<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO.1
[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, 1995
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
(formerly The Lori 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) 352-3200
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 February 29, 1996 $44,370,000
-----------
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 February 29, 1996
- ---------------------------------------- --------------------------------
Common stock, $.01 par value 9,338,698
Documents Incorporated by Reference: None
<PAGE>
Item 1. Business
General
COMFORCE Corporation (the "Company" or "COMFORCE") is a provider of
technical staffing and consulting services in the information technology and
telecommunications sectors. Its operations are currently conducted through its
operating subsidiary, COMFORCE Global ("COMFORCE Global"). The Company has
entered into an asset purchase agreement to acquire the assets and business of
RRA Inc. and certain affiliated entities ("RRA") through a second operating
subsidiary, COMFORCE Technical Services, Inc. ("COMFORCE Technical Services").
COMFORCE Global provides telecommunications and computer specialists and
expertise on a project outsourcing basis, primarily to Fortune 500 companies
worldwide. It offers manpower on a contract basis to the telecommunications and
computer industries, on both a short-term and long-term basis, to meet its
customers' needs for virtually every staffing level within these industries,
including wireless infrastructure services, network management, engineering,
design and technical support. COMFORCE Global maintains an extensive data base
of technically skilled telecommunications and computer personnel, classified by
experience and geographic location, for its customers. A majority of COMFORCE
Global's business is derived from contract labor services provided to the
wireless sector.
Upon completion of the acquisition of RRA, COMFORCE Technical Services will
provide specialists for supplemental staffing assignments as well as outsourcing
and vendor-on-premises programs, primarily in the electronics, aviation,
telecommunications and information technology business sectors. In addition,
COMFORCE Technical Services provides specialists for mission-critical projects,
principally in the scientific and technical research and development fields,
including the areas of laser and weapons technology, environmental safety and
alternative energy source development. The proposed acquisition of RRA is
subject to various conditions and no assurance can be given that it will be
completed. See "Forward Looking and Other Statements" in this Item 1.
History
The Company was incorporated in Delaware in 1969. From 1985 until September
1995, the Company, under the name The Lori Corporation ("Lori"), designed and
distributed fashion jewelry (the "Jewelry Business"). Prior thereto, under the
names APECO Corporation and American Photocopy Equipment Company, the Company
engaged in various business activities, including the manufacture of photocopy
machines.
Due to continuing losses in the Jewelry Business and the erosion of the markets
for its products, in September 1995, the Company 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, the Company
acquired all of the capital stock of COMFORCE Global. In addition, in connection
with its new business direction, the Company changed its name to COMFORCE
Corporation. ARTRA GROUP Incorporated ("ARTRA"), then the majority stockholder
of the Company, approved these transactions. At the time of the acquisition,
COMFORCE Global (formerly YIELD TechniGlobal) was one of several wholly-owned
subsidiaries of Spectrum Information Technologies, Inc., a Delaware corporation
("Spectrum"), which had a Chapter 11 petition pending. Originally founded in
1987, Spectrum had acquired YIELD TechniGlobal in 1993.
The purchase price paid by the Company for the COMFORCE Global stock 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
$700,000, including a fee of $500,000 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 an unrelated party for guaranteeing the purchase price to the
seller, (ii) 100,000 shares issued to ARTRA, then the majority stockholder of
<PAGE>
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.
Current management of the Company has questioned its obligation to issue the
150,000 shares to Peter Harvey and the 100,000 shares to ARTRA in consideration
of their guarantees. However, for purposes of presenting earnings per share
data, the Company is recognizing these shares as being issued and outstanding
pending resolution of the disagreement among the parties. See "Discontinued
Jewelry Business" in this Item 1.
