These factors have caused IT services to be one of
the fastest growing segments of the specialty staffing services industry.
With the approach of the Year 2000, management believes that over the next
several years opportunities in the IT sector will increase as a result of the
need to correct the Year 2000 problem. Virtually from the origins of the
computer, dates have been programmed into computer applications as six-digit
fields, with the last two digits representing the year. In many cases these
fields are encrypted in basic or fundamental applications, often in obscure or
obsolete computer languages. As a result, after December 31, 1999, many computer
applications will lose the ability to distinguish dates and will cease to
function or give erroneous results unless reprogrammed. Industry sources
estimate that corporations and government agencies will spend from $200 to $600
billion to assess and correct this problem. Estimates indicate that up to 90% of
these projected costs will be incurred for professional services, with the
balance incurred for software tools. In 1995 only an estimated $50 million was
spent rectifying the problem. However, the Year 2000 challenge is receiving
increasing attention. Many companies and organizations requiring Year 2000
conversions do not have the internal personnel, resources or expertise that will
be required to address the problem and instead will rely on the staffing
industry to supply personnel, including programmers with skills in multiple
computer languages or obscure languages that have not been used in many years.
Technical Services. The technical services sector, the traditional market
for staffing companies such as the Company, is a more mature sector than the
more rapidly emerging telecommunications and IT sectors. However, the Company
believes that this sector has experienced significant growth in recent years due
principally to the factors that have contributed to the growth in the staffing
services industry generally, including the increasing prevalence of corporate
restructurings and downsizings, increased government regulations governing
employee relations and the desire by many companies to shift employee costs from
a fixed to a variable expense.
Services
The Company provides a wide range of technical staffing, consulting and
outsourcing services. The Company's extensive proprietary database and national
presence enable it to draw from a wealth of resources to link highly-trained
telecommunications and computer professionals with businesses that need highly
skilled labor. The Company's services are designed to give its customers maximum
flexibility and maximum choice. The Company's professionals are available on a
short-term or long-term basis. The Company's services permit businesses to
increase the volume of their work without increasing fixed overhead and
permanent personnel costs.
The Company's employees provide services ranging from basic equipment
installation to sophisticated engineering skills to customers in the
telecommunications sector, typically in support of telecommunications network
expansion or modernization programs. To customers in the IT sector, the
Company's employees provide computer programming
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services that include updating or modifying existing programs as well as
developing new programs and integrating new programs with existing systems. The
Company's employees offer both manufacturing and engineering support to
customers in the technical services sector on research and development and
product design projects that relate to, inter alia, energy research and
aerospace design.
The Company offers its customers four staffing alternatives: Project
Support, Vendor-on-Premises, RightSourcing(sm) and Needs Analysis. The staffing
alternatives serve different customer needs, depending on the nature and length
of the assignment and the degree of management responsibility the customer
wishes to delegate. In addition, the Company is currently developing a new
telecommuting service, COMFORCE Homework(sm), to offer its customers even
greater flexibility.
Project Support. Through its Project Support program, the Company contracts
with its customers to provide staffing for specific projects requiring highly
specialized skills such as applications programming and development,
client/server development, systems software architecture and design, systems
engineering and systems integration. Generally, project staffing involves the
commitment of a team of employees who remain at the site until a project is
completed. However, the Company helps its customers complete their development
projects by providing both short-term and long-term staffing. The Company has
the resources and experience to plan and manage a project from conception
through completion, as well as the ability to enter a project midstream, assess
its status, develop a plan and successfully complete the project.
Vendor-on-Premises. Through its Vendor-on-Premises program, the Company
coordinates personnel services by establishing an on-site office to assist in
the procurement and management of the customer's workforce. The program
facilitates customer use of staffing personnel and allows the customer to
outsource a portion of its personnel responsibility. The Company designs and
implements customized programs that can include services such as specialized
testing, drug screening, selection and monitoring of secondary staffing vendors,
enforcement of the customer's quality standards, and orientation of the
workforce. The program can also provide permanent, full-time placement services
through traditional staff selection and recruiting services.
RightSourcing(sm). Through the RightSourcing(sm) program, the Company
evaluates the performance level of a particular department, function, or project
and recommends ways to increase cost-effectiveness and workforce efficiency
through specific staffing strategies. The Company then tailors a program to meet
specific staffing needs and established performance standards. Through the use
of RightSourcing(sm) software, the customer can access information and data
regarding the cost, management and productivity of its contract and permanent
personnel. The RightSourcing(sm) program provides the customer with the option
to transfer its workers from its payroll to the Company's payroll.
Needs Analysis. Through its Needs Analysis service, the Company evaluates
the specific objectives and requirements of a project or function and identifies
needed staff positions and responsibilities. This is accomplished by the
development of a work breakdown structure and other needs analysis techniques
that define tasks, outputs, and interdependencies, establish task durations and
milestones, and identify elements critical to the successful implementation of
the function or completion of the project. The resulting staffing plan defines
an organizational structure, identifies specific staff positions, numbers,
responsibilities, and qualifications, defines the start and end date of each
position, and indicates the employment category for each position (permanent
full-time, temporary short-term, or contract). The staffing requirements can
then be matched to the Company's proprietary database of more than 110,000
prospective employees.
New Telecommuting Initiative. The Company's COMFORCE Homework(sm) program
is designed to allow highly-skilled professionals to telecommute from their
homes, eliminating geographic barriers in order to provide the most qualified
staff for specific customer requirements. The program is also designed to
provide increased flexibility by allowing part-time staff to assist more than
one customer over any given time period and by reducing overhead costs to the
customer. The Company's staffing, consulting and outsourcing services are
particularly well suited for telecommuting due to the highly skilled nature of
its employee base.
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Customers
The Company's customers are typically Fortune 500 companies and other large
organizations. Since January 1, 1996, the Company provided technical staffing,
consulting and outsourcing solutions to over 725 customers including
telecommunication equipment manufacturers, telecommunication service providers
(wireline and wireless), computer software and hardware manufacturers, aerospace
and avionics firms, utilities and national laboratories engaged in such areas as
environmental safety research and development of alternative energy sources and
laser technology. The Company believes that its large customer base provides it
with attractive opportunities for further marketing and cross-selling of its
technical staffing solutions capabilities. In addition, the requirements of
these organizations often provide opportunities for major projects that extend
for multiple years or generate additional assignments. Generally, the Company's
contracts with its customers provide that the Company will have the first
opportunity to supply the personnel required by that customer. Other staffing
companies not under contract with the customer are typically offered the
opportunity to supply personnel only if the Company is unable to meet the
customer's requirements.
One customer accounted for 19% of the Company's 1996 revenues, but no other
customer accounted for more than 10% of 1996 revenues. In 1995, three customers
accounted for 17.3%, 12.6% and 10.1%, respectively, of historical revenues
during that year. Sales to the Company's 10 largest customers account for
approximately 51% of the Company's current revenues, with sales to Microsoft
Corporation and The Boeing Company accounting for approximately 15% and 13%,
respectively, of the Company's current revenues.
The Company provides staffing for cellular and wireless technology
communications system development, satellite and earth station deployment and
network management services to customers engaged in the telecommunications
industries. Sales to customers in the telecommunications sector account for
approximately 20% of the Company's current revenues. Among the customers in this
sector are ALCATEL, AT&T Wireless Services, Inc., Lucent Technologies, Inc.,
Northern Telecom, Inc. (NORTEL), Fujitsu Network Transmission Systems, Inc.,
Bell Atlantic Corporation and Motorola, Inc. Typically, customers from the
telecommunications sector obtain the services of the Company on a purchase order
basis and are invoiced weekly.
Sales to the Company's customers in the information technology sector
represent approximately 25% of the Company's current revenues. The major
customers in this sector are Microsoft Corporation, Western Digital Corporation,
NEC Technologies, Inc., Oracle Corporation, First Union Bank, Xerox Corporation,
Eastman Kodak Company and Electronic Data Systems Corporation. The Company
expects that revenues contributed by the IT sector will continue to increase as
a percentage of its total revenues. IT customers generally obtain the services
of the Company on a contract and purchase order basis and are typically invoiced
weekly or bi-weekly.
The customers in the technical services sector are principally quasi-public
organizations, aerospace, electronics and petrochemical companies and public
utilities. Sales to technical services customers represent approximately 55% of
the Company's current revenues. The major customers in this sector include The
Boeing Company, Cable Systems International, Gulfstream Aerospace Corporation,
Honeywell, Inc., Westinghouse Electric Corporation, McDonnell Douglas
Corporation and National Department of Energy Research Laboratories including
Los Alamos National Laboratory, Sandia National Laboratory, Lawrence Livermore
National Laboratory and Battelle Northwest Laboratory. Typically, customers in
the technical services sector obtain the services of the Company on a long-term
contract basis and are invoiced weekly.
Sales and Marketing
The Company services its customers through a network of 31 branch offices
located in 15 states across the United States and its corporate headquarters
located in Lake Success, New York. The Company's sales and marketing strategy is
focused on expanding its business with existing customers through cross-selling
and establishing relationships with new customers. The strategy focuses on
national accounts that are primarily serviced on a local level through its
branch locations.
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These accounts, as well as local accounts serviced by the Company, are
targeted by account managers at the branch offices, permitting the Company to
capitalize on the local expertise and established relationships of its branch
office employees. Such accounts are solicited through personal sales
presentations, telephone marketing, direct mail solicitation, referrals from
customers, and advertising in a variety of local and national media including
the Yellow Pages, magazines, newspapers, trade publications and through the
Company's home page on the World Wide Web. The Company also sponsors public
relations activities designed to enhance public recognition of the Company and
its services. Local employees are encouraged to be active in civic organizations
and industry trade groups to facilitate the development of new customer
relationships.
The Company's international and national sales and marketing effort is and
will continue to be coordinated by management at the corporate level, enabling
the Company to develop a consistent, focused strategy to pursue national and
international account opportunities. This strategy allows the Company to
capitalize on the desire of national and international customers to work with a
limited number of preferred vendors for their staffing requirements. As larger
customers consolidate their purchasing of staffing services, management believes
that the Company's ability to provide a full range of services to national
accounts will be a competitive advantage.
In certain markets, the Company intends to cross-sell professional
services. The Company has established long-term relationships with many of its
customers. Most of these customers are currently serviced by the Company in a
single sector in which they operate. The Company believes that the access and
goodwill from these existing customer relationships provide it with significant
advantages in marketing services to these customers in other sectors.
In order to maximize its marketing effectiveness, the Company provides
motivational training to empower its employees and instill a proactive,
solution-based approach to problem solving. In addition, the Company offers
additional compensation, in the form of cash and stock options, to certain of
its employees as incentive to maximize their sales efforts.
Recruiting of Billable Employees
The Company's success is dependent upon its ability to effectively and
efficiently match skilled technical personnel with specific customer
assignments. As a result of continuous recruiting efforts, the Company has
established an extensive national resume database of over 110,000 prospective
employees with expertise in the technical disciplines served by the Company. The
Company continuously updates its proprietary database to reflect changes in
technical personnel skill levels and availability. Upon receipt of assignment
specifications, the Company searches the database to identify suitable technical
personnel. Once technical skills are matched to the specifications, the Company
considers other selection criteria such as interpersonal skills, availability
and geographic preferences to ensure there is a proper fit between personnel and
the assignment being staffed. The Company's resume database, which may be
accessed by appropriate personnel throughout the Company, can be searched by a
number of different criteria, including specific skills or qualifications.
To identify qualified personnel for inclusion in its proprietary database,
the Company solicits referrals from its existing personnel and customers and
places advertisements in local newspapers, trade magazines and on the Company's
home page on the World Wide Web. As competition for the limited number of
qualified technical personnel with certain "niche" skills intensifies, the
Company intends to enhance its recruiting practices to attract technical
personnel in areas of high demand.
The Company believes it has a competitive advantage in attracting and
retaining technical personnel as it provides assignments that make use of
advanced technology and offer the employees the opportunity to obtain additional
experience that can enhance their skills and overall marketability. In addition,
in certain instances the Company provides its billable employees the opportunity
to participate in a stock option purchase plan of the Company. The Company
believes this plan distinguishes the Company from most of its competitors.
9
The Company also offers flexible schedules, better-than-competitive wages
and, depending on the contract or assignment, paid holidays, vacation, and
certain benefit plan opportunities to attract and retain qualified technical
personnel. In addition, the Company offers its billable employees a wide range
of choices for custom designing a benefit package specific to each employee's
needs and an opportunity for immediate participation in the Company's 401(k)
savings plan. The Company also offers health insurance benefits to its billable
employees at their cost through a national trade association to which the
Company belongs.
Payroll/Billing/Accounting
The Company believes that its management information ("MIS") systems are
instrumental to the success of its operations and are technologically advanced.
Its invoice customization and electronic billing features enable the Company to
expedite its billing and collection functions and to meet payroll in a more
timely and efficient manner. The Company's MIS systems also retain coded
information regarding employment candidates' qualifications and skills,
providing the Company with a competitive advantage in matching such skills and
qualifications with customer needs.
The Company seeks to increase its profitability by adding offices and
employees without proportionately increasing overhead expenses. The Company
believes that its MIS systems are well suited to facilitate that goal in that
the administrative functions of the acquired businesses can be integrated into
those of the Company at low incremental costs, allowing the Company to spread
its fixed costs over a larger revenue base.
Competition
The specialty staffing services industry is very competitive and
fragmented. There are relatively limited barriers to entry and new competitors
frequently enter the market. The Company's competitors vary depending on
geographic region and the nature of the service(s) being provided. The Company
faces substantial competition from both larger firms possessing substantially
greater financial, technical and marketing resources than the Company and
smaller, regional firms with a strong presence in their respective local
markets. Large national firms that offer specialty staffing services include
AccuStaff Incorporated, Corestaff, Inc., Butler International, Inc., CDI
Corporation and TAD Technical Services. Local firms are typically
operator-owned, and each market generally has one or more significant
competitors. The Company believes that as it grows and expands geographically,
it may compete with additional national, regional and local service providers.
Management believes that the availability and quality of candidates, the
effective monitoring of job performance, scope of geographic service and the
price of service are the principal elements of competition. The availability of
quality technical staffing personnel is an especially important facet of
competition. In order to attract staffing candidates, the Company places
emphasis upon its ability to provide permanent placement opportunities,
competitive compensation, quality and varied assignments, and scheduling
flexibility. The Company believes its ability to compete also depends in part on
a number of competitive factors outside its control, including the ability of
its competitors to hire, retain and motivate skilled technical and management
personnel and the extent of its competitors' responsiveness to customer needs.
Additionally, in certain markets the Company has experienced significant pricing
pressure from some of its competitors. Although the Company believes it competes
favorably with respect to these factors, it expects competition to increase, and
there can be no assurance that the Company will remain competitive.
Employees
The Company currently employs approximately 200 full-time staff employees
and has approximately 3,700 billable employees on assignment. In addition to
employees on assignment, the Company maintains a proprietary database of over
110,000 prospective employees with expertise in the technical disciplines served
by the Company. Billable employees are employed by the Company on an as-needed
basis dependent on customer demand and are paid only for time they actually
work. Non-billable administrative personnel provide management, sales and
marketing and other services in support of the Company's staffing services.
10
For its non-billable employees, the Company offers a package of benefits
which it believes to be competitive, including vacation and holiday pay and a
401(k) plan. All employees are covered by workers' compensation and general
liability insurance. The Company is responsible for and pays the employer's
share of Social Security taxes (FICA), federal and state unemployment taxes,
workers' compensation insurance and other costs for all employees. The Company
also offers its billable employees the benefits described under "Recruiting of
Billable Employees" in this Item 1.
Intellectual Property
The Company has applications pending with the Patent and Trademark Office
for federal registration of the service marks "COMFORCE" and RightSourcing for
job placement services for staffing personnel and permanent employees and
telecommunications and computer consultation services and the service mark
COMFORCE Homework for intent to use for job placement services for placing
personnel from traditional work environments into a home environment.
Regulations
Staffing services firms are generally subject to one or more of the
following types of government regulation: (i) registration of the
employer/employees; (ii) licensing, record keeping and recording requirements;
and (iii) substantive limitations on its operations. Staffing services are the
legal employers of their workers. Therefore, the Company is governed by laws
regulating the employer/employee relationship, such as tax withholding or
reporting, social security or retirement, antidiscrimination and workers'
compensation.
Forward Looking Statements
The statements under "Strategy" and "Market Opportunities" in this Item 1
and elsewhere in this Report that suggest that the Company will increase
revenues and become profitable, achieve significant growth through strategic
acquisitions or other means, realize operating efficiencies, and like statements
as to the Company's objectives and management's beliefs are forward looking
statements. The Company's actual results could differ materially from those
projected or suggested in any forward-looking statement. Factors that could
cause or contribute to such differences include, but are not limited to, the
following important factors:
The Company's technical staffing business has been developed principally
through the acquisition of established technical staffing businesses, all of
which have been acquired since October 1995. The Company's officers have had
limited experience in managing companies as large and as rapidly growing as the
Company. The Company's strategy of continuing its growth and expansion will
place additional demands upon the Company's current management and will require
additional information systems and management, operational and other financial
resources. The ability of the Company to achieve growth through acquisition will
depend on a number of factors, including the availability of attractive
acquisition opportunities, the availability of funds needed to complete
acquisitions, the availability of working capital needed to fund the operations
of acquired businesses and the effect of existing and emerging competition on
operations. Acquisitions also involve special risks, including risks associated
with unanticipated liabilities and contingencies, diversion of management
attention and possible adverse effects on earnings resulting from increased
goodwill amortization, increased interest costs, the issuance of additional
securities and difficulties related to the integration of the acquired business.
Since the fourth quarter of 1995, the Company has funded its strategy of
growth through acquisitions principally through private debt or equity
financing, including its sale of $25.2 million of convertible debentures in
February and March 1997. In March 1997, a portion of these proceeds were used to
retire its $10.0 million credit facility (the "Chase Credit Facility") with The
Chase Manhattan Bank ("Chase"). The Company is presently seeking to obtain a
credit facility providing for term loan and revolving credit availability of
from $50 million to $75 million to fund additional acquisitions and to finance
working capital needs. In this connection, the Company can give no assurance
that such a credit facility will be available or, if available, that it will be
available on terms acceptable to the Company. A lack of available funds may
require the Company to delay, scale back or eliminate all or some of its market
development and acquisition projects
11
and could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Liquidity and Capital Resources" in
Item 7.
The staffing services industry is highly competitive and has low barriers
to entry. Heightened competition for customers could result in the Company being
unable to maintain its current fee scales, thus impacting margins. As is common
in the staffing industry, the Company's engagements to provide services to its
customers are generally non-exclusive, of a short-term nature and subject to
termination by the customer with little or no notice. The loss of or a material
reduction in the revenues from any of the Company's significant customers could
have an adverse effect on the Company's business, results of operations and
financial condition. Furthermore, heightened competition for personnel could
result in the Company being unable to fulfill its customers' needs or being
required to bear higher personnel costs, which may not be recoverable through
its fees to customers. Competition is intense for qualified personnel in certain
areas in which personnel shortages exist, such as in the information technology
and telecommunications sectors and in some technical specialties, and could
occur in other sectors or specialities in the future. The Company competes for
such individuals with other providers of technical staffing services, systems
integrators, providers of outsourcing services, computer systems consultants,
customers and personnel agencies.
Demand for staffing services is significantly affected by the general level
of economic activity in the country. Companies use staffing services to manage
personnel costs and changes in staffing needs due to business fluctuations. When
economic activity increases, employees from staffing companies are often added
before full-time employees are hired. As economic activity slows, many companies
reduce their usage of employees from staffing companies before undertaking
layoffs of their regular employees. In addition, the Company may experience more
competitive pricing pressure during such periods of economic downturn.
Therefore, any significant economic downturn could have a material adverse
effect on the Company's business.
Discontinued Operations
History of Discontinued Operations
From 1985 until September 1995, the Company, under the name The Lori
Corporation, was engaged in the business of designing and distributing fashion
jewelry (referred to as "Lori" as the context may require). Prior thereto, under
the names American Photocopy Equipment Company and APECO Corporation, the
Company engaged in various business activities, including the manufacture of
photocopy machines. The Company's current management was not involved in the
operation of any of these discontinued businesses.
Due to continuing losses in the jewelry business and the erosion of the
markets for its products, in September 1995, Lori adopted a plan to discontinue
the jewelry business and determined to seek to enter into another line of
business. In June 1995, Lori contracted with current management to direct its
entry into the technical staffing business. On October 17, 1995, Lori acquired
all of the capital stock of Spectrum Global Services, Inc. (formerly d/b/a YIELD
Global and subsequently renamed COMFORCE Telecom, Inc.). In addition, in
connection with its new business direction, Lori changed its name to COMFORCE
Corporation. At the time of the acquisition, COMFORCE Telecom was one of several
wholly-owned subsidiaries of Spectrum Information Technologies, Inc., a Delaware
corporation ("Spectrum"), which had a Chapter 11 petition pending. The sale of
COMFORCE Telecom, which was not a party to the Chapter 11 proceeding, was
approved by the bankruptcy court in which Spectrum's bankruptcy was pending.
Spectrum had acquired COMFORCE Telecom in 1993.
In conjunction with the COMFORCE Telecom acquisition, the Company and ARTRA
GROUP Incorporated, then the Company's majority stockholder ("ARTRA"), entered
into an Assumption Agreement as of October 17, 1995 (the "Assumption
Agreement"). Under the Assumption Agreement, ARTRA agreed to pay and discharge
substantially all of the then existing liabilities and obligations of the
Company, including indebtedness, corporate guarantees, accounts payable and
environmental liabilities. ARTRA also agreed to assume responsibility for all
liabilities of the jewelry business from and after October 17, 1995, and applied
the proceeds of the sale thereof to pay creditors. On April 12, 1996, ARTRA sold
the business and certain of the assets of the Company's Lawrence Jewelry Company
subsidiary
12
("Lawrence") for a selling price of $252,000 plus certain proceeds subsequently
realized from the sale of existing inventory, which proceeds were applied to pay
creditors of Lawrence or deposited in an escrow account to be applied for such
purpose. ARTRA has advised the Company that none of the proceeds from the sale
would remain following the payment of such creditors.
Environmental Matters
Prior to its entry into the jewelry business in 1985, the Company operated
in excess of 20 manufacturing facilities for the production of, inter alia,
photocopy machines, photographic chemical and paper coating. These operations
were sold or discontinued in the late 1970s and early 1980s. Certain of these
facilities may have used and/or generated hazardous materials and may have
disposed of the hazardous substances, particularly before the enactment of laws
governing the safe disposal of hazardous substances, at an indeterminable number
of sites. Although the controlling stockholders and current management had no
involvement in such prior manufacturing operations, the Company could be held to
be responsible for clean-up costs if any hazardous substances were deposited at
these manufacturing sites, or at off-site waste disposal locations, under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), or under other Federal or state environmental laws now or hereafter
enacted. However, except for the Gary, Indiana site described below, the Company
has not been notified by the Federal Environmental Protection Agency (the "EPA")
that it is a potentially responsible party for, nor is the Company aware of
having disposed of hazardous substances at, any site.
In December 1994, the Company was notified by the EPA that it is a
potentially responsible party under CERCLA for the disposal of hazardous
substances at a site in Gary, Indiana. The alleged disposal occurred in the
mid-1970s at a time when the Company conducted operations as APECO Corporation
(see "Discontinued Operations--History of Discontinued Operations" in this Item
1). In this connection, in December 1994, the Company was named as one of
approximately 80 defendants in a case brought in the United States District
Court for the Northern District of Indiana by a group of 14 potentially
responsible parties who agreed in a consent order entered into with the EPA to
clean-up this site. The plaintiffs have estimated the cost of cleaning up this
site to be $45 million, and have offered to settle the case with the Company for
$991,445. This amount represents the plaintiffs' estimate of the Company's pro
rata share of the clean-up costs. At the direction of ARTRA, which, as described
below, is contractually obligated to the Company for any environmental
liabilities, the Company declined to accept this settlement proposal, which was
subsequently withdrawn.
The evidence produced by the plaintiffs to date is the testamentary
evidence of four former employees of a waste disposal company that deposited
wastes at the Gary, Indiana site identifying the Company as a customer of such
disposal company, and entries in such disposal company's bookkeeping ledgers
showing invoices to the Company. The Company, however, has neither discovered
any records which indicate, nor located any current or former employees who have
advised, that the Company deposited hazardous substances at the site. Management
and its counsel cannot state whether a negative outcome is probable regarding
the Company's potential liability at this site.
Under the terms of the Assumption Agreement and a subsequent agreement
entered into between ARTRA and the Company, ARTRA has agreed to pay and
discharge substantially all of the Company's pre-existing liabilities and
obligations, including environmental liabilities at any sites at which the
Company allegedly operated facilities or disposed of hazardous substances,
whether or not the Company is currently identified as a potentially responsible
party therefor. Consequently, the Company is entitled to full indemnification
from ARTRA for any environmental liabilities associated with the Gary, Indiana
site. In addition, ARTRA has deposited 50,000 shares of the Common Stock in
escrow as additional collateral to satisfy any judgment adverse to the Company
or to pay any agreed upon settlement amount with respect to the Gary, Indiana
site. Proceeds from the sale of the shares held in escrow might not be
sufficient to satisfy any such judgment or pay any such settlement amount. While
ARTRA is obligated to indemnify the Company for any environmental liabilities,
no assurance can be given that ARTRA will be financially capable of satisfying
its obligations with respect to any liability in connection with the Gary,
Indiana site or any other environmental liabilities. ARTRA has advised that it
intends to vigorously defend this case.
ITEM 2. PROPERTIES
The Company owns no real estate. It leases its corporate headquarters as
well as its 30 branch offices. These leases are for office space ranging in size
from approximately 500 square feet to approximately 21,000 square feet and have
remaining lease terms of from less than one year to four years. The Company
believes that its facilities are adequate for
13
its present and reasonably anticipated future business requirements, except to
the extent of future acquisitions of existing businesses. In the case of such
acquisitions, the Company expects to assume the leases of businesses acquired
or, to the extent possible, consolidate such operations with existing offices.
The Company does not anticipate difficulty locating additional facilities, if
needed.
ITEM 3. LEGAL PROCEEDINGS
In January 1997, Austin A. Iodice, who served as the Company's Chief
Executive Officer, President and Vice Chairman while the Company was engaged in
the jewelry business, and Anthony Giglio, who performed the functions of the
Company's Chief Operating Officer while the Company was engaged in the jewelry
business, filed separate suits against the Company in the Connecticut Superior
Court alleging that the Company had breached the terms of management agreements
entered into with them by failing to honor options to purchase Common Stock
awarded to them in connection with the management of the jewelry business under
the terms of such management agreements and the Company's Long-Term Stock
Investment Plan. The suits allege that the plaintiffs are entitled to an
unspecified amount of damages. The Company believes that the option to purchase
370,419 shares granted to Mr. Iodice (through Nitsua, Ltd., a corporation
wholly-owned by him) and the option to purchase 185,210 shares granted to Mr.
Giglio, each having an exercise price of $1.125 per share, expired in 1996,
three months after Messrs. Giglio and Iodice ceased to be employed by the
Company. Messrs. Giglio and Iodice maintain that they were agents and not
employees of the Company and that the options continue to be exercisable. In
March 1997, the Company filed motions to dismiss each of these suits. The
Company intends to vigorously defend these suits.
In a case filed in U.S. District Court, Central District of California,
against RHO and Technical Staff Associates, Inc. ("TSA"), which was acquired by
RHO in 1992, TSA's former insurance carrier has alleged that TSA and RHO are
obligated to repay to it approximately $1.6 million that it was required to pay
in connection with an injury and death that occurred in November 1992 to a
temporary employee of TSA. The action has been referred to RHO's insurance
carrier, which is defending it with a reservation of rights. RHO has been
granted summary judgment with respect to all claims made in the action, which
judgment is the subject of an appeal by the plaintiff. Management believes that
the case is without substantial merit and intends to vigorously defend it.
The Company is also involved in a proceeding described above under
"Discontinued Operations--Environmental Matters" in Item 1.
The Company is a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are believed
by management to be material to the business, results of operations or financial
condition of the Company. The Company maintains general liability insurance,
property insurance, automobile insurance, employee benefit liability insurance,
owner's and contractor's protective insurance and exporter's foreign operations
insurance with coverage of $1 million on a per claim basis and $2 million
aggregate (with $3 million umbrella coverage). The Company insures against
workers' compensation in amounts required under applicable state law and in the
amount of $500,000 in the case of foreign workers. The Company also maintains
fidelity insurance in the amount of $25,000 per claim and directors' and
officers' liability insurance in the amount of $2 million. The Company is
presently soliciting quotations to obtain errors and omissions coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 28, 1996, the annual meeting of the stockholders of the
Company was held, at which the stockholders voted on and approved the following,
which constitute all of the matters presented to the stockholders at the
meeting: the election of Richard Barber, Michael Ferrentino, Keith Goldberg and
Dr. Glen Miller to the Board of Directors for a term of one year; the
ratification of the Company's issuance of Common Stock to certain individuals in
consideration of their agreement to direct the Company's entry into the
technical staffing business; the ratification of the Company's entering into the
technical staffing business and exiting the jewelry business and transactions
related thereto;
14
the approval of an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of the Company's capital stock; the
approval of an amendment to the Company's Certificate of Incorporation to
eliminate cumulative voting; the approval of an amendment of the Company's
Long-Term Stock Investment Plan; and the ratification of the appointment of
Coopers & Lybrand LLP as the Company's independent certified public accountants
for the fiscal year ending December 31, 1996.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $.01 par value, is traded on the American Stock
Exchange (AMEX:CFS). The high and low sales prices for the Company's Common
Stock, as reported by the American Stock Exchange in the Monthly Market
Statistics during the past two years, were as follows:
High Low
Prior to Acquisition of COMFORCE Telecom:
Fiscal Year 1995
First Quarter .................................. 3-7/8 1-15/16
Second Quarter ................................. 3-1/2 2
Third Quarter .................................. 4-3/4 1-9/16
Fourth Quarter (through October 16, 1995) ...... 4-3/8 3-1/4
Following Acquisition of COMFORCE Telecom:
Fourth Quarter (commencing October 17, 1995) ... 9-1/4 3-1/4
Fiscal Year 1996
First Quarter .................................. 10-3/8 6
Second Quarter ................................. 34-1/8 9-3/8
Third Quarter .................................. 28-1/2 15-1/2
Fourth Quarter ................................. 18-3/8 11-1/2
The last reported sale price of the Common Stock on the American Stock
Exchange on March 27, 1997 was $8.375. As of March 27, 1997, there were
approximately 5,400 shareholders of record.
The Company anticipates that it will not pay cash dividends on the Common
Stock for the foreseeable future and that it will retain its earnings to finance
future growth. The declaration and payment of dividends by the Company are
subject to the discretion of its Board of Directors and compliance with
applicable law. Any determination as to the payment of dividends in the future
will depend upon, among other things, general business conditions, the effect of
such payment on the Company's financial condition and other factors the
Company's Board of Directors may in the future consider relevant. Under the
Chase Credit Facility, which was repaid in March 1997, the Company was
prohibited from paying cash dividends on its Common Stock or, subject to limited
exceptions, its Preferred Stock. The Company is presently seeking to obtain a
replacement credit facility, which, if one becomes available, is likely to
impose restrictions on the payment of dividends. No dividends have been declared
or paid on the Common Stock during 1995 or 1996.
16
ITEM 6. SELECTED FINANCIAL DATA
Selected Historical Financial Information
Year Ended December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share data)
Revenues (1) $ 55,867 $2,387 $ -- $ -- $ --
Stock compensation charge (2) -- 3,425 -- -- --
Earnings (loss) from continuing operations 1,352 (4,332) (2,282) (1,456) (421)
Loss from discontinued operations (3) -- (17,211) (16,220) (216) (34,198)
Earnings (loss) before extraordinary credits 1,352 (21,543) (18,502) (1,672) (34,619)
Extraordinary credits (4) -- 6,657 8,965 22,057 --
Net earnings (loss) 1,352 (14,886) (9,537) 20,385 (34,619)
Dividends on Preferred Stock 325 -- -- -- --
Accretive Dividends on Series F
Preferred Stock 665
Income available for Common Stockholders 362 -- -- -- --
Earnings (loss) per share:
Continuing operations .03 (.95) (.72) (.39) (.13)
Discontinued operations -- (3.74) (5.08) (.06) (10.86)
Earnings (loss) before extraordinary .03 (4.69) (5.80) (.45) (10.99)
credits
Extraordinary credits -- 1.45 2.81 6.03 --
Net earnings (loss) .03 (3.24) (2.99) 5.58 (10.99)
Total assets (5) 43,366 8,536 18,704 40,174 42,818
Long-term debt -- -- -- -- 6,105
Receivable from (payable to) ARTRA(6) -- 1,046 (289) -- (16,025)
Liabilities assumed by ARTRA (6) -- 4,240 -- -- --
Liabilities subject to compromise -- -- -- -- 41,500
Debt subsequently discharged -- -- 7,105 -- --
Cash dividend 228 -- -- -- --
- ----------
(1) Revenues for the year ended December 31, 1995 represent revenues of
COMFORCE Telecom from the date of its acquisition, October 17, 1995.
Revenues for the year ended December 31, 1996 represent revenues of
COMFORCE Telecom for the entire year, revenues from Williams from the
acquisition date of March 3, 1996 through December 31, 1996, revenues from
RRA from the acquisition date of May 10, 1996 through December 31, 1996,
revenues
17
from Force Five from the effective date of acquisition of July 31, 1996
through December 31, 1996, revenues from AZATAR from the effective date of
acquisition of November 1, 1996 through December 31, 1996, and revenues
from Continental from the effective date of acquisition of November 8, 1996
through December 31, 1996. The Company's jewelry operations were
discontinued effective as of September 30, 1995. Accordingly, selected
financial data of the Company's jewelry operations for each of the three
years in the period ended December 31, 1994 has been reclassified to
discontinued operations.
(2) Represents a non-recurring compensation charge related to the issuance of a
35% common stock interest in the Company to certain individuals to manage
the Company's entry into the technical staffing services business.
(3) The loss from discontinued operations for the year ended December 31, 1995
includes a charge to operations of $12.9 million to write-off the remaining
goodwill of the Company's discontinued jewelry operations effective June
30, 1995 and a provision of $1.6 million for loss on disposal of these
discontinued operations. The loss from discontinued operations for the year
ended December 31, 1994 includes a charge to operations of $10.8 million
representing a write-off of goodwill of the Company's former New Dimensions
subsidiary. The loss from discontinued operations for the year ended
December 31, 1992 includes charges to operations of $8.7 million
representing an impairment of goodwill at December 31, 1992 and $8.5
million representing increased reserves for markdown allowances and
inventory valuation.
(4) The 1995 and 1994 extraordinary credits represent gains from net discharge
of indebtedness under terms of the Company's debt settlement agreement with
its bank related to the discontinued jewelry operations. The 1993
extraordinary credit represents a gain from a net discharge of indebtedness
due to the reorganization of the Company's former New Dimensions
subsidiary. See Note 11 to the Company's consolidated financial statements
for the year ended December 31, 1996.
(5) As partial consideration for a debt settlement agreement, in December 1994,
the Company's bank lender received all of the assets of the Company's
former New Dimensions subsidiary.
(6) In conjunction with the COMFORCE Telecom acquisition, ARTRA, formerly the
parent of the Company, agreed to assume substantially all pre-existing
liabilities of the Company. During 1995, ARTRA received $399,000 of
advances from the Company. Subsequent to December 31, 1995, ARTRA repaid
the above advances and made net payments of $647,000 to reduce these
pre-existing liabilities. Such payments have been included in the Company's
consolidated financial statements at December 31, 1995 as amounts
receivable from ARTRA and as additional paid-in capital. To the extent
ARTRA makes subsequent payments, they will be recorded as additional
paid-in capital. In the fourth quarter of 1995, ARTRA exchanged all of its
shares of the Company's Series C Preferred Stock for 100,000 newly issued
shares of the Company's Common Stock. During 1994, ARTRA made net advances
to the Company of $2.5 million. Effective December 29, 1994, ARTRA
exchanged $2.2 million of its notes and advances for additional Series C
Preferred Stock. In February 1993, ARTRA transferred all of its notes to
the Company's capital account. See Notes 9, 10 and 11 to the Company's
consolidated financial statements for the year ended December 31, 1996 and
"Discontinued Operations" in Item 1 of this Report.
18
Selected Pro Forma Financial Information
The historical financial information for the Company presented under Item 8
of this Report for December 31, 1995 and 1994 relates principally to the
Company's former jewelry operations which were discontinued September 30, 1995.
This historical financial information includes limited results of the Company's
technical staffing operations, all of which, except for COMFORCE Telecom, were
acquired since January 1, 1996. Consequently, a discussion and comparison of the
Company's historical results of operations may not be meaningful. In order to
provide a discussion of results which may be more meaningful than the historical
discussion, the Company has (i) presented below unaudited pro forma data of the
Company for the years ended December 31, 1995 and 1994 assuming that the
acquisition of COMFORCE Telecom (which was acquired by the Company in October
1995) and related financing and capital transactions had occurred as of January
1, 1994, and (ii) presented under Item 7 of this Report a comparison of 1996
historical results of operations with 1995 pro forma results, and of 1995 pro
forma results with 1994 pro forma results.
Year Ended December 31, 1995
(unaudited in thousands)
------------------------------------------------------------------------------------------
COMFORCE Pro Forma
Historical Telecom (1) Adjustments ProForma
-------------- -------------- ------------ --------------
Revenues $ 2,387 $ 9,568 (2) $ 11,955
------------- ------------ ------------
Operating costs and expenses:
Cost of revenues 1,818 7,178 8,996
Stock compensation (5) 3,425 3,425
Spectrum corporate management
fees (4) 1,140 1,140
Other operating costs and expenses 823 1,397 $ 50 (2) 2,270
-------------- -------------- ------------ --------------
6,066 9,715 50 15,831
-------------- -------------- ------------ --------------
Operating earnings (loss) (3,679) (147) (50) (3,876)
-------------- -------------- ------------ --------------
Interest and other non-operating
expenses (618) 7 410 (3) (201)
-------------- -------------- ------------ --------------
(618) 7 410 (201)
-------------- -------------- ------------ --------------
Earnings (loss) from continuing
operations before income taxes (4,297) (140) (4,077)
(Provision) credit for income taxes
(35) 21 360 (14)
------------ ------------- ------------ ------------
Loss from continuing operations $ (4,332) $ (119) $ 460 $ (4,091)
============ ============= ============ ============
19
Year Ended December 31, 1994
(unaudited in thousands)
-----------------------------------------------------------------------------------
COMFORCE Pro Forma
Historical Telecom (1) Adjustments Pro Forma
-------------- ------------- -------------- ------------
Revenues $ 8,245 $ 8,245
------------- ------------
Operating costs and expenses:
Cost of revenues 6,417 6,417
Spectrum corporate management
fees (4) 803 803
Other operating costs and
expenses $ 966 1,134 $ 68 (2) 2,168
-------------- ------------- -------------- ------------
966 8,354 68 9,388
-------------- ------------- -------------- ------------
Operating earnings (loss) (966) (109) (68) (1,143)
-------------- ------------- -------------- ------------
Interest and other non-operating
expenses (1,316) 9 (1,307)
-------------- ------------- ------------
(1,316) 9 (1,307)
-------------- ------------- ------------
Loss from continuing operations
before income taxes (2,282) (100) (68) (2,450)
Provision for income taxes (15) (15)
-------------- ------------- -------------- ------------
Loss from continuing operations $ (2,282) $ (115) $ (68) $ (2,465)
============== ============= ============== ============
- ----------
Pro forma adjustments to the unaudited condensed consolidated of operations:
(1) The pro forma data presented for COMFORCE Telecom's operations is for
the periods prior to its acquisition on October 17, 1995, or January
1, 1995 through October 16, 1995 and January 1, 1994 through December
31, 1994, respectively.
(2) Amortization of goodwill from the COMFORCE Telecom acquisition. The
table below reflects where amortization goodwill has been recorded.
1995 1994
-------- --------
Historical COMFORCE Telecom ........................ $ 51,000 $ --
Historical Telecom ................................. 142,000 175,000
Pro Forma Adjustments .............................. 50,000 68,000
-------- --------
Adjusted pro forma per financial statements ........ $243,000 $243,000
======== ========
(3) Reverse interest expense on notes and other liabilities assumed by
ARTRA. The interest adjustment in 1995 was for interest on notes
directly related to the jewelry operations and were incurred in 1995.
These liabilities were not outstanding during 1994 and, accordingly, a
similar interest adjustment is not required.
20
(4) Corporate management fees from COMFORCE Telecom's former parent,
Spectrum Information Technologies, Inc. The amount of these management
fees may not be representative of costs incurred by COMFORCE Telecom
on a stand alone basis.
(5) Represents a non-recurring compensation charge related to the issuance
of the 35% common stock interest in the Company to certain individuals
to manage the Company's entry into and development of the
telecommunications and computer technical staffing business.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth below supplements the information found in the
consolidated financial statements and related notes. The matters discussed below
and elsewhere in this Report contain forward looking statements that involve
risks and uncertainties, many of which may be beyond the Company's control. See
"Forward Looking Statements" in Item 1 of this Report for a discussion of
certain of such risks and uncertainties.
Overview
The October 1995 acquisition of COMFORCE Telecom marked the Company's entry
into the technical staffing business, followed by the acquisition of six
additional technical staffing businesses through February 1997. Following is a
summary of these acquisitions, which are also discussed under "Acquisition
History" in Item 1 of this Report:
Fiscal 1995
Year Acquisition Revenue Current
Acquired Company Founded Date (millions) Offices Headquarters Market Served
---------------- ------- ---- ---------- ------- ------------ -------------
COMFORCE Telecom 1987 October 1995 $11.4 5 Lake Success, Telecommunications
NY
Williams 1991 March 1996 $4.2 1 Englewood, Telecommunications
FL
RRA 1964 May 1996 $52.0 8 Tempe, AZ Technical Services
Force Five 1993 August 1996 $7.1 4 Dallas, TX Information Technology
AZATAR 1980 November $7.1 2 Rochester, Information Technology
1996 NY
Continental 1965 November $9.9 2 Elmsford, NY Telecommunications
1996
RHO 1971 February 1997 $83.6 9 Redmond, Technical Services and
WA Information Technology
All acquisitions made by the Company have been accounted for on a purchase
basis and the results of operations of each of the businesses acquired have been
included in the Company's consolidated financial statements from the date of
acquisition.
The Company's results of operations and financial condition reflect its
rapid growth through acquisitions. Amortization of intangibles, principally
goodwill, has also increased as a result of acquisitions. The Company has made
and continues to make investments in connection with the purchase and
integration of its acquired businesses in order to realize long-term
improvements in profitability; however, the costs of integration may have an
adverse effect on short-
21
term operating results. Management believes that, as the Company integrates its
acquired businesses, the adverse effect of integration expenses on profitability
are expected to decline as are operating expenses as a percentage of net sales.
However, to the extent that the Company makes additional acquisitions in the
future, there can be no assurance that the Company's results of operations will
not be adversely affected by integration costs. See "Forward Looking Statements"
in Item 1 of this Report.
The Company serves customers in three principal sectors --
telecommunications, information technology and technical services. In the
telecommunications sector, the Company provides staffing for wireline and
wireless communications systems development, satellite and earth station
deployment, network management and plant modernization. In the information
technology sector, the Company provides staffing for specific projects requiring
highly specialized skills such as applications programming and development,
client/server development, systems software architecture and design, systems
engineering and systems integration. In the technical services sector, the
Company provides staffing for national laboratory research in such areas as
environmental safety, alternative energy source development and laser
technology, and provides highly-skilled labor meeting diverse commercial needs
in the avionics and aerospace, architectural, automotive, energy and power,
pharmaceutical, marine and petrochemical fields.
Gross margins on staffing services can vary significantly depending on
factors such as the specific services being performed, the overall contract size
and the amount of recruiting required. Margins on the Company's sales in the
technical services sector are typically significantly lower than those in the
telecommunications and IT sectors, although the trend in the IT staffing sector
has been toward lower gross margins generally as this sector matures and
consolidates. Additionally, in certain markets the Company has experienced
significant pricing pressure from some of its competitors. Consequently, changes
in the Company's sales mix can be expected to impact the overall gross margins
generated by the Company.
Staffing personnel placed by the Company are Company employees. The Company
is responsible for employee 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,
disability and life insurance to its billable employees.
The Company's quarterly operating results are affected primarily by the
number of billing days in the quarter and the seasonality of its customers'
businesses. Demand for services in the technical services sector has
historically been lower during the year-end holidays through January of the
following year, showing gradual improvement over the remainder of the year.
Although less pronounced than in technical services, the demand for services of
the telecommunications and IT sectors is typically lower during the first
quarter until customers' operating budgets are finalized. The Company believes
that the effects of seasonality will be less severe in the future as revenues
contributed by the information technology and telecommunications sectors
continue to increase as a percentage of the Company's consolidated revenues.
Results of Operations
The historical financial information for the Company presented under Item 8
of this Report for December 31, 1995 and 1994 relates principally to the
Company's former jewelry operations which were discontinued September 30, 1995.
This historical financial information includes limited results of the Company's
technical staffing operations, all of which, except for COMFORCE Telecom, were
acquired since January 1, 1996. Consequently, a discussion and comparison of the
Company's historical results of operations may not be meaningful. In order to
provide a discussion of results which may be more meaningful than the historical
discussion, the Company has (i) presented under Item 6 of this Report unaudited
pro forma data of the Company for the years ended December 31, 1995 and 1994
assuming that the acquisition of COMFORCE Telecom (which was acquired by the
Company in October 1995) and related financing and capital transactions had
occurred as of January 1, 1994, and (ii) presented below a comparison of 1996
historical results of operations with 1995 pro forma results, and of 1995 pro
forma results with 1994 pro forma results.
22
Year Ended December 31, 1996 Compared to Pro Forma Year Ended December 31, 1995
Revenues of $55.9 million for the year ended December 31, 1996 were $43.9
million, or 367% higher than pro forma revenues for the year ended December 31,
1995. This increase in revenues is attributable to the acquisitions completed
during 1996 and growth in the telecommunications and information technology
sectors which were served by the Company in 1995 and 1996.
Cost of revenues for the year ended December 31, 1996 was 85.2% of revenues
compared to pro forma cost of revenues of 75.3% for the year ended December 31,
1995. The 1996 cost of revenues increase of 9.9% is a result of the Company's
expansion into more mature technical staffing sectors.
Selling, general and administrative expenses for the year ended December
31, 1996 decreased $1.0 million or 14.0% from the pro forma selling, general and
administrative expenses for the year ended December 31, 1995. The decrease in
selling, general and administrative expense is a result of the absence, in 1996,
of two nonrecurring charges that impacted 1995 pro forma selling, general and
administrative expenses. These charges included a stock compensation expense of
$3.4 million and management fees of $1.1 million paid by COMFORCE Telecom to its
former parent company prior to its acquisition by the Company.
Historical operating income for the year ended December 31, 1996 was $2.3
million compared to a pro forma operating loss of $3.9 million for the year
ended December 31, 1995. The improvement of $6.2 million was principally
attributable to the discontinuance in the 1996 period of the non-recurring
charges of $4.5 million recorded in 1995. The 1996 operating income was also
impacted by acquisitions completed during the year and increased margins on
revenue growth in the Company's telecommunications and information technology
sectors.
The income tax provision for the year ended December 31, 1996 was $900,000
on income of $2.3 million compared with pro forma income taxes of $14,000 (on
pro forma loss before income taxes of $4.1 million) for the year ended December
31, 1995.
Pro Forma Year Ended December 31, 1995 Compared to Pro Forma Year
Ended December 31, 1994
Pro forma revenues of $12.0 million for the year ended December 31, 1995
were $3.7 million or 45% higher than pro forma revenues for the year ended
December 31, 1994. The increase in 1995 pro forma revenues is attributable to
growth in sectors serviced by the Company-telecommunications and information
technology services.
Pro forma cost of revenues for the year ended December 31, 1995 was 75.3%
of pro forma revenues compared to pro forma cost of revenues of 77.8% for the
year ended December 31, 1994. Although the pro forma cost of revenues increased
by $2.6 million for the year ended December 31, 1995 as compared to the year
ended December 31, 1994 due to increased revenues during 1995, on a percentage
basis, the 1995 pro forma cost of revenues decreased by 2.5% as a result of a
more favorable sales mix in 1995.
Pro forma selling, general and administrative expenses for the year ended
December 31, 1995 increased $3.9 million, over the pro forma selling, general
and administrative expenses for the year ended December 31, 1994. This increase
was principally related to a non-recurring stock compensation charge of $3.4
million.
Pro forma operating results for the year ended December 31, 1994 were
negatively impacted by a non-recurring charge of $803,000 related to management
fees paid by COMFORCE Telecom to its former parent company prior to its
acquisition by the Company. Pro forma operating results for the year ended
December 31, 1995 included a charge of $1.1 million for management fees paid by
COMFORCE Telecom to its former parent Company prior to its acquisition by the
Company as well as a $3.4 million charge related to non-recurring stock
compensation expense. The net impact of these non-recurring charges on the 1995
pro forma results was $4.5 million as compared to $803,000 for 1994.
23
Pro forma operating loss for the year ended December 31, 1995 was $3.9
million compared to a pro forma operating loss of $1.1 million for the year
ended December 31, 1994. The increase in operating loss of $2.8 million was
principally attributable to increased management fees and stock compensation
charges of $3.8 million recorded in 1995 as compared to 1994, partially offset
by increased margin contributions resulting from revenue growth experienced in
1995.
Pro forma other expense, principally net interest expense, for the year
ended December 31, 1995 decreased $1.1 million as compared to the year ended
December 31, 1994. The 1995 decrease is principally due to the 1994 and 1995
discharge of indebtedness under terms of the bank loan agreements related to the
Company's discontinued jewelry operations.
As a result of the discontinuance of its jewelry operations, it has been
determined that the Company will be unable to utilize losses from those
businesses in the future.
Financial Condition, Liquidity and Capital Resources
During 1996, the Company's primary sources of funds to meet working capital
needs were from operations and borrowings under the $10.0 million Chase Credit
Facility. In addition, in connection with the RHO acquisition in February 1997,
the Company entered into a short-term credit facility with U.S. Bank of
Washington, National Association (the "U.S. Bank Credit Facility"), providing
for up to $7.5 million in availability for working capital purposes. Since the
fourth quarter of 1995, the Company has funded its strategy of growth through
acquisitions principally through private debt or equity financing, including its
sale of $25.2 million of convertible debentures in February and March 1997. See
note 20 to the Company's consolidated financial statements for the year ended
December 31, 1996. In March 1997, a portion of the proceeds from the debenture
offering were used to retire the Chase Credit Facility. The Company is presently
seeking to obtain a credit facility providing for term loan and revolving credit
availability of from $50 million to $75 million to fund additional acquisitions,
to retire the U.S. Bank Credit Facility (which matures in July 1997) and to
finance working capital needs (to replace the Chase Credit Facility and the U.S.
Bank Credit Facility). In respect of its working capital requirements, the
Company typically pays its billable employees weekly for their services before
receiving payment from its customers. As new offices are established or
acquired, or as existing offices expand and revenues are increased, there will
be greater requirements for cash resources to fund current operations.
Management believes that such a replacement credit facility will be
sufficient to meet its anticipated level of business activity in 1997. However,
the Company can give no assurance that such a credit facility will be available
or, if available, that it will be available on terms acceptable to the Company.
Although management believes that the funds provided by operations, the U.S.
Bank Credit Facility and funds remaining under the $25.2 million debt placement
will be sufficient to meet its present working capital requirements through July
1997, the Company's inability to obtain a new credit facility could require the
Company to delay, scale back or eliminate all or some of its market development
and acquisition projects and could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is obligated under various acquisition agreements to make
earn-out payments to the sellers of acquired companies, subject to the acquired
companies' achieving specified earnings targets. The maximum amount of these
potential earn-out payments is $717,000 in cash payable in 1997 and $5 million
in cash and $4.5 million in stock payable in the three-year period from 1998 to
2000. The Company cannot currently estimate whether it will be obligated to pay
the maximum amount; however, the Company anticipates that the cash generated by
the operations of the acquired companies will provide all or a substantial part
of the capital required to fund the cash portion of the earn-out payments.
Cash and cash equivalents increased $3 million during 1996. Cash flows of
$25.3 million provided by financing activities exceeded cash flows of $5.8
million used in operating activities and cash flows of $16.5 million used by
investing activities. Cash flows used by operating activities were principally
attributable to temporary need to fund Williams, RRA, Force Five, AZATAR and
Continental accounts receivable and their carrying costs due to the purchase of
Williams in March 1996, RRA in May 1996, Force Five in August 1996 (effective
July 31, 1996), AZATAR in
24
November 1996, and Continental in November 1996. Cash flows used in investing
activities are principally related to the purchase of Williams, RRA, Force Five,
AZATAR and Continental for a total of $15.8 million, including directly related
costs, as well as loans made to certain officers of the Company pursuant to
their employment contracts in the amount of $373,000 and the purchase of fixed
assets in the amount of $329,000. Cash flows from financing activities were
attributable to net borrowings under the Chase Credit Facility of $3.9 million,
the exercise of warrants in the amount of $2.0 million, the issuance of Series
D, E and F Preferred Stock in the amount of $6.4 million, $4.6 million and $3.0
million, respectively, and the proceeds from the sale of Common Stock and
associated payment rights of $6.4 million, partially offset by dividend payments
of $228,000, repayments on notes of $500,000 and registration costs of $300,000.
In the technical staffing industry, administrative, accounting and other
"back office" operations are often provided on a centralized basis. The Company
believes that its management information systems responsible for these functions
are capable of supporting additional levels of business in the future at low
incremental costs. The Company currently intends to integrate the administrative
functions of its recent and future acquisitions into the systems of previously
acquired companies to seek to improve operating efficiencies.
During the year ended December 31, 1996, the Company eliminated its working
capital deficiency and, at December 31, 1996, had excess working capital of $8.0
million. The increase in working capital is principally attributable to the
Company's increase in accounts receivable due to the acquisition of Williams,
RRA, Force Five, AZATAR and Continental and the reduction in the liabilities
assumed by ARTRA.
As of December 31, 1996, approximately $24.8 million, or 57%of the
Company's total assets were intangible assets, which will increase substantially
with the inclusion of RHO's assets. These intangible assets substantially
represent amounts attributable to goodwill recorded in connection with the
Company's acquisitions and will be amortized over a five to forty year period,
resulting in an annual charge of in excess of $1 million with the inclusion of
RHO. Various factors could impact the Company's ability to generate the earnings
necessary to support this amortization schedule, including fluctuations in the
economy, the degree and nature of competition, demand for the Company's
services, and the Company's ability to integrate the operations of acquired
businesses, to recruit and place staffing professionals, to expand into new
markets and to maintain gross margins in the face of pricing pressures. The
failure of the Company to generate earnings necessary to support the
amortization charge may result in an impairment of the asset. The resulting
write-off could have a material adverse effect on the Company's business,
financial condition and results of operations.
Other Matters
On January 1,1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), which requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Impairment
is evaluated by comparing future cash flows (undiscounted and without interest
charges) expected to result from the use or sale of the asset and its eventual
disposition, to the carrying amount of the asset.
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), in 1996. As permitted by
SFAS 123, the Company continues to measure compensation cost in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but provides pro forma disclosures of net income and earnings per
share as if the fair value method (as defined in SFAS 123) had been applied
beginning in 1995.
The Company does not believe that its adoption of either SFAS 121 or SFAS
123 will have a material impact on its financial statements and the Company will
comply with the related disclosure requirements.
See "Discontinued Operations" in Item 1 of this Report for a discussion of
the Company's discontinued operations.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Schedules as listed on pages F-1 and F-36.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to
"Information Concerning Directors and Nominees" and "Information Concerning
Executive Officers" in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission on or before April 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to
"Executive Compensation" in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission on or before April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to
"Principal Stockholders" in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission on or before April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to
"Transactions with Management and Others" in the Company's Proxy Statement to be
filed with the Securities and Exchange Commission on or before April 30, 1997.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements as listed on pages F-1 and F-36.
2. Financial Statement Schedules as listed on pages F-1 and F-36.
3. Exhibits as listed on page E-1.
(b) Reports on Form 8-K.
On November 4, 1996, the Company filed, on Form 8-K/A, Amendment No. 1 to
its Form 8-K dated September 3, 1996 reporting the purchase, through its
subsidiary, COMFORCE Information Technologies, Inc., of all of the stock of
Force Five, Inc., to file the financial statements as required in accordance
with Item 7(a)(4) of Form 8-K and to file related pro forma financial
information as required in accordance with Item 7(b) of Form 8-K.
On November 19, 1996, the Company filed a Current Report on Form 8-K to
report that on November 4, 1996, the Company, through a subsidiary, had entered
into a definitive agreement with RHO to purchase all of the stock of RHO and
that on November 8, 1996, the Company, through its subsidiary, COMFORCE Telecom,
purchased substantially all of the assets of Continental Field Services
Corporation and its affiliate, Progressive Telecom, Inc.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By:/s/ Michael Ferrentino
------------------------
Michael Ferrentino
President
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/James L. Paterek Chairman of the Board March 31, 1997
- ------------------------
James L. Paterek
/s/Christopher P. Franco Chief Executive Officer, March 31, 1997
- ------------------------ Secretary and Director
Christopher P. Franco
/s/Michael Ferrentino President and Director March 31, 1997
- ------------------------
Michael Ferrentino
/s/Paul Grillo Chief Financial Officer March 31, 1997
- ------------------------
Paul Grillo
/s/ Andrew Reiben Chief Accounting Officer March 31, 1997
- ------------------------ and Director of Finance
Andrew Reiben
/s/ Richard Barber Director March 31, 1997
- ------------------------
Richard Barber
/s/ Keith Goldberg Director March 31, 1997
- ------------------------
Keith Goldberg
/s/ Glen Miller Director March 31, 1997
- ------------------------
Glen Miller
28
Comforce Corporation and Subsidiaries
Index to Financial Statements
Page
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-7
Notes to Financial Statements F-9
Schedule II Valuation and Qualifying Accounts F-35
F-1
Report of Independent Accountants
To the Shareholders and Board of Directors of Comforce Corporation, Inc.:
We have audited the accompanying consolidated financial statements and the
financial statement schedule of Comforce Corporation and Subsidiaries (the
"Company") as listed in the index on page F-1 of this registration statement.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Comforce Corporation and Subsidiaries as of December 31, 1996 and 1995, and
consolidated the results of their operations and their cash flows for the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
January 30, 1997, except as to Note 20
for which the date is March 21, 1997.
F-2
Comforce Corporation and Subsidiaries
Consolidated Balance Sheets
as of December 31, 1996 and 1995 (in thousands)
Assets
1996 1995
Current assets:
Cash and cash equivalents $ 3608 $ 649
Accounts receivable, net 12042 1698
Prepaid expenses 243
Other assets 373 117
Receivable from ARTRA GROUP Incorporated 1046
Deferred income tax 278
--------- --------
Total current assets 16,544 3,510
Property and equipment, net 744 90
Intangible assets, net 24,756 4,801
Other assets 1,322 135
--------- --------
Total assets $ 43,366 $ 8,536
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ 3,850
Notes payable $ 500
Accounts payable 1,398 75
Accrued expenses 2,930 719
Income taxes 354 214
Liabilities to be assumed by ARTRA GROUP Incorporated, and
net liabilities of discontinued operations 3,699
--------- --------
Total current liabilities 8,532 5,207
--------- --------
Noncurrent liabilities to be assumed by ARTRA GROUP Incorporated 541
Obligations expected to be settled by the issuance of common stock 550
Deferred income tax 90
--------- --------
Total liabilities 8,622 6,298
--------- --------
Commitments and contingencies
Stockholders' Equity:
Series D senior convertible preferred stock, $.01 par value; 15,000 shares authorized,
7,002 shares issued and outstanding, liquidation value of $1,000 per share
($7,002,000) 1
Series F convertible preferred stock, $.01 par value; 10,000 shares
authorized, 3,250 shares issued and outstanding, liquidation value of
$1,000 per share ($3,250,000) 1
Common stock, $.01 par value; 100,000,000 shares authorized, 12,701,934 shares
issued and outstanding in 1996 and 9,309,000 shares issued and outstanding in 1995 127 92
Additional paid-in capital 34,253 95,993
Accumulated deficit (93,847)
Retained earnings, since January 1, 1996 362
--------- --------
Total stockholders' equity 34,744 2,238
--------- --------
Total liabilities and stockholders' equity $ 43,366 $ 8,536
========= ========
The accompanying notes are an integral part of the financial statements.
F-3
Comforce Corporation and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31, 1996, 1995 and 1994 (in thousands, except per share data)
1996 1995 1994
Net sales $ 55,867 $ 2,387
-------- --------
Costs and expenses:
Cost of goods sold 47,574 1,818
Stock compensation 3,425
Selling, general and administrative expenses 5,266 461 $ 966
Depreciation and amortization 614 362
-------- -------- --------
Total costs and expenses 53,454 6,066 966
-------- -------- --------
Operating income (loss) 2,413 (3,679) (966)
Other income (expense):
Interest expense (201) (585) (1,316)
Other income (expense), net 40 (33)
-------- -------- --------
(161) (618) (1,316)
Income (loss) from continuing operations before income taxes
and extraordinary credit 2,252 (4,297) (2,282)
Provision for income taxes (900) (35)
-------- -------- --------
Income (loss) from continuing operations 1,352 (4,332) (2,282)
Loss from discontinued operations (17,211) (16,220)
-------- -------- --------
Income (loss) before extraordinary credit 1,352 (21,543) (18,502)
Extraordinary credit, net discharge of indebtedness 6,657 8,965
-------- -------- --------
Net income (loss) 1352 (14,886) (9,537)
Dividends on preferred stock 325
-------- -------- --------
Accretive dividend on Series F preferred stock 665
-------- -------- --------
Income (loss) available to common stockholders $ 362 $(14,886) $ (9,537)
======== ======== ========
Income (loss) per share:
Continuing operations before accretive dividend $ .08 $ (0.95) $ (0.72)
Discontinued operations (3.74) (5.08)
-------- -------- --------
Income (loss) before extraordinary credit and accretive
dividend .08 (4.69) (5.80)
Extraordinary credit 1.45 2.81
Accretive dividend on Series F preferred stock (.05)
-------- -------- --------
Net income (loss) per share $ .03 $ (3.24) $ (2.99)
======== ======== ========
Weighted average shares outstanding 12,991 4,596 3,195
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-4
Comforce Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 (in thousands, except share amounts)
Restricted
Preferred Stock Common Stock Common Stock
----------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------- ------- --------- ------ -------- --------
Balance at December 31, 1993 7,459 $17,273 3,162,772 $31
Net loss
ARTRA capital contributions
Lori preferred stock issued in exchange for
ARTRA notes and advances 2,242 2,242
Common stock issued under terms of debt settlement agreement
settlement agreement 100,000 1
Restricted common stock 100,000 $(700)
Exercise of stock options and warrants 2,500
Fractional shares purchased (253)
------- ------- --------- ----- -------- --------
Balance at December 31, 1994 9,701 19,515 3,265,019 32 100,000 (700)
Net earnings
Common stock issued as consideration for debt restructuring 150,000 2
Common stock issued as additional consideration for short-term
borrowings 141,176 1
Common stock issued to pay liabilities 115,098 1
Common stock sold through private placements 1,946,667 19
Common stock issued under compensation agreements with
individuals to manage the Company's telecommunications and
computer technical staffing services business 3,091,304 31
Common stock issued as additional consideration for Telecom
purchase guarantee 350,000 3
Common stock issued as compensation for Telecom acquisition fees 150,000 2
Common stock issued to ARTRA in exchange for the Company's
entire preferred stock issue (9,701) (19,515) 100,000 1
Restricted common stock issued as additional consideration for
short-term borrowings (100,000) 700
Liabilities assumed by ARTRA
Fractional shares purchased (66)
------- ------- --------- ----- -------- --------
Balance at December 31, 1995 -- -- 9,309,198 92 -- --
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
-------- -------- -------
Balance at December 31, 1993 $60,680 $(69,424) $8,560
Net loss (9,537) (9,537)
ARTRA capital contributions 4,000 4,000
Lori preferred stock issued in exchange for
ARTRA notes and advances 2,242
Common stock issued under terms of debt settlement agreement
settlement agreement 699 700
Restricted common stock (700)
Exercise of stock options and warrants 13 13
Fractional shares purchased
-------- -------- -------
Balance at December 31, 1994 65,392 (78,961) 5,278
Net earnings (14,886) (14,886)
Common stock issued as consideration for debt restructuring 335 337
Common stock issued as additional consideration for short-term
borrowings 229 230
Common stock issued to pay liabilities 374 375
Common stock sold through private placements 5,820 5,839
Common stock issued under compensation agreements with
individuals to manage the Company's telecommunications and
computer technical staffing services business 2,844 2,875
Common stock issued as additional consideration for Telecom
purchase guarantee 587 590
Common stock issued as compensation for Telecom acquisition fees 251 253
Common stock issued to ARTRA in exchange for the Company's
entire preferred stock issue 19,514
Restricted common stock issued as additional consideration for
short-term borrowings 700
Liabilities assumed by ARTRA 647 647
Fractional shares purchased
-------- -------- -------
Balance at December 31, 1995 95,993 (93,847) 2,238
F-5
Continued
Comforce Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended December 31, 1996, 1995 and 1994 (in thousands, except share amounts)
Series E Series D
Common Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
------------ -------- ------ ------ -------- ------
Balance at December 31, 1995 9,309,198 $92
Quasi-Reorganization as of January 1, 1996
Exercise of stock options 4,500 1
Exercise of stock warrants 449,445 5
Issuance of Series E convertible preferred stock 8,871 $1
Conversion of Series E preferred to common stock 887,100 9 (8,871) (1)
Issuance of Series D senior convertible preferred stock 7,002 $1
Issuance of Series F preferred stock
Common stock sold through private placement 810,000 8
SEC registration fees
Common stock issued as consideration for the
purchase of Force Five 27,398 1
Common stock issued as consideration for the
purchase of AZATAR 243,211 2
Common stock issued as consideration for the purchase
of Continental 36,800 1
Common stock issued to pay liabilities assumed by ARTRA 137,500 1
Liabilities assumed by ARTRA
Common stock issued to management for anti-dilution provision 796,782 7
Net earnings
Dividends:
Series E preferred stock
Series D preferred stock
Series F preferred stock
Accretive dividend on Series F preferred stock
------------ -------- ------ ------ -------- ------
12,701,934 $127 -- $ -- 7,002 $1
============ ======== ====== ====== ======== ======
Retained
Series F Earnings
Preferred Stock Additional Since Total
--------------- Paid-in Accumulated January 1, Stockholders'
Shares Amount Capital Deficit 1996 Equity
------ ------ ---------- ----------- ---------- -------------
Balance at December 31, 1995 $95,993 $(93,847) $2,238
Quasi-Reorganization as of January 1, 1996 (93,847) 93,847
Exercise of stock options 22 23
Exercise of stock warrants 2,041 2,046
Issuance of Series E convertible preferred stock 4,635 4,636
Conversion of Series E preferred to common stock (8)
Issuance of Series D senior convertible preferred stock 6,415 6,416
Issuance of Series F preferred stock 33 $1 2,957 2,958
Common stock sold through private placement 6,362 6,370
SEC registration fees (300) (300)
Common stock issued as consideration for the
purchase of Force Five 499 500
Common stock issued as consideration for the
purchase of AZATAR 4,118 4,120
Common stock issued as consideration for the purchase
of Continental 574 575
Common stock issued to pay liabilities assumed by ARTRA 275 276
Liabilities assumed by ARTRA 3,318 3,318
Common stock issued to management for anti-dilution provision 534 541
Net earnings $1,352 1,352
Dividends:
Series E preferred stock (18) (18)
Series D preferred stock (280) (280)
Series F preferred stock (27) (27)
Accretive dividend on Series F preferred stock 665 (665)
---- --- ------- -------- ------ -------
33 $1 $34,253 $ -- $362 $34,744
==== === ======= ======== ====== =======
The accompanying notes are an integral part of the financial statements.
F-6
Comforce Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 (in thousands)
1996 1995 1994
Cash flows from operating activities:
Net income (loss) $ 1,352 $(14,886) $ (9,537)
Adjustments to reconcile net earnings (loss) to cash flows from
operating activities:
Extraordinary gain from net discharge of indebtedness (6,657) (8,965)
Provision for disposal of fashion costume jewelry business 1,600
Depreciation of property, plant and equipment 139 101 438
Amortization of excess of cost over net assets acquired 475 261 1,018
Impairment of goodwill 12,930 10,800
Amortization of other assets 374 648
Common stock compensation 3,657
Allowance for doubtful accounts 212
Deferred taxes (189)
Changes in assets and liabilities, net of the effects of
acquisitions and the discontinued fashion costume
jewelry business (in 1995 and 1994):
(Increase) decrease in receivables (10,500) 913 2,117
Decrease in receivable from ARTRA 400
Decrease in inventories 2,105 1,098
Increase in prepaid expenses and other current assets (59) (56)
(Increase) decrease in other noncurrent assets (1,183) 170 153
Increase (decrease) in payables and accrued expenses 3,637 (2,127) (513)
Decrease in income taxes (60)
Decrease in other current and noncurrent
liabilities (408) (468)
-------- -------- --------
Net cash used by operating activities (5,776) (2,023) (3,211)
-------- -------- --------
Cash flows from investing activities:
Acquisition of COMFORCE Global, net of cash acquired (5,580)
Acquisition of Williams, RRA, Force Five, Continental and
Azatar, net of cash acquired (15,834)
Additions to property, plant and equipment (329) (656) (697)
Increase in receivable from officers (373)
Payment of liabilities with restricted cash 550 (550)
-------- -------- --------
Net cash used by investing activities (16,536) (5,686) (1,247)
-------- -------- --------
F-7
Continued
Comforce Corporation and Subsidiaries
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1996, 1995 and 1994 (in thousands)
1996 1995 1994
Cash flows from financing activities:
Payment of note payable (500)
Net increase (decrease) in short-term debt 2,486 (138)
Proceeds from line of credit 4,750
Repayment on line of credit (900)
Proceeds from issuance of preferred stock 14,010
Proceeds from exercise of stock options 23
Proceeds from exercise of warrants 2,046
Payment of registration costs (300)
Dividends paid (228)
Proceeds from long-term borrowings 1,241
Reduction of long-term debt (750) (444)
Proceeds from private placement of common stock 6,370 5,839
ARTRA capital contribution 1,500
Notes and advances from ARTRA 2,531
Other 11
-------- -------- --------
Net cash from financing activities 25,271 7,575 4,701
-------- -------- --------
Increase (decrease) in cash and cash equivalents 2,959 (134) 243
Cash and cash equivalents, beginning of year 649 783 540
-------- -------- --------
Cash and cash equivalents, end of year $ 3,608 $ 649 $ 783
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 157 $ 273 $ 435
Income taxes paid, net 934 7 24
Supplemental schedule of noncash investing and financing activities:
Quasi-reorganization (93,848)
Common stock issued in connection with acquisitions 5,195 843
Accretive dividend on preferred stock 665
Common stock issued to settle liabilities 550 374
Amounts assumed by ARTRA 3,594
Accrued dividends 97
Common stock issued as consideration for debt
restructuring and short-term loans 567
ARTRA common stock issued to Lori's bank lender
under terms of the debt settlement agreement
2,500
Transfer New Dimensions assets, net of cash of $674 to Lori's
bank lender under terms of the debt settlement agreement
6,475
Lori preferred stock issued in exchange for ARTRA notes
and advances 2,242
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
Comforce Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation:
COMFORCE Corporation ("COMFORCE" or the "Company"), formerly The Lori
Corporation ("Lori"), is a provider of telecommunications and computer
technical staffing and consulting services worldwide and maintains an
extensive global database of technical specialists. As discussed in Note 4,
in September 1995, the Company adopted a plan to discontinue its jewelry
business ("Jewelry Business") conducted by its two wholly-owned
subsidiaries, Lawrence Jewelry Corporation ("Lawrence") and Rosecraft, Inc.
("Rosecraft").
Effective January 1, 1996, the Company effected a quasi-reorganization
through the application of $93,847,000 of its $95,993,000 additional
paid-in capital account to eliminate its accumulated deficit. The Company's
Board decided to effect a quasi-reorganization given that the Company
achieved profitability following its entry into the technical staffing
business and discontinuation of its unprofitable Jewelry Business. The
Company's accumulated deficit at December 31, 1995 is primarily related to
the discontinued operations and is not, in management's view, reflective of
the Company's current financial condition.
ARTRA Group Incorporated ("ARTRA"), a public company whose shares are
traded on the New York Stock Exchange, was formerly the Company's parent
prior to October 17, 1995. At December 31, 1996, ARTRA owned less than 20%
of the Company's stock. ARTRA owns its shares of Common Stock in the
Company through a wholly-owned subsidiary, Fill-Mor Holding, Inc.
("Fill-Mor").
On October 17, 1995, Lori acquired one hundred percent of the capital stock
of COMFORCE Telecom Inc. ("COMFORCE Telecom"), formerly Spectrum Global
Services, Inc., d/b/a Yield Global, a wholly-owned subsidiary of Spectrum
Information Technologies, Inc. ("Spectrum"). In connection with the
re-focus of Lori's business, Lori changed its name to COMFORCE Corporation.
Since October 17, 1995, the Company has acquired a number of staffing and
consulting business throughout the United States. See Note 3.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of COMFORCE
Corporation, COMFORCE Telecom, Inc. COMFORCE Technical Services, Inc.
("CTS") and COMFORCE Information Technology, Inc. ("CIT"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
F-9
Notes to Consolidated Financial Statements, Continued
Revenue Recognition
Revenue for providing staffing services is recognized at the time such
services are rendered.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid short-term investments with
an original maturity of three months or less. Cash equivalents consists
primarily of money market funds.
Accounts Receivable and Unbilled Accounts Receivable
Accounts receivable consists of those amounts due to the Company for
staffing services rendered to various customers. The Company's allowance
for doubtful accounts was $213,000 as of December 31, 1996. Unbilled
receivables consists of revenues earned and recoverable costs for which
billings have not yet been presented to the customers as of the balance
sheet date. Unbilled accounts receivable was $1,148,000 and $151,000 as of
December 31, 1996 and 1995, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
primarily on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the life
of the lease or of the improvement. Maintenance and repairs are charged to
income as incurred and betterments that extend the useful life are
capitalized. Upon retirement or sale, the cost and accumulated depreciation
are eliminated from the respective accounts, and the gain or loss, if any,
is included in income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the
long-lived asset, an impairment loss is recognized. To date, no impairment
losses have been recognized.
Intangibles
The net assets of a purchased business are recorded at their fair value at
the date of acquisition. At December 31, 1996, the excess of purchase price
over the fair value of net assets acquired (primarily goodwill) is
reflected as an intangible asset and amortized on a straight-line basis
over a period of 20-40 years. (See Note 5.)
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through forecasted future operations.
Impairment is evaluated by comparing future cash flows (undiscounted and
without interest charges) expected to result from the use or sale of the
asset and its eventual disposition, to the carrying amount of the asset. To
date, no impairment losses have been recognized.
F-10
Notes to Consolidated Financial Statements, Continued
Income Taxes
The Company recognizes deferred income taxes for the tax consequences in
future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense consists of the tax payable for
the period and the change during the period in deferred tax assets and
liabilities.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 most significant estimates relate to the
realizability of accounts receivable, long-lived assets and deferred tax
assets. Actual results could differ from those estimates.
Fair Values of Financial Instruments
Cash and cash equivalents and fixed rate debt obligations are reflected in
the accompanying consolidated balance sheets at amounts considered by
management to reasonably approximate fair value.
Management is not aware of any factors that would significantly affect the
value of these amounts.
Accounting for Long-Lived Assets
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges)
expected to result from the use or sale of the asset and its eventual
disposition, to the carrying amount of the asset.
Accounting for Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), in 1996. As
permitted by SFAS 123, the Company continues to measure compensation cost
in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," but provides pro forma disclosures of net
income and earnings per share as if the fair value method (as defined in
SFAS 123) had been applied beginning in 1995.
F-11
Notes to Consolidated Financial Statements, Continued
Earnings Per Share Calculation
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), which establishes standards for computing and presenting
earnings per share (EPS). SFAS No. 128 will be effective for financial
statements issued for periods ending after December 15, 1997. Earlier
application is not permitted. Management has not yet evaluated the effects
of this change on the Company's financial statements.
Reclassification
Certain items in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
3. Certain Acquisitions:
On October 17, 1995, Lori acquired one hundred percent of the capital stock
of COMFORCE Telecom. The price paid by the Company for the COMFORCE Telecom
stock and related acquisition costs was approximately $6.4 million, net of
cash acquired. This consideration consisted of cash to the seller of
approximately $5.1 million, fees of approximately $950,000, including a fee
of $750,000 to a related party, and 500,000 shares of the Company's common
stock valued at $843,000 (at a price per share of $1.68) issued as
consideration for various fees and guarantees associated with the
transaction. The 500,000 shares issued by the Company consisted of (i)
100,000 shares issued to a then unrelated party for guaranteeing the
purchase price to the seller, (ii) 100,000 shares issued to ARTRA, then the
majority stockholder of the Company, in consideration of its guaranteeing
the purchase price to the seller and agreeing to enter into the Assumption
Agreement, (iii) 150,000 issued to two unrelated parties for advisory
services in connection with the acquisition, and (iv) 150,000 shares issued
to Peter R. Harvey, then a Vice President and director of the Company, for
guaranteeing the payment of the purchase price to the seller and other
guarantees to facilitate the transaction. Additionally, in conjunction with
the COMFORCE Telecom acquisition, ARTRA agreed to assume substantially all
pre-existing Lori liabilities and indemnify COMFORCE in the event any
future liabilities arise concerning pre-existing environmental matters and
business related litigation.
COMFORCE Telecom provides telecommunications and computer technical
staffing services worldwide to Fortune 500 companies and maintains an
extensive, global database of technical specialists with an emphasis on
wireless communications capability. The acquisition of COMFORCE Telecom was
accounted for by the purchase method and, accordingly, the assets and
liabilities of COMFORCE Telecom were included in the Company's financial
statements at their estimated fair market value at the date of acquisition
and COMFORCE Telecom's operations are included in the Company's statement
of operations from the date of acquisition. (See Note 5.)
The acquisition of COMFORCE was funded principally by private placements of
approximately 1,950,000 shares of the Company's common stock at $3.00 per
share plus detachable warrants to
F-12
Notes to Consolidated Financial Statements, Continued
purchase approximately 970,000 shares of the Company's common stock at
$3.375 per share. The warrants expire five years from the date of issue.
On March 3, 1996, the Company acquired all of the assets of Williams
Communications Services, Inc. ("Williams"), a regional provider of
telecommunications and technical staffing services. The purchase price for
the assets of Williams was $2 million with a four year contingent payout
based on earnings of Williams. The value of the contingent payouts will not
exceed $2 million, for a total purchase price not to exceed $4 million. The
acquisition of Williams was accounted for by the purchase method and,
accordingly, Williams' operations are included in the Company's statement
of operations from the date of acquisition. (See Note 5.)
On May 10, 1996, the Company purchased all of the stock of Project Staffing
Support Team, Inc. and substantially all of the assets of RRA Inc. and
Datatech Technical Services, Inc. (collectively, "RRA") for an aggregate
purchase price of $5,100,000, plus acquisition costs and contingent
payments payable over three years in an aggregate amount not to exceed
$650,000. RRA is in the business of providing contract employees to other
businesses. The Company's headquarters are located in Tempe, Arizona. The
acquisition of RRA enables the Company, through its COMFORCE Technical
Services, Inc. subsidiary ("CTS"), to provide specialists for supplemental
staffing assignments as well as outsourcing and vendor-on-premises
programs, primarily in the electronics, avionics, telecommunications and
information technology business sectors. The acquisition was accounted for
by the purchase method and, accordingly, its operations are included in the
Company's statement of operations from the date of acquisition. (See Note
5.)
Effective July 31, 1996, the Company purchased all of the stock of Force
Five, Inc. ("Force Five") for an aggregate purchase price of $2,000,000,
payable in $1,500,000 cash, and 27,398 shares of the Company's Common Stock
valued at $500,000, plus a three-year contingent payout based on future
earnings of Force Five in an aggregate amount not to exceed $2,000,000.
Force Five, renamed COMFORCE Information Technologies, Inc. ("CIT"),
located in Dallas, Texas, provides information technology consulting
services to leading companies nationwide. The acquisition of Force Five was
accounted for under the purchase method and, accordingly, Force Five's
operations are included in the Company's statement of operations from the
date of acquisition. (See Note 5.)
On November 1, 1996, COMFORCE IT Acquisition Corp., a wholly-owned
subsidiary of the Company, merged with Azatar Computer Systems, Inc.
("Azatar") pursuant to the terms of an Agreement and Plan of Reorganization
entered into by such parties and W. Mark Holbrook, formerly the controlling
stockholder of Azatar (the "Merger Agreement"). Under the terms of the
Merger Agreement, the stockholders of Azatar received cash payments of
$1.03 million, 243,211 shares of the Company's common stock valued at $4.12
million, and contingent payments payable over three years in an aggregate
amount not to exceed $1.2 million payable in stock. Azatar is in the
business of information technology consulting. The acquisition of Azatar
was accounted for under the purchase method and, accordingly, Azatar's
operations are included in the Company's statement of operations from the
date of acquisition. (See Note 5.)
On November 8, 1996, the Company, through its subsidiary, COMFORCE Telecom
Inc., purchased, substantially all of the assets of Continental Field
Services Corporation and its affiliate, Progressive Telecom, Inc.,
(collectively "Continental") for a purchase price of $4.425 million in
F-13
cash, 36,800 shares of the Company's common stock valued at $575,000, and
contingent payments payable over three years in an aggregate amount not to
exceed $1.02 million. The acquisition of Continental was accounted for
under the purchase method and, accordingly, Continental's operations are
included in the Company's statement of operations from the date of
acquisition. (See Note 5.)
The aforementioned acquisitions were acquired through funding raised from
the issuance of common stock, preferred stock and bank borrowings.
The following unaudited proforma summary presents the consolidated results
of operations as if the acquisition has occurred on January 1, 1995 and
does not purport to be an indication of what would have occurred had the
acquisition been made as of that date or of results which may occur in the
future (in thousands).
Year Ended December 31,
1996 1995
(Unaudited) (Unaudited)
Revenue $ 98,692 $ 91,571
Net income (loss) from continuing operations 2,015 (1,934)
Loss from discontinued operations -- (17,211)
Extraordinary credits, net discharge of indebtedness -- 6,657
---------- --------
Net income (loss) $ 2,015 $(12,488)
========== ========
Income (loss) per share from continuing operations $ .07 $ (.22)
Income (loss) per share from discontinued operations (1.74)
Extraordinary credits .67
---------- --------
Net income (loss) per share $ .07 $ (1.29)
========== ========
The above proforma data assume the issuance of Series F preferred stock and
the borrowing under the revolving line of credit to finance these
transactions. Proforma adjustments include an interest cost increase of
$96,000 in 1996, a reduction of interest expense of $126,000 in 1995,
additional goodwill amortization of $290,000 and $619,000 in the 1996 and
1995 periods, respectively, and the related income tax effect.
F-14
Notes to Consolidated Financial Statements, Continued
4. Fixed Assets:
Fixed assets consist of (in thousands):
Estimated
Useful Lives
in Years 1996 1995
Office equipment 3-5 $ 225 $ 97
Furniture, fixtures and vehicles 3-7 592
Leasehold improvements 3-7 73
----- ----
890 97
Less, accumulated depreciation and amortization (146) (7)
----- ----
$ 744 $ 90
===== ====
Depreciation expense was $139,000, $101,000 and $438,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
5. Intangibles:
Intangibles as of December 31, 1996 and 1995 consisted of (in thousands):
Estimated
Useful
Lives
in Years 1996 1995
Excess of cost over net assets acquired (goodwill) 20-40 $ 24,547 $4,852
Non-compete covenants 5 730
Other 5 5
25,282 4,852
-------- ------
Less accumulated amortization (526) (51)
-------- ------
$ 24,756 $4,801
======== ======
Amortization expense was $475,000, $261,000 and $1,081,000 in the years ended
December 31, 1996, 1995 and 1994, respectively.
F-15
Notes to Consolidated Financial Statements, Continued
6. Accrued Expenses:
Accrued expenses consist of the following (in thousands):
1996 1995
Payroll and payroll taxes $ 969
Pension plan 660
Vacation 324
Professional fees 288 $320
Medical insurance 171
Management fees 178
Other 518 221
------ ----
$2,930 $719
====== ====
7. Income Taxes:
The provision (benefit) for income taxes as of December 31, 1996 consists
of (in thousands):
1996 1995
Current:
Federal $ 867
State 222 35
Deferred (189)
----- ----
$ 900 $ 35
===== ====
The 1995 and 1994 extraordinary credits represent net gains from discharge
of bank indebtedness under the loan agreements of Lori and its discontinued
fashion costume jewelry subsidiaries. No income tax expense is reflected in
the Company's financial statements resulting from the extraordinary credits
due to the utilization of tax loss carryforwards.
The difference between the statutory Federal income tax rate and the
effective income tax rate is reconciled as follows (in thousands):
1996 1995 1994
Statutory Federal tax rate provision (benefit) $34.0 $(34.0) $(34.0)
State and local taxes, net of Federal benefit 5.0 .3 .1
Current year tax loss not utilized 4.7
Impairment of goodwill 30.0 38.6
Amortization of goodwill .9 .6 3.6
Previously unrecognized benefit from utilizing tax
loss carryforwards (8.2)
----- ----- ------
$39.9 $ 1.6 $ .1
===== ===== ======
F-16
Notes to Consolidated Financial Statements, Continued
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the
deferred tax liabilities and deferred tax assets at December 31, 1996 and
1995 (in thousands) are as follows:
1996 1995
Deferred tax assets:
Bad debt reserve $ 89
Accrued liabilities and other 189 $ 800
Net operating loss 16,400
-------- --------
Total deferred tax asset 278 17,200
-------- --------
Deferred tax liability:
Deductible intangibles 90
Machinery and equipment 100
-------- --------
Total deferred tax liability 90 100
-------- --------
Valuation allowance (17,100)
-------- --------
Net deferred tax asset $ 188 $ --
======== ========
At December 31, 1995, the Company and its subsidiaries had Federal income
tax loss carryforwards of approximately $42,000,000 available to be applied
against future taxable income. As a result of the discontinuance of the
Jewelry business it has been determined that the Company will be unable to
utilize losses from those businesses in the future.
In 1995, the Company recorded a valuation allowance with respect to the
future tax benefits and the net operating loss reflected in deferred tax
assets as a result of the uncertainty of their ultimate realization.
8. Debt:
On July 22, 1996, the Company and certain subsidiaries entered into a $10
million Revolving Credit Agreement (the "Credit Agreement") with the Chase
Manhattan Bank ("Chase") to provide working capital for the Company's
operations. The Company, COMFORCE Telecom and COMFORCE Technical Services,
Inc. are co-borrowers under the Credit Agreement and Project Staffing
Support Team, Inc. ("PSST") is a guarantor of the obligations. Principal
outstanding under the Credit Agreement is due June 30, 1998. Chase agreed
to make revolving credit loans outstanding as prime rate loans or LIBOR
loans, provided that, during the occurrence and continuance of an event of
default, the Company and its subsidiaries could not elect, and Chase had no
obligation to make, LIBOR loans. Interest on LIBOR loans is payable in the
amount of the LIBOR rate plus 2.0% per annum. Interest on the prime rate
loans is payable in the amount of Chase's prime rate as announced from time
to time (8.25% at December 31, 1996). The amount outstanding at December
31, 1996 was $3,850,000. As of December 31, 1996, the Company was not in
compliance with certain loan covenants. In March 1997, the Company repaid
its debt to Chase in full. (See Note 20.)
F-17
Notes to Consolidated Financial Statements, Continued
At December 31, 1995, notes payable and long-term debt (in thousands)
consisted of:
Year Ended December 31,
-----------------------
1996 1995
Outstanding debt:
Revolving credit borrowings $ 3,850
Amount due to a former related party, interest at
the prime rate plus 1% $ 750
Accounts receivable credit facility, discontinued operations 1,535
Other, interest principally at 15% 1,736
Less:
Liabilities to be assumed by ARTRA (1,986)
Liabilities included with discontinued operations (1,535)
------- -------
$ 3,850 $ 500
======= =======
As discussed in Note 11, ARTRA, Fill-Mor, Lori and Lori's fashion costume
jewelry subsidiaries entered into an agreement with Lori's bank lender to
settle obligations due the bank. As partial consideration for the debt
settlement agreement the bank received a $750,000 Lori note payable due
March 31, 1995.
The $750,000 note due the bank was paid and the remaining indebtedness of
Lori and Fill-Mor was discharged, resulting in an additional extraordinary
gain to Lori of $6,657,000 in 1995. The $750,000 note payment was funded
with the proceeds of a $850,000 short-term loan from a former director of
the Company. The loan provided for interest at the prime rate plus 1%. As
consideration for assisting with the debt restructuring, the former
director received 150,000 shares of the Company's common stock valued at
$337,500 ($2.25 per share) based upon the closing market value on March 30,
1995. The $337,500 represented additional compensation for debt
restructuring and, as such, was charged against the extraordinary gain from
debt restructuring in 1995. The principal amount of the loan was reduced to
$750,000 at July 31, 1995. The remaining loan principal was not repaid on
its scheduled maturity date of July 31, 1995. Per terms of the loan
agreement, the former director received an additional 50,000 of the
Company's common stock as compensation for the non-payment of the loan at
its originally scheduled maturity. The additional 50,000 shares at a value
of approximately $82,000 has been charged to interest expense in 1995. At
December 31, 1995, the $750,000 note was classified in the Company's
consolidated balance sheet as liabilities to be assumed by ARTRA. The loan
was paid in full in March 1996 by ARTRA pursuant to the assumption
agreement as discussed in Note 9.
During the second and third quarters of 1995, Lori entered into a series of
agreements with certain unaffiliated lenders that provided for short-term
loans with interest at 15%. As additional compensation certain lenders
received an aggregate of 91,176 shares of the Company's common stock valued
at approximately $149,000 (which amount was included in interest expense in
1995) and certain lenders received warrants to purchase an aggregate of
195,000 shares of the Company's common stock at prices ranging from $2.00
per share to $2.50 per share, the fair market value at the dates of grant.
The warrants expire five years from the date of issue. The proceeds from
these loans were used to fund the September $500,000 down payment on the
COMFORCE Global
F-18
Notes to Consolidated Financial Statements, Continued
acquisition, with the remainder used to fund working capital requirements
of the Company's discontinued Jewelry Business. At December 31, 1995,
short-term loans with an aggregate principal balance of $1,236,000 were
classified in the Company's consolidated balance sheet as liabilities to be
assumed by ARTRA.
In August 1995, Lori obtained a credit facility for the factoring of the
accounts receivable of its discontinued Jewelry Business. The credit
facility provides for advances of 80% of receivables assigned, less
allowances for markdowns and other merchandise credits. The factoring
charge, a minimum of 1.75% of the receivables assigned, increased on a
sliding scale if the receivables assigned were not collected within 45
days. Borrowings under the credit facility were collateralized by the
accounts receivable, inventory and equipment of Lori's discontinued fashion
costume jewelry subsidiaries and guaranteed by Lori. At December 31, 1995,
outstanding borrowings under this credit facility of $1,535,000, along with
other net liabilities of the discontinued Jewelry Business, were classified
in the Company's consolidated balance sheet as liabilities to be assumed by
ARTRA and net liabilities of the discontinued Jewelry Business.
In 1996, ARTRA completed the assumption of the agreed upon recorded
liabilities (see Note 9).
9. Liabilities to be Assumed by ARTRA Group Incorporated:
Under the Assumption Agreement between ARTRA and the Company in October
1995 (the "Assumption Agreement") entered into in connection with the
COMFORCE Telecom acquisition (see Note 3), ARTRA agreed to assume
substantially all pre-existing Lori liabilities and indemnify COMFORCE in
the event any future liabilities arise concerning pre-existing
environmental matters and business related litigation. Additionally, ARTRA
agreed to acquire all of the assets and assume all liabilities of the
Company's discontinued Jewelry Business aggregating a net liability of
$4,240,000 as of December 31, 1995. In April 1996, ARTRA sold the business
and certain assets of the Jewelry Business.
At December 31, 1995, liabilities to be assumed by ARTRA and net
liabilities of the discontinued Jewelry Business (in thousands) consist of:
Current:
Liabilities to be assumed by ARTRA
Notes payable $1,986
Court ordered payments 990
Accrued expenses 349
------
3,325
Net liabilities of the discontinued Jewelry Business 374
$3,699
======
Noncurrent:
Liabilities to be assumed by ARTRA Court ordered payments $ 541
======
As of December 31, 1996, ARTRA paid or assumed all of the above
liabilities. ARTRA continues to assume certain contingent liabilities
relating to outstanding litigation (see Note 16).
F-19
Notes to Consolidated Financial Statements, Continued
On December 19, 1996, the Company and ARTRA agreed to settle various
differences in the interpretation of the Assumption Agreement dated October
1995. In addition, ARTRA has agreed to deposit into an escrow account
125,000 shares of COMFORCE common stock to collateralize its obligation
with respect to (1) a warrant to a lender to purchase 50,000 shares of
common stock at $5 per share with a put option for $500,000, which the
Company and ARTRA believe is no longer effective, (2) potential liability
for clean-up costs, if any, or other damages in connection with the Gary,
Indiana site as discussed in Note 16, and (3) the remaining assumed
liabilities of the jewelry operations of $350,000 due to certain creditors.
10. Discontinued Operations:
In September 1995, the Company adopted a plan to discontinue its Jewelry
Business. A provision of $1,000,000 was recorded in September 1995 and an
additional provision of $600,000 was recorded during the fourth quarter of
1995 for the estimated costs to complete the disposal of the Jewelry
Business. The Jewelry Business was disposed of in 1996 with no cost to the
Company.
The Company's 1995 consolidated financial statements have been reclassified
to report separately results of operations of the discontinued Jewelry
Business. Additionally, in conjunction with the Comforce Telecom
acquisition (see Note 3), ARTRA agreed to assume substantially all
pre-existing liabilities of the Company and its discontinued Jewelry
Business and indemnify Comforce in the event any future liabilities arise
concerning pre-existing environmental matters and business related
litigation. Accordingly, the Company's 1995 consolidated balance sheet has
been reclassified to report separately the remaining net liabilities to be
assumed by ARTRA, including net liabilities of the discontinued Jewelry
Business. (See Note 9.)
The operating results of the discontinued Jewelry Business for the years
ended December 31, 1995 and 1994 (in thousands) consists of:
Year Ended December 31,
------------------------
1995 1994
Net sales $ 10,588 $ 34,431
======== ========
Loss from operations before income taxes $(15,606) $(16,210)
Provision for income taxes (5) (10)
-------- --------
Loss from operations (15,611) (16,220)
-------- --------
Provision for disposal of business (1,600)
Provisions for income taxes
-------- --------
Loss on disposal of business (1,600)
-------- --------
Loss from discontinued operations $(17,211) $(16,220)
======== ========
F-20
Notes to Consolidated Financial Statements, Continued
11. Extraordinary Gains Related to Discontinued Operations:
In accordance with the terms of the debt settlement agreement, borrowings
due a bank under the loan agreements of Lori and its fashion costume
jewelry subsidiaries and Fill-Mor (approximately $25,000,000 as of December
23, 1994), plus amounts due the bank for accrued interest and fees, were
reduced to $10,500,000 (of which $7,855,000 pertained to Lori's obligation
to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank).
Upon the satisfaction of certain conditions of the Amended Settlement
Agreement in March 1995, the balance of this indebtedness was discharged.
(See Note 12.)
The Company recognized an extraordinary gain of $8,965,000 ($2.81 per
share) in December 1994 as a result of the reduction of amounts due the
bank under the loan agreements of Lori and its operating subsidiaries and
Fill-Mor to $10,500,000 (of which $7,855,000 pertained to Lori's obligation
to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank)
as of December 23, 1994. The 400,000 shares of ARTRA common stock issued as
consideration for the debt settlement agreement (with a fair market value
of $2,500,000 based upon the closing market price on the date of issue)
were contributed by ARTRA to Lori's capital account. The extraordinary gain
was calculated (in thousands) as follows:
Amounts due the bank under loan agreements of Lori and its fashion
costume jewelry subsidiaries $ 22,749
Less, amounts due the bank at December 29, 1994 (7,855)
--------
Bank debt discharged 14,894
Accrued interest and fees discharged 3,635
Other liabilities discharged 1,985
Less consideration to the bank per terms of the amended
settlement agreement
Cash (1,900)
ARTRA common stock (400,000 shares) (2,500)
New Dimensions assets assigned to the bank at estimated fair value (7,149)
--------
Net extraordinary gain $ 8,965
========
On March 31, 1995, the $750,000 note due the bank was paid and the
remaining indebtedness of Lori and Fill-Mor was discharged, resulting in an
additional extraordinary gain to the Company of $6,657,000 ($1.45 per
share) in the first quarter of 1995. The $750,000 note payment was funded
with the proceeds of a $850,000 short-term loan from a former director of
the Company. As consideration for assisting in the debt restructuring, the
former director received 150,000 shares of the Company's common stock
valued at $337,500 ($2.25 per share) based upon the Company's closing
market value on March 30, 1995. The first quarter 1995 extraordinary gain
was calculated (in thousands) as follows:
F-21
Notes to Consolidated Financial Statements, Continued
Amounts due the bank under loan agreements of Lori and its
operating subsidiaries $ 7,855
Less, amounts due the bank applicable to Lori (561)
-------
Bank debt discharged 7,294
Less fair market value of the Company's common stock issued as
consideration for the debt restructuring (337)
Other fees and expenses (300)
-------
Net extraordinary gain $ 6,657
=======
12. Related Party Transactions:
During 1996, the Company made loans of $367,000 in the aggregate to Michael
Ferrentino, the President and a Director of the Company, Christopher P.
Franco, an Executive Vice President of the Company, Kevin W. Kiernan, an
employee of the Company, and James L. Paterek, a consultant to the Company,
to cover their tax liabilities resulting from the issuance of the Company's
common stock to them as inducements to direct the Company's entry into the
technical staffing business. Of this amount, $55,000 was advanced in 1995,
$38,000 was advanced in February 1996, $238,000 was advanced in April 1996,
and $36,000 was advanced in July 1996. Yield Industries, Inc., a
corporation wholly-owned by Messrs. Paterek and Ferrentino, earned a
delivery fee of $750,000 in connection with the Company's acquisition of
COMFORCE Telecom, $250,000 of which was paid in 1995 and the balance of
which was paid in 1996.
The Company paid L.H. Friskoff & Company, a certified public accounting
firm at which Richard Barber, a Director of the Company, is a partner,
approximately $104,000 in fees during 1996 for tax-related advisory
services.
Effective July 4, 1995, Lori's management agreed to issue up to a 35%
common stock interest in the Company to certain individuals to manage the
Company's entry into the technical staffing business (approximately
3,888,000 after certain anti-dilutive provisions). In October 1995, the
Company issued approximately 3,100,000 shares of its common stock to such
individuals. The remaining common shares due these individuals were issued
in 1996 after shareholder approval of an increase in the Company's
authorized common shares. The Company recognized a non-recurring
compensation charge of $3,425,0000 in 1995 related to the issuance of this
stock since these stock awards were 100% vested when issued, and were
neither conditioned upon these individuals' service to the Company as
employees nor the consummation of the COMFORCE Telecom's acquisition. The
cost of the remaining common shares of $500,000 is classified in the
Company's consolidated balance sheet at December 31, 1995 as obligations
expected to be settled by the issuance of common stock, and is classified
as equity as of December 31, 1996.
In conjunction with an agreement (see Note 11) to settle borrowings due a
bank under the loan agreements of Lori and its fashion costume jewelry
subsidiaries and Fill-Mor, ARTRA entered into a $1,850,000 short-term loan
agreement with a non-affiliated corporation, the proceeds of which were
advanced to Lori and used to fund amounts due Lori's bank. The loan, due
June 30, 1995,
F-22
Notes to Consolidated Financial Statements, Continued
was collateralized by 100,000 shares of Lori common stock. These 100,000
Lori common shares, originally issued to the bank under terms of the August
18, 1994 Settlement Agreement, were carried in the Company's consolidated
balance sheet at December 31, 1994 as restricted common stock. In August
1995, the loan was extended until September 15, 1995 and the lender
received the above mentioned 100,000 Lori common shares as consideration
for the loan extension. The loan was repaid by ARTRA in February, 1996.
Accordingly, the carrying value of these 100,000 Lori common shares was
transferred to ARTRA as reduction of amounts due to ARTRA.
In the fourth quarter of 1995, ARTRA agreed to exchange its interest in the
entire issue of the Company's Series C cumulative preferred stock for
100,000 newly issued shares of the Company's common stock. During 1995,
ARTRA received $399,000 of advances from the Company. In 1996, the Company
advanced ARTRA an additional $54,000. ARTRA repaid the above advances and
paid down $647,000 of the pre-existing Lori liabilities it assumed in
conjunction with the COMFORCE Global acquisition as discussed in Note 9.
The $399,000 advance to ARTRA and the $647,000 payment on pre-existing Lori
liabilities made by ARTRA have been classified in the Company's
consolidated financial statements at December 31, 1995 as amounts
receivable from ARTRA.
Through 1995, ARTRA had provided certain financial, accounting and
administrative services for the Company's corporate entity. Additionally,
the Company's corporate entity had leased its administrative office space
from ARTRA. During 1995 and 1994, fees for these services amounted to
$91,000 and $151,000, respectively.
During 1994, ARTRA made net advances to Lori of $2,531,000. The advances
consisted of a $1,850,000 short-term note with interest at 10%, the
proceeds of which were used to fund the $1,900,000 cash payment to the bank
in conjunction with the Amended Settlement Agreement with Lori's bank
lender, and certain non-interest bearing advances used to fund Lori working
capital requirements.
Effective December 29, 1994, ARTRA exchanged $2,242,000 of its notes and
advances for additional Lori Series C preferred stock. Additionally, the
August 18, 1994 Settlement Agreement required ARTRA to contribute cash of
$1,500,000 and ARTRA common stock with a fair market value of $2,500,000 to
Lori's capital account.
13. Equity:
In March 1996, 4,500 stock options were exercised at an average price of $5
per share.
In April 1996, 301,667 warrants were exercised at an average price of $3.12
per share.
In April 1996, in conjunction with the purchase of RRA, the Company sold
8,871 shares of Series E Preferred Stock at a selling price of $550 per
share for 8,470 shares and $750 per share for 401 shares. Each share of
Series E Preferred Stock will be automatically converted into 100 shares of
common stock on the date the Company's Certificate of Incorporation is
amended so that the Company has a sufficient number of authorized and
unissued shares of common stock to effect the conversion and any accrued
and unpaid dividends have been paid in full. Holders of shares of Series E
Preferred Stock are entitled to dividends equal to those declared on the
common stock, or
F-23
Notes to Consolidated Financial Statements, Continued
if no dividends are declared on the common stock, nominal cumulative
dividends payable only if the Series E Preferred Stock fails to be
converted into common stock by September 1, 1996. The Series E Preferred
Stock has a liquidation preference of $100 per share ($887,100 in the
aggregate for all outstanding shares). Effective as of October 28, 1996,
each share of Series E Preferred Stock was automatically converted into 100
shares of common stock.
In May 1996, the Company sold 7,002 shares of Series D Preferred Stock at a
selling price of $1,000 per share. The holder of each share of Series D
Preferred Stock has the right to convert such shares into 83.33 fully paid
and nonassessable shares of common stock at any time subsequent to the date
the Company's Certificate of Incorporation is amended so that the
Corporation has sufficient number of authorized and unissued common stock
to effect the conversion. Holders of the shares of Series D Preferred Stock
are entitled to cumulative dividends of 6% per annum, payable quarterly in
cash on the first day of February, May, August and November in each year.
The Series D Preferred Stock has a liquidation preference of $1,000 per
share ($7,002,000 in the aggregate for all outstanding shares).
In May 1996, 16,667 warrants were exercised at an average price of $3.38
per share.
In July 1996, the Company issued 137,500 shares of common stock to pay
certain liabilities.
In August 1996, 20,000 warrants were exercised at an average price of $2.00
per share.
In September 1996, 27,398 common shares were issued as partial
consideration for the purchase of Force Five. (See Note 3.)
On October 25, 1996, the Board authorized the issuance of up to 10,000
shares of Preferred Stock, par value $0.01 per share, designated the Series
F Convertible Preferred Stock ("Series F Preferred Stock"). As subsequently
modified by agreement of the Company and the holders, each share of Series
F Preferred Stock will, (i) at the option of the holder or (ii)
automatically on the second anniversary of the date of issuance, be
converted into such number of shares of Common Stock determined by dividing
$1,000 plus all accrued, unpaid dividends thereon by the per share
conversion price. The conversion price is 83% of the average closing bid
price of the Common Stock for the five trading days immediately preceding
the conversion date, subject to certain limitations. Holders of shares of
Series F Preferred Stock are entitled to cumulative dividends of 5% per
annum, payable quarterly on the first day of March, June, September, and
December in each year, payable in cash or Common Stock (valued at the
closing price on the date of declaration), at the Company's election. The
Series F Preferred Stock has a liquidation preference over the Common Stock
in the event of any liquidation or sale of the Company. Except as otherwise
provided by law, the holders of Series F Preferred Stock will not be
entitled to vote. As of December 31, 1996, there were 3,250 shares of
Series F Preferred Stock outstanding. The Company recorded an accretive
dividend on Series F Preferred Stock related to the discount noted above of
$665,000.
In connection with the sale of the Series F Preferred Stock, the Company
issued warrants to purchase 15,000 shares of Common Stock at an exercise
price of $24.00 per share as a placement fee, which warrants expire in
October 1998.
F-24
Notes to Consolidated Financial Statements, Continued
At the Company's annual meeting held on October 28, 1996, the Company's
stockholders ratified or approved, among other matters, (i) the Company's
issuance of 3,091,302 shares of its common stock and its agreement to issue
796,782 additional shares to certain individuals in consideration of their
agreement to direct the Company's entry into the technical staffing
business; (ii) the Company's entering into the technical staffing business
and exiting the fashion jewelry business and transactions related thereto,
including (a) its acquisition of all of the capital stock of Spectrum
Global Services, Inc. (formerly d/b/a/Yield Global and, following its
acquisition by the Company, renamed COMFORCE Telecom, Inc.), (b) its
issuance of 1,946,667 shares of its common stock plus detachable warrants
to purchase 973,333 shares of its common stock in a private placement, (c)
its issuance of 100,000 shares and 150,000 shares, respectively, of its
common stock to ARTRA, and Peter R. Harvey, formerly a director of the
Company, in consideration of their guarantees in connection with the
transactions, (d) its exchange of 100,000 shares of its common stock to
ARTRA for the 9,701 shares of the Company's Series C Preferred Stock held
by ARTRA, and (e) its disposition of its discontinued fashion jewelry
operations; (iii) an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
capital stock from 10,000,000 shares to 100,000,000 shares of common stock
and from 1,000,000 shares to 10,000,000 shares of Preferred Stock (upon
which approval, the 8,871 shares of Series E Preferred Stock which were
outstanding automatically converted to 8,871,000 shares of common stock);
(iv) an amendment to the Company's Certificate of Incorporation to
eliminate cumulative voting; (v) and to amend the Company's Long-Term Stock
Investment Plan (a) to increase the maximum number of shares which may be
issued under such Plan from 1,500,000 to 4,000,000 shares, (b) the grant of
options to non-employee directors, and (c) in various other respects,
principally designed to permit the Plan administrator additional
flexibility in structuring option grants.
In November 1996, 111,111 warrants were exercised at a price of $9 per
share.
In November 1996, the Company issued 243,211 shares and 36,800 shares as
partial consideration for the purchase of Azatar Computer Systems, Inc. and
Continental Field Services, Inc.
Effective December 26, 1996, the Company sold 460,000 shares of its Common
Stock, together with a related payment right, for $3.5 million. This
payment right requires the Company to make a payment to the investors in
either cash or Common Stock, at the Company's option, equal to the amount,
if any, by which $10.00 per share exceeds the average closing bid price for
the ten trading days prior to a specified payment date (not later than
April 1, 1997). See Note 20 for additional rights given to these holders of
Common Stock.
In addition, effective December 26, 1996, the Company sold 350,000 shares
of its Common Stock, together with a related payment right, for $3.5
million. This payment right requires the Company to make a payment to the
investors in either cash or Common Stock, at the Company's option, equal to
the amount, if any, by which $12.05 per share exceeds the average closing
bid price for the ten trading days prior to a specified payment date (not
later than May 1, 1997). In lieu of this amount, a payment of $2.05 per
share will be payable if, among other things, as of April 1, 1997, such
average trading price is between $10.00 and $15.00 and the Company's daily
trading volume does not meet specified levels.
F-25
Notes to Consolidated Financial Statements, Continued
In connection with this private placement of Common Stock, the Company
issued warrants to purchase 198,928 shares of Common Stock at $19 per share
which expire on December 26, 1999. In addition, the Company paid a
placement fee of 8,000 shares of Common Stock and warrants to purchase
25,000 shares of Common Stock at $14.25 per share (market price) which
expire on December 26, 1999.
The Company's Series C cumulative preferred stock, which was owned in its
entirety by ARTRA, accrued dividends at the rate of 13% per annum on its
liquidation value. Book value and accumulated dividends of $7,011,000 on
this stock aggregated $19,515,000 at December 31, 1994. In the fourth
quarter of 1995, ARTRA agreed to exchange its Series C cumulative preferred
stock for 100,000 newly issued shares of the Company's common stock.
14. Earnings Per Share:
Earnings per common share is computed by dividing net earnings available
for common shareholders, by the weighted average number of shares of common
stock and common stock equivalents (stock options and warrants),
outstanding during each period. Common stock equivalents relate to
outstanding stock options and warrants. For this computation, shares of the
Series F Preferred Stock are anti-dilutive and as such are not considered
common stock equivalents for this calculation. The shares of Series D
Preferred Stock are not considered common stock equivalents and are
excluded from primary earnings per share. The dividends accrued or paid on
the Series D Preferred Stock of $175,000, Series E Preferred Stock of
$18,000, Series F Preferred Stock of $27,000, and accretive dividends on
Series F Preferred Stock of $665,000, have been deducted for computing
earnings available to common shareholders. Fully diluted earnings per share
have not been presented as the result is anti-dilutive or does not differ
from primary earnings per share. Primary earnings per share is calculated
as follows (in thousands):
1996 1995 1994
Earnings (loss) available for common shareholders $ 362 $ (14,886) $ (9,537)
======== ======== ========
Weighted average number of shares outstanding
for the period 11,049 4,596 3,195
Dilutive effect of common stock equivalents 1,942
-------- -------- --------
$ 12,991 $ 4,596 $ 3,195
======== ======== ========
Primary earnings (loss) per share $ .03 $ (3.24) $ (2.99)
======== ======== ========
15. Stock Options and Warrants:
Long-Term Stock Investment Plan
On December 16, 1993, Lori's stockholders approved the Long-Term Stock
Investment Plan (the "1993 Plan"), effective January 1, 1993, which
authorizes the grant of options to purchase
F-26
Notes to Consolidated Financial Statements, Continued
the Company's common stock to executives, key employees and non-employee
consultants and agents of the Company and its subsidiaries. The 1993 Plan
authorizes the awarding of Stock Options, Incentive Stock Options and
Alternative Appreciation Rights. The 1993 Plan reserved 1,500,000 shares of
the Company's common stock for grant on or before December 31, 2002. In
October 1996, the Stock Option Plan was amended to allow for the issuance
of an additional 2,500,000 options under the plan for a total of 4,000,000
shares.
Incentive Stock Option Plan
Options to purchase common shares of the Company have been granted to
certain officers and key employees under the 1982 Incentive Stock Option
Plan (the "Plan"), which initially reserved 250,000 shares of the Company's
common stock. On December 19, 1990, the Company's stockholders approved an
increase in the number of shares available for grant under the plan to
500,000. The plan expired in 1992.
Summary of Options
A summary of stock option transactions for the year ended December 31, 1996
is as follows:
1996 1995 1994
Outstanding at January 1,
Shares 1,541,378 959,378 1,098,544
Prices $1.125 to $6.75 $1.125 to $5.00 $1.125 to $12.19
Options granted:
Shares 1,120,275 601,250 --
Price $6.75 to $27.00 $6.00 to $6.75 --
Options exercised:
Shares (4,500) -- (2,500)
Price $5.00 -- $5.00
Options cancelled:
Shares (565,628) (19,250) (136,666)
Price $1.125 $3.125 to $5.00 $3.125 to $12.19
Outstanding at December 31, 1996:
Shares 2,091,525 1,541,378 959,378
========= ========= =======
Price $1.125 to $22.75 $1.125 to $6.75 $1.125 to $5.00
Options exercisable at December 31, 1996 1,537,500 945,128 940,710
========= ======= =======
Options available for future grant at
December 31, 1996 778,475
=======
Approximately 555,628 of the options shown as cancelled were exercisable as
of December 31, 1995 at an exercise price of $1.125 per share. The Company
maintains that these options
F-27
Notes to Consolidated Financial Statements, Continued
terminated in 1996. The former option holders maintain that these options
continue to be exercisable. The Company is attempting to resolve this
dispute.
Warrants
On November 23, 1988, Lori issued warrants to purchase 25,000 of its common
shares, at $4.00 per share, to an investment banker as additional
compensation for certain financial and advisory services. During 1993, the
warrant holder exercised warrants to purchase 8,750 shares of the Company's
common stock. At December 31, 1995, such warrants to purchase 16,250 shares
of the Company's common stock at $4.00 per share remained outstanding.
Principally during the second and third quarters of 1995, Lori entered into
a series of agreements with certain unaffiliated investors that provided
for $1,800,000 of short-term loans that provide for interest at 15%. As
additional compensation certain lenders received an aggregate of 91,176
Lori common shares and certain lenders received warrants to an aggregate of
195,000 shares of the Company's common stock at prices ranging from $2.00
per share to $2.50 per shares, the fair market value at the dates of grant.
The warrants expire five years from the date of issue.
The acquisition of COMFORCE Telecom was funded principally by private
placements of approximately 1,950,000 of the Company's common shares at
$3.00 per share (total proceeds of approximately $5,800,000) plus
detachable warrants to purchase 973,333 Lori common shares at $3.375 per
share. In 1996, 36,667 warrants were exercised for $98,751. The warrants
expire five years from the date of issue.
In April 1996, the Company amended the warrants included above held by two
stockholders to purchase 301,667 shares of the Company's Common Stock at
exercise prices ranging from $2.125 to $3.375 per share to permit immediate
exercise and to provide for the issuance of supplemental warrants to
purchase 301,667 at an exercise price of $9.00 per share (market value) for
each warrant exercised on or before April 12, 1996. Warrants to purchase
all 301,667 shares were exercised in April 1996. The Company used the
proceeds from the exercise of the warrants for working capital purposes.
In connection with the sale of the Series F Preferred Stock, the Company
issued warrants to purchase 15,000 shares of Common Stock at an exercise
price of $24.00 per share as a placement fee, which warrants expire in
October 1998.
On December 26, 1996, the Company sold 810,000 shares through a private
placement. In connection with this private placement of common stock, the
Company issued warrants to purchase 198,928 shares of common stock at $19
per share which expire on December 26, 1999 In addition, the Company paid a
placement fee of 8,000 shares of common stock and warrants to purchase
25,000 shares of common stock at $14.25 per share (market price) which
expire on December 26, 1999.
At December 31, 1996 and 1995, total warrants were outstanding to purchase
a total of 1,371,844 and 1,184,583 of the Company's common shares at prices
ranging from $2.00 per share to $24.00 per share. The warrants expire three
to five years from the date of issue at various dates through 1999.
F-28
Notes to Consolidated Financial Statements, Continued
As discussed in Note 1, the Company has applied the disclosure-only
provision SFAS 123. Had compensation cost been determined based on the fair
value at the grant date consistent with the provisions of SFAS 123, the
Company's net income (loss) and earnings (loss) per share would have been
reduced to the pro forma amounts indicated below for the years ended
December 31, 1996 and 1995:
1996 1995
(in thousands) (in thousands)
Net income (loss) attributable to common
shareholders as reported $ 362 $ (14,886)
========== ==========
Pro forma (loss) $ (1,898) $ (16,010)
========== ==========
Earnings (loss) per share as reported $ .03 $ (3.24)
========== ==========
Pro forma $ (.17) $ (3.48)
========== ==========
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the
following weighted average assumptions used for grants in 1996 and 1995,
respectively: no dividend yield; expected volatility of 60%; risk-free
interest rate (ranging from 5.25% - 6.64%); and expected lives ranging from
approximately 4.5 to 5.5 years. Weighted averages are used because of
varying assumed exercise dates.
A summary of the status of the Company's stock option plans as of December
31, 1996 and 1995, and changes during the years ended on those dates is
presented below (shares in thousands):
December 31, 1996 December 31, 1995
------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year 1,541,378 $ 3.24 959,378 $ 1.21
Granted 1,120,275 9.35 601,250 6.48
Exercised (4,500) 5.00
Canceled (565,628) 1.13 (19,250) 5.00
----------- -----------
Outstanding at end of year 2,091,525 7.08 1,541,378 3.24
=========== ===========
Options exercisable at year end 1,537,500 945,128
=========== ===========
Weighted average fair value of options granted during the year $ 4.37 $ 2.38
=========== ===========
F-29
Notes to Consolidated Financial Statements, Continued
The following table summarizes information about stock options outstanding
at December 31, 1996 (shares in thousands):
Weighted
average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercisable
Prices Outstanding Life Price Exercisable Price
$1 360 6 $ 1 360 $ 1
$3 10 6 3 10 3
$6 to $7 1,431 9 7 1,138 7
$10 to $12 56 9 12
$17 to $19 152 9 18 30 17
$22 to $27 4 9 26
$14 to $17 79 9 16
------------ ------- ------- ---------- --------
$1 to $27 2,092 9 7 1,538 6
16. Litigation:
Prior to its entry into the Jewelry Business in 1985, the Company operated
in excess of 20 manufacturing facilities for the production of, inter alia,
photocopy machines, photographic chemical and paper coating. These
operations were sold or discontinued in the late 1970s and early 1980s.
Certain of these facilities may have used and/or generated hazardous
materials and may have disposed of the hazardous substances, particularly
before the enactment of laws governing the safe disposal of hazardous
substances, at an indeterminable number of sites. Although the controlling
stockholders and current management had no involvement in such prior
manufacturing operations, the Company could be held to be responsible for
clean-up costs if any hazardous substances were deposited at these
manufacturing sites, or at off-site waste disposal locations, under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), or under other Federal or state environmental laws now or
hereafter enacted. However, except for the Gary, Indiana site described
below, the Company has not been notified by the Federal Environmental
Protection Agency (the "EPA") that it is a potentially responsible-party
for, nor is the Company aware of having disposed of hazardous substances
at, any site.
In December 1994, the Company was notified by the EPA that it is a
potentially responsible party under CERCLA for the disposal of hazardous
substances at a site in Gary, Indiana. The alleged disposal occurred in the
mid-1970s at a time when the Company conducted operations as APECO
Corporation. In this connection, in December 1994, the Company was named as
one of approximately 80 defendants in a case brought in the United States
District Court for the Northern District of Indiana by a group of 14
potentially responsible parties who agreed in a consent order entered into
with the EPA to clean up this site. The plaintiffs have estimated the cost
of cleaning up this site to be $45 million and have offered to settle the
case with the Company for $991,445. This amount represents the plaintiffs'
estimate of the Company's pro rata share of the clean-up costs. At the
direction of ARTRA, which, as described below, is contractually obligated
to the Company for any environmental liabilities, the Company declined to
accept this settlement proposal, which was subsequently withdrawn.
F-30
Notes to Consolidated Financial Statements, Continued
The evidence produced by the plaintiffs to date is the testamentary
evidence of four former employees of a waste disposal company that
deposited wastes at the Gary, Indiana site identifying the Company as a
customer of such disposal company, and entries in such disposal company's
bookkeeping ledgers showing invoices to the Company. The Company, however,
has neither discovered any records which indicate, nor located any current
or former employees who have advised, that the Company deposited hazardous
substances at the site. Management and its counsel cannot determine whether
a negative outcome is probable regarding the Company's potential liability
at this site. Accordingly, no provision has been made for the potential
liability related to this matter.
Under the terms of the Assumption Agreement and a subsequent agreement
entered into between ARTRA and the Company, ARTRA has agreed to pay and
discharge substantially all of the Company's pre-existing liabilities and
obligations, including environmental liabilities at any sites at which the
Company allegedly operated facilities or disposed of hazardous substances,
whether or not the Company is currently identified as a potentially
responsible party therefor. Consequently, the Company is entitled to
indemnification from ARTRA for any environmental liabilities associated
with the Gary, Indiana site. In addition, ARTRA has deposited 50,000 shares
of Common Stock in escrow as additional collateral to satisfy any judgment
adverse to the Company or to pay any agreed upon settlement amount with
respect to the Gary, Indiana site. Proceeds from the sale of the shares
held in escrow might not be sufficient to satisfy any such judgment or pay
any such settlement amount. While ARTRA is obligated to indemnify the
Company for any environmental liabilities, no assurance can be given that
ARTRA will be financially capable of satisfying its obligations with
respect to any liability in connection with the Gary, Indiana site or any
other environmental liabilities. ARTRA has advised that it intends to
vigorously defend this case.
In September 1996, the Company received notice of litigation from a
competitor who charged that RRA obtained and benefited from a list of
confidential data provided by a former employee of the competitor prior to
the acquisition of RRA. RRA has denied such charges. The Acquisition
Agreement provides for indemnification from any claims prior to the
acquisition.
The Company is a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are
believed by management to be material to the business, results of
operations or financial condition of the Company.
17. Savings Incentive and Profit Sharing Plan:
The Company participates in a savings incentive and profit sharing plan
(the "Plan"). All eligible employees may make contributions to the Plan on
a pre-tax salary reduction basis in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. No contributions were made by
the Company in 1996 and 1995.
Certain employees who work for governmental agencies are required to be
covered under a separate pension plan. During 1996, the Company recorded
approximately $700,000 of expense related to these benefits.
F-31
Notes to Consolidated Financial Statements, Continued
18. Lease Commitments:
The Company leases certain office space and equipment in its
telecommunications and computer staffing service business. Rent expense for
all operating leases in 1996 and 1995 approximated $200,000 and $17,000,
respectively.
As of December 31, 1996, future minimum rent payments due under the terms
of noncancelable operating leases excluding any amount that will be paid
for operating costs are:
Year ending Total
December (in thousands)
1997 $ 425
1998 410
1999 287
2000 244
2001 218
Thereafter 24
------------
$ 1,608
============
The aggregate commitment for future salaries at December 31, 1996,
excluding bonuses, during the remaining term of all management and
employment agreements, are approximately:
Year ending Total
December (in thousands)
1997 $ 1,372
1998 1,010
1999 602
2000 17
-------------
$ 3,001
============
19. Concentration of Credit Risk:
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash and cash equivalents and trade receivables.
The Company maintains cash in bank accounts which at times may exceed
federally insured limits. The Company has not experienced any losses in
such accounts and believes they are not exposed to any significant credit
risk on their cash balances. The Company believes it mitigates such risk by
investing its cash through major financial institutions.
F-32
Notes to Consolidated Financial Statements, Continued
At December 31, 1996, the Company had four customers, and at December 31,
1995, the Company had nine customers with accounts receivable balances that
aggregated 23% and 67% of the Company's total accounts receivable,
respectively. Percentages of total revenues from significant customers for
the years ended December 31, 1996 and from October 17, 1995 (entry into
staffing business) to December 31, 1995 are summarized as follows:
December 31, December 31
1996 1995
Customer 1 19.0% 17.3%
Customer 2 * 12.6%
Customer 3 * 10.1%
*Less than 10%.
20. Subsequent Events:
On February 28, 1997, the Company purchased all of the stock of RHO Company
Incorporated ("RHO") for $14.8 million payable in cash, plus a contingent
payout to be paid over three years based on future earnings of RHO payable
in stock in an aggregate amount not to exceed $3.3 million. The total
number of shares issuable under the contingent payout can not exceed
386,249 shares. The cash portion of the purchase price paid at closing was
principally funded through the Company's offering of convertible
debentures, as described below. RHO is a defendant in a lawsuit by its
former insurance carrier who alleges that RHO is obligated to repay to it
$1,600,000 that the carrier was required to pay in connection with a claim
settlement. The Company is defending against this claim and management
believes that the case is without substantial merit. However, in the event
of any adverse judgment in the case or if the Company determines to settle
the case, any payments relating to this pre-acquisition contingency will be
added to the purchase price of RHO.
From February 27 to March 21, 1997, the Company sold $25.2 million of its
Subordinated Convertible Debentures ("Debentures") to certain institutional
investors for cash or in exchange for shares of the Company's Series F
Preferred Stock (discussed below). The Debentures bear interest at the rate
of 8% per annum during the 180 day period following closing and thereafter
at the rate of 10% per annum continuing until fully paid or converted.
Interest on the Debentures is payable quarterly in cash or in common stock
of the Company, at the Company's option. The Debentures may be redeemed by
the Company in whole or in part at any time from the date of issuance,
within 360 days after any disbursement to the Company of net proceeds from
the sale of Debentures at a redemption price equal to the sum of (i) the
principal amount thereof, (ii) all accrued, unpaid interest thereon, and
(iii) premiums ranging from 5% (2.5% in the case of Debentures exchanged
for Series F Preferred Stock) for Debentures redeemed within 60 days after
closing increasing up to 25% for Debentures redeemed between 181 and 360
days after closing. The Company is currently seeking long-term financing to
redeem these Debentures and to provide capital for continued expansion of
its operations.
F-33
Notes to Consolidated Financial Statements, Continued
From February 27 to March 21, 1997 the Company issued or agreed to issue
three year warrants ("Warrants") to purchase up to 504,000 share of its
Company's Common Stock to the Debenture holders. Warrants to purchase
100,800 shares of common stock were issued at the time of the offering and
become exercisable six months after closing. If the debt is not repaid in
60 days, the Company will issue additional warrants to purchase 100,800
shares of common stock for each additional 30 day period the debt is
outstanding up to issuing an aggregate of warrants to purchase 504,000
shares of common stock. The exercise price of the warrants issued ranges
from $6.85 to $7.65 per share. The Company is also required to issue
additional warrants ("Additional Warrants") to purchase 504,000 shares of
the Company's common stock if the Debentures are not redeemed within 180
days following closing. The Additional Warrants will have an exercise price
equal to the average closing price of the Company's common stock over the
five-day trading period ending 179 days after the closing.
On February 27, 1997, in connection with the sale of $5 million of
debentures to various holders of the Company's Common Stock purchased on
December 26, 1996, the Company issued a put option whereby, if such
debentures are not repaid by April 28, 1997, May 28, 1997, June 27, 1997 or
July 27, 1997, such stockholders will have the option to put back 115,000
shares of Common Stock at the above listed dates, at $10.00 per share
payable in cash, reduced by the value of any cash or stock issued under
payment rights.
As part of the issuance of the Debentures, the Company has also effected
the repurchase of 2,750 of the 3,250 outstanding shares of its Series F
Preferred Stock by issuing additional Debentures in the amount of 115% of
its original principal amount ($1,000 per share) for total Debentures
issued of $3,162,500. Approximately $3,900,000 of the proceeds from the
Debenture offering was utilized to repay the Company's bank debt.
<
F-34
Comforce Corporation and Subsidiaries
Schedule II Valuation and Qualifying Accounts
for the years ended December 31, 1996, 1995 and 1994 (in thousands)
Column A Column B Column C Column D Column E
- ----------------------------------------------- --------- --------------------- --------- --------
(1) (2)
Balance at Charged to Charged to Balance
Description Beginning Costs and Other Deductions at end of
of Period Expenses Accounts (Describe) Period
--------- -------- -------- ---------- ------
For the year ended December 31, 1996:
Deducted from assets to which they apply:
Allowance for inventory valuation $ -- $ -- $ -- $ --
====== ====== ====== ======
Allowance for markdowns $ -- $ -- $ -- $ --
Allowance for doubtful accounts -- 213 (D) 213
------ ------ ------ ------
$ -- $ 213 $ -- $ 213
====== ====== ====== ======
For the year ended December 31, 1995
Deducted from assets to which they apply:
Allowance for inventory valuation $ 207 $ 25 $ 232 (A) $ --
====== ====== ====== ======
Allowance for markdowns $ 835 $ 291 $1,126 (A) $ --
Allowance for doubtful accounts 503 424 927 (A) --
------ ------ ------ ------
$1,338 $ 715 $2,053 $ --
====== ====== ====== ======
For the year ended December 31, 1994:
Deducted from assets to which they apply:
Allowance for inventory valuation $4,150 $ 218 $4,161 (B) $ 207
====== ====== ====== ======
Allowance for markdowns $2,499 $4,799 $6,463 (C) $ 835
Allowance for doubtful accounts 432 269 198 (D) 503
------ ------ ------ ------
$2,931 $5,068 $6,661 $1,338
====== ====== ====== ======
(A) Principally amounts reclassified to discontinued operations.
(B) Principally inventory written off, net of recoveries.
(C) Principally markdowns taken.
(D) Principally uncollectible accounts written off, net of recoveries.
F-35
RHO Company Incorporated
Index to Financial statements
Page
Report of Independent Public Accountants F-37
Balance Sheets F-38
Statements of Income F-39
Statements of Changes in Shareholders,
Deficit F-40
Statements of Cash Flows F-41
Notes to Financial Statements F-42
F-36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Rho Company Incorporated:
We have audited the accompanying balance sheets of Rho Company Incorporated (a
Washington Corporation) as of December 31, 1995 and 1996, and the related
statements of income, changes in shareholders' deficit and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rho Company Incorporated as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington,
January 24, 1997
F-37
RHO COMPANY INCORPORATED
BALANCE SHEETS -- DECEMBER 31, 1995 AND 1996
(Dollar amounts in thousands)
ASSETS
1995 1996
-------- --------
CURRENT ASSETS:
Cash $ 412 $ 287
Restricted cash 705 1,133
Escrow deposit -- 500
Accounts receivable, less allowance for doubtful accounts of
$200 and $180, respectively 8,725 7,572
Prepaid expenses 167 155
-------- --------
Total current assets 10,009 9,647
-------- --------
FURNITURE AND EQUIPMENT, less accumulated depreciation of $1,065
and $1,007 513 575
-------- --------
OTHER ASSETS 132 51
-------- --------
Total assets $ 10,654 $ 10,273
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - bank $ 6,253 $ 6,223
Current portion of long-term debt, related party 130 396
Accounts payable 329 218
Wages payable 844 647
Payroll taxes and withholdings payable 1,167 630
Accrued interest 147 113
Accrued vacations, bonuses and other 605 625
-------- --------
Total current liabilities 9,475 8,852
-------- --------
LONG-TERM DEBT, RELATED PARTY 9,956 9,268
-------- --------
SHAREHOLDERS' EQUITY:
Common stock; $1.00 par value; authorized 50,000 and 1,000,000
shares, respectively, issued and outstanding 50,000 shares 50 50
Other capital -- 2,680
Deferred stock option charge -- (1,920)
Retained deficit (8,827) (8,657)
-------- --------
Total shareholders' equity (8,777) (7,847)
-------- --------
Total liabilities and shareholders' equity $ 10,654 $ 10,273
======== ========
The accompanying notes are an integral part of these balance sheets.
F-38
RHO COMPANY INCORPORATED
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollar amounts in thousands)
1994 1995 1996
------- ------- -------
REVENUES $76,170 $83,631 $85,746
COST OF OPERATIONS 69,157 74,978 76,457
------- ------- -------
Gross profit 7,013 8,653 9,289
GENERAL AND ADMINISTRATIVE EXPENSES 5,266 6,510 7,512
------- ------- -------
Income from operations 1,747 2,143 1,777
------- ------- -------
OTHER EXPENSES:
Stock option expense -- -- 260
Interest expense, net 1,435 1,643 1,317
------- ------- -------
Total other expenses 1,435 1,643 1,577
------- ------- -------
Net income $ 312 $ 500 $ 200
======= ======= =======
The accompanying notes are an integral part of these statements.
F-39
RHO COMPANY INCORPORATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollar amounts in thousands)
Deferred
Stock Total
Common Other Option Retained Shareholders'
Stock Capital Charge Deficit Deficit
------- ------- ------- ------- -------
BALANCE, December 31, 1993 $ 50 $ -- $ -- $(9,534) $(9,484)
Net income -- -- -- 312 312
------- ------- ------- ------- -------
BALANCE, December 31, 1994 50 -- -- (9,222) (9,172)
Net income -- -- -- 500 500
Dividends paid -- -- -- (105) (105)
------- ------- ------- ------- -------
BALANCE, December 31, 1995 50 -- -- (8,827) (8,777)
Net income -- -- -- 200 200
Dividends paid -- -- -- (30) (30)
Stock option granted -- 2,180 (2,180) -- --
Amortization of deferred
stock option charge -- -- 260 -- 260
Treasury stock subscribed -- (567) -- -- (567)
Common stock subscribed -- 1,067 -- -- 1,067
------- ------- ------- ------- -------
BALANCE, December 31, 1996 $ 50 $ 2,680 $(1,920) $(8,657) $(7,847)
======= ======= ======= ======= =======
The accompanying notes are an integral part of these statements.
F-40
RHO COMPANY INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollar amounts in thousands)
1994 1995 1996
------- ------- -------
OPERATING ACTIVITIES:
Net income $ 312 $ 500 $ 200
Depreciation 196 223 268
Amortization of intangible assets 4 4 35
Loss on retirement of furniture and fixtures -- 17 4
Deferred income taxes (37) -- --
Stock option expense -- -- 260
Net change in current assets and liabilities-
Accounts receivable and other (1,559) (1,778) 1,153
Prepaid expenses 214 (70) 12
Accounts payable 60 200 (111)
Wages payable 139 9 (197)
Payroll taxes and withholdings payable 72 296 (537)
Accrued interest 40 15 (34)
Accrued vacations, bonuses and other (56) 110 20
------- ------- -------
Cash flows from operating activities (615) (474) 1,073
------- ------- -------
INVESTING ACTIVITIES:
Purchase of furniture and equipment (136) (334) (334)
Decrease (increase) in other assets (8) (24) 46
------- ------- -------
Cash flows from investing activities (144) (358) (288)
------- ------- -------
FINANCING ACTIVITIES:
Increase in restricted cash (591) (35) (428)
(Decrease) increase in bank borrowings 1,482 1,302 (30)
Borrowings of long-term debt 114 168 --
Repayments of long-term debt (270) (266) (422)
Dividends paid -- (105) (30)
------- ------- -------
Cash flows from financing activities 735 1,064 (910)
------- ------- -------
(DECREASE) INCREASE IN CASH (24) 232 (125)
CASH, beginning of year 204 180 412
------- ------- -------
CASH, end of year $ 180 $ 412 $ 287
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 1,395 $ 1,628 $ 1,351
Income taxes 8 8 43
The accompanying notes are an integral part of these statements.
F-41
RHO COMPANY INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
The Company markets the services of temporary technical and clerical people to
various industries located primarily in the states of Washington and California.
Furniture and Equipment
Furniture and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided using the straight-line and accelerated methods over
expected useful lives of three to seven years.
Income Taxes
The Company has elected S-corporation status for reporting taxable income. Any
income or loss from the corporation is reportable on the personal returns of the
stockholders.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and those
differences could be significant.
Reclassifications
Certain reclassifications have been made to the prior year statements to conform
to the current year format.
2. RESTRICTED CASH:
Collections of accounts receivable are deposited in a restricted collateral
account used for repayment of advances under the Company's bank line of credit.
The balance in the collateral account at December 31, 1995 and 1996 was $705 and
$1,133, respectively, shown in the accompanying balance sheets. The remaining
cash balance is unrestricted.
F-42
3. NOTE PAYABLE - BANK:
The Company has available a line of credit for up to $7.5 million in borrowings,
bearing interest at the bank's prime rate plus .875% (9.125% at December 31,
1996), collateralized by accounts receivable. The line of credit is limited to
75% of eligible accounts receivable and requires collections to be deposited in
a restricted collateral account. The outstanding balance on the line of credit
was $6,223 at December 31, 1996. The loan agreement contains various covenants,
including minimum levels of working capital and net worth. The loan agreement
expires June 15, 1997. Although there can be no assurance, the Company
anticipates it will be able to renew the line of credit. If it were not able to
renew the line of credit or obtain other acceptable financing, it then could
have adverse consequences, including possible cessation of operations.
4. LONG-TERM DEBT:
Long-term debt as of December 31, 1995 and 1996 consists of the following:
1995 1996
-------- --------
Subordinated notes payable to former stockholder in monthly installments equal
to 55% of average monthly net income, as defined, or $50, whichever is
greater, with total minimum payments of $195 per quarter, including interest
at 6.6% (10.5% prior to January 1, 1996), collateralized by a stock pledge
agreement with shareholders of Rho Company Incorporated $ 6,882 $ 6,531
Subordinated note payable to former stockholder, 9.125%, collateralized by
accounts receivable, subordinate to the bank line of credit. Due on demand,
but stockholder does not intend to call the note before January 1, 1998 1,548 1,548
Subordinated note payable to stockholder, 9.125%, collateralized by
accounts receivable, subordinate to the bank line of credit
Due on demand, but stockholder does not intend to call the note
before January 1, 1998 1,369 1,369
Subordinated note payable to stockholder, 9.125%, collateralized by
accounts receivable, subordinate to the bank line of credit
Due on demand, but stockholder does not intend to call the note
before January 1, 1998 178 178
Other 109 38
-------- --------
10,086 9,664
Less- Current portion (130) (396)
-------- --------
$ 9,956 $ 9,268
======== ========
All of the notes payable agreements are with related parties. Total interest
expense related to these notes was $987, $1,038 and $744 for the years ended
December 31, 1994, 1995 and 1996.
F-43
Effective as of January 1, 1996, the Company's 10.5% subordinated notes were
modified to provide for a new interest rate of 6.6% and for accelerated payments
based on net income. The noteholder was granted an option to purchase up to 25%
of the Company's common stock (after giving effect to the exercise of the
option) at a price based on a formula. The noteholder has the right to use the
interest calculated using the difference between the old interest rate and the
new lower interest rate as a credit toward the option price. The Company has
valued the option using the fair value method. The option was valued at $2,180
based on the present value of the foregone interest payments under the modified
note agreement. This amount is being amortized using the effective interest
method over the life of the note payable.
Debt maturities on these notes are as follows:
1997 $ 396
1998 3,478
1999 409
2000 436
2001 466
Thereafter 4,479
------
$9,664
======
5. LEASE COMMITMENTS:
The Company leases office and storage space and equipment under noncancelable
operating leases. Future minimum rentals are as follows:
Year ending December 31,
------------------------
1997 $ 608
1998 547
1999 389
2000 337
2001 99
------
$1,980
======
Rental expense under operating leases totaled $316, $457 and $659 for the years
ended December 31, 1994, 1995 and 1996, respectively.
6. COMMITMENTS:
The Company has covenant not-to-compete agreements with the former stockholders
of an acquired/merged company. Payments under the agreements are the greater of:
(a) $50 per year for five years; or (b) 8% of the gross margin (defined as gross
billings minus temporary employee wages) generated by the merged company's
clients.
The minimum future payment under these covenant not-to-compete agreements is $50
for the year ending December 31, 1997.
The Company expensed $236, $167 and $118 under these agreements for the years
ended December 31, 1994, 1995 and 1996, respectively.
F-44
7. EMPLOYEE BENEFIT PLAN:
The Company has a qualified 401(k) profit sharing plan covering eligible
employees. The plan provides for contributions by the Company without regard to
current or accumulated earnings at the discretion of the Board of Directors. The
Company did not make any matching contributions to the plan for the years ended
December 31, 1994 and 1995. Matching contributions totaling $44 were made during
the year ended December 31, 1996.
8. MAJOR CUSTOMERS:
During the year ended December 31, 1996, the Company had two customers with
sales greater than 10% of the Company's revenues. Contracts with one customer in
the software industry accounted for approximately $22,600, $29,000 and $26,100,
of the Company's sales for the years ended December 31, 1994, 1995 and 1996,
respectively. As of December 31, 1995 and 1996, this customer's accounts
receivable balance was $1,540 and $680, respectively. Contracts with one
customer in the aerospace industry accounted for approximately $12,800 of the
Company's sales for the year ended December 31, 1996. As of December 31, 1996,
this customer's accounts receivable balance was $1,484. Contracts with these two
customers can be terminated at any time with 30 days' notice.
9. PRIOR PERIOD ADJUSTMENT:
During 1995, the Company began accruing for vacations earned but unpaid to its
permanent employees and the portion of bonuses earned but unpaid to its contract
employees. The effect of this correction on the prior year financial statements
was as follows:
Net income, year ended December 31, 1994, as
previously reported $ 364
Less: Adjustment for correction of error (52)
-------
Net income, year ended December 31, 1994, as restated $ 312
=======
Retained deficit, as previously reported for
December 31, 1993 $(9,221)
Less: Adjustment for correction of error (313)
-------
Retained deficit, as restated for December 31, 1993 $(9,534)
=======
10. CONTINGENCIES:
The Company is the defendant in litigation with a previous insurer regarding a
settlement paid by the insurer which the insurer alleges should be indemnified
by the Company in the amount of approximately $1.6 million. The Company is
vigorously defending the lawsuit and management, in consultation with legal
counsel, believes it is more likely than not that the Company will prevail. In
November 1996, the Court granted a motion for summary judgment to dismiss the
case in favor of the Company. The plaintiff may still appeal the decision.
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11. PURCHASE AGREEMENT:
The stockholders of the Company have signed a definitive purchase agreement
whereby the Company will repurchase their shares concurrent with issuing shares
to COMFORCE Corporation. COMFORCE would then own all of the outstanding shares
of the Company. As part of this agreement, COMFORCE has advanced, on behalf of
the Company, $567 to a shareholder as a prepayment for the purchase of his
shares, which represent 1/3 of the outstanding shares of the Company. This
amount represents treasury stock subscribed and is shown as a reduction of
shareholders' equity. COMFORCE has also placed $500 in an earnest money escrow
account. In the event the stock purchase agreement fails to close as a result of
a breach of or material representative by the Company, the Company would be
required to return the entire $1,067 to COMFORCE, which was advanced as common
stock subscribed.
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EXHIBIT INDEX
2.1 Stock Purchase Agreement dated September 11, 1995 among Spectrum
Technologies, Inc., the Company, COMFORCE Corporation, ARTRA Group
Incorporated, Peter R. Harvey, Marc L. Werner, James L. Paterek,
Michael Ferrentino and Christopher P. Franco (included as an exhibit
to the Company's Current Report on Form 8-K dated September 11, 1995
and incorporated herein by reference).
2.2 Purchase Agreement among COMFORCE Telecom, Inc., Williams
Communications Services, Inc. and Bruce Anderson (included as an
exhibit to the Company's Current Report on Form 8-K dated March 13,
1996 and incorporated herein by reference).
2.3 Stock Purchase Agreement effective as of May 13, 1996 among the
Company, COMFORCE Technical Services, Inc., Project Staffing Support
Team, Inc., Raphael Rashkin and Stanley Rashkin (included as an
exhibit to Amendment No. 1 to the Company's Quarterly Report on Form
10-Q/A for the quarter ended March 31, 1996 filed May 16, 1996 and
incorporated herein by reference).
2.4 Asset Purchase Agreement effective as of May 13, 1996 among the
Company, COMFORCE Technical Services, Inc., DataTech Technical
Services, Inc., Raphael Rashkin and Stanley Rashkin (included as an
exhibit to Amendment No. 1 to the Company's Quarterly Report on Form
10-Q/A for the quarter ended March 31, 1996 filed May 16, 1996 and
incorporated herein by reference).
2.5 Asset Purchase Agreement effective as of May 13, 1996 among the
Company, COMFORCE Technical Services, Inc., RRA, Inc., Raphael Rashkin
and Stanley Rashkin (included as an exhibit to Amendment No. 1 to the
Company's Quarterly Report on Form 10-Q/A for the quarter ended March
31, 1996 filed May 16, 1996 and incorporated herein by reference).
2.6 Letter Agreement dated May 6, 1996 amending Asset Purchase Agreement
effective as of May 13, 1996 among the Company, COMFORCE Technical
Services, Inc., RRA, Inc., Raphael Rashkin and Stanley Rashkin
(included as an exhibit to Amendment No. 1 to the Company's Quarterly
Report on Form 10-Q/A for the quarter ended March 31, 1996 filed May
16, 1996 and incorporated herein by reference).
2.7 Letter Agreement dated April 19, 1996 among CTS Acquisition Co. I,
COMFORCE Technical Services, Inc., Project Staffing Support Team, Inc.
and RRA, Inc. (included as an exhibit to Amendment No. 1 to the
Company's Quarterly Report on Form 10-Q/A for the quarter ended March
31, 1996 filed May 16, 1996 and incorporated herein by reference).
2.8 Agreement and Plan of Reorganization dated October 22, 1996 between
AZATAR Computer Systems, Inc. and the Company (included as an exhibit
to the Company's Current Report on Form 8-K dated November 8, 1996 and
incorporated herein by reference).
2.9 Asset Purchase Agreement dated October 25, 1996 by and among
Continental Field Services Corporation, Michael Hill, Roy Hill and
COMFORCE Telecom, Inc. (included as an exhibit to the Company's
Current Report on Form 8-K dated November 19, 1996 and incorporated
herein by reference).
2.10 Asset Purchase Agreement dated October 25, 1996 between Progressive
Telecom, Inc., Beth Wilson Hill and COMFORCE Telecom, Inc. (included
as an exhibit to the Company's Current Report on Form 8-K dated
November 19, 1996 and incorporated herein by reference).
2.11 Amendment to Escrow Agreement and Purchase Agreements dated November
8, 1996 by and among Continental Field Service Corporation,
Progressive Telecom, Inc., Michael Hill, Roy Hill, Beth Wilson Hill,
McCarthy, Fingar, Donovan, Drazen & Smith, and COMFORCE Telecom, Inc.
(included as an exhibit to the Company's Current Report on Form 8-K
dated November 19, 1996 and incorporated herein by reference).
E-1
2.12 Subscription Agreement dated October 28, 1996 by and among RHO
Company, Inc., J. Scott Erbe, COMFORCE Corporation and COMFORCE
Technical Services, Inc. (included as an exhibit to the Company's
Current Report on Form 8-K dated November 19, 1996 and incorporated
herein by reference).
2.13 Stock Sale and Termination Agreement dated October 28, 1996 by and
between James R. Ratcliff and RHO Company, Inc. (included as an
exhibit to the Company's Current Report on Form 8-K dated November 19,
1996 and incorporated herein by reference).
2.14 Letter Agreement dated November 4, 1996 amending Stock Sale and
Termination Agreement between RHO Company, Inc. and James R. Ratcliff.
(included as an exhibit to the Company's Current Report on Form 8-K
dated November 19, 1996 and incorporated herein by reference).
3.1 Restated Certificate of Incorporation of the Company, as amended by
Certificates of Amendment filed with the Delaware Secretary of State
on June 14, 1987 and February 12, 1992 (included as an exhibit to
Amendment No. 1 to the Registration Statement on Form S-1 of the
Company filed with the Commission on May 10, 1996 and incorporated
herein by reference).
3.2 Certificate of Ownership (Merger) of COMFORCE Corporation into the
Company (included as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by
reference).
3.3 Designation of Rights and Preferences of Series D Preferred Stock
(included as an exhibit to Amendment No. 1 to the Company's Quarterly
Report on Form 10-Q/A for the quarter ended March 31, 1996 filed May
16, 1996 and incorporated herein by reference).
3.4 Designation of Rights and Preferences of Series E Preferred Stock
(included as an exhibit to Amendment No. 1 to the Company's Quarterly
Report on Form 10-Q/A for the quarter ended March 31, 1996 filed May
16, 1996 and incorporated herein by reference).
3.5* Designation of Rights and Preferences of Series F Preferred Stock.
3.6 Certificate of Ownership (Merger) of AZATAR into the Company (included
as an exhibit to the Company's Current Report on Form 8-K dated
November 8, 1996 and incorporated herein by reference).
3.7* Bylaws of the Company, as amended and restated effective as of
February 26, 1997.
3.8* Certificate of Elimination of Series E Convertible Participating
Preferred Stock.
10.1 Management Agreement dated as of April 9, 1993 between the Company and
Nitsua, Ltd. (a corporation wholly-owned by Austin Iodice, formerly
Lori's Chairman and Chief Executive Officer) (included as an exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference).
10.2 Letter Agreement dated June 29, 1995, among the Company, ARTRA Group
Incorporated, James L. Paterek, Michael Ferrentino and Christopher P.
Franco (included as an exhibit to the Company's Current Report on Form
8-K dated September 11, 1995 and incorporated herein by reference).
10.3 Amendment dated October 6, 1995 of Letter Agreement dated June 29,
1995, among the Company, ARTRA Group Incorporated, James L. Paterek,
Michael Ferrentino and Christopher P. Franco (included as an exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference).
E-2
10.4 Employment Agreement dated December 9, 1995 between the Company and
Michael Ferrentino (included as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference).
10.5 Employment Agreement dated December 9, 1995 between the Company and
Christopher Franco (included as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference).
10.6 Assumption Agreement dated October 17, 1995 between the Company and
ARTRA GROUP Incorporated respecting ARTRA's assumption of
substantially all of the Company's pre-existing liabilities (included
as an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.7 Loan Agreement between COMFORCE Telecom, Inc. and Chase Manhattan Bank
(included as an exhibit to the Company's Current Report on Form 8-K
dated March 13, 1996 and incorporated herein by reference).
10.8 Asset Purchase Agreement dated as of April 11, 1996 among Lawrence
Jewelry Corporation, ARTRA GROUP Incorporated, the Company and Hanover
Advisors, Inc. respecting the disposition of the assets of the
Company's Jewelry Business (included as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference).
21.1* List of Subsidiaries
27.1* Financial Data Schedule
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* Filed herewith.
E-3