In October and November 1995, in order to fund the acquisition of COMFORCE
Global and meet certain working capital requirements, the Company sold 1,946,667
shares of its Common Stock in a private offering in units consisting of one
share of Common Stock with a detachable warrant to purchase one-half share of
Common Stock (973,333 shares in the aggregate) for a selling price of $3.00 per
unit. The gross proceeds from the offering were $5,840,000. The warrants have an
exercise price of $3.375 per share and are exercisable for a period of five
years from the date of grant commencing June 1, 1996 (except for certain
warrants which were subsequently amended to provide for immediate exercise, as
described below).
In order to facilitate the COMFORCE Global acquisition, ARTRA agreed to exchange
all of the Series C Preferred Stock of the Company then held by it (9,701
shares, which constituted all of the issued and outstanding Preferred Stock of
the Company) for 100,000 shares of the Company's Common Stock. The liquidation
value of the Series C Preferred Stock was $19.5 million in the aggregate.
In March 1996, the Company acquired all of the assets of Williams Communication
Services, Inc., a provider of telecommunications and technical staffing
services. The purchase price for the assets of Williams Communication Services,
Inc. ("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
was funded by a revolving line of credit with Chase Manhattan Bank.
In April 1996, the Company entered into an agreement to purchase the assets of
RRA. The purchase price of the assets of RRA is $4.75 million, with a three year
contingent payout based on earnings of RRA. The value of the contingent payout
will not exceed $1 million, for a total purchase price not to exceed $5.75
million. The proposed acquisition of RRA is subject to various conditions and no
assurance can be given that it will be completed. See "Forward Looking and Other
Statements" in this Item 1.
In April 1996, the Company amended the warrants held by two unaffiliated
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 (in the case of warrants to purchase 241,667 shares not immediately
exercisable) and to provide for the issuance of one supplemental warrant at an
exercise price of $9.00 per share for each warrant exercised on or before April
12, 1996. Warrants to purchase all 301,667 shares were exercised in April 1996
for an aggregate exercise price of $943,000. The Company intends to use the
proceeds from the exercise of these warrants for working capital purposes.
On April 12, 1996, ARTRA sold the business and certain assets of the Company's
Lawrence Jewelry Corporation subsidiary.
Strategy
Plan for Growth
The Company's objective is to become the leading provider of telecommunications
and information technology staffing services. The Company established its
telecommunications staffing business with the acquisition of COMFORCE Global in
October 1995, and further strengthened its base with the acquisition of Williams
in March 1996.
<PAGE>
The Company has identified the area of skilled technical contract labor and
consulting for the telecommunications and information technology sectors as a
potentially high growth, profitable market niche that could benefit from new
opportunities in the wireless telephone industry and growth in networked
information systems and the "information superhighway." The Company believes
that it is positioned to capitalize on the anticipated continued growth in the
telecommunications and information technology and technical sectors due to its
size and industry expertise in providing a wide range of staffing services. The
Company will seek to grow significantly through strategic acquisitions, the
opening of offices in new and existing markets and aggressive recruiting,
training, and marketing of industry specialists with a wide range of technical
expertise.
Strategic Acquisitions
The Company's growth strategy includes the acquisition of established,
profitable regional staffing companies in markets with attractive growth
opportunities. These "platform" companies are intended to serve as a basis for
future growth and, therefore, must have the management infrastructure and other
operating characteristics necessary to significantly expand the Company's
presence within a specific market sector or geographic area. In addition, the
Company has as an objective acquisitions of smaller companies to supplement the
operations within (or "tuck-under") a platform and thereby increase market share
and profits with minimal incremental expense. The Company believes that its
reputation in the industry and management style will facilitate its efforts to
acquire smaller businesses that are seeking alliances with larger staffing
companies to more effectively compete for national contracts. The Company's
senior management team has experience in identifying acquisition targets and
integrating acquired businesses into the Company's existing operations.
The Company intends to establish its technical services platform with the
acquisition of RRA, and is actively seeking an acquisition of a platform company
servicing the information technology market sector.
Internal Growth
The Company believes it can increase revenues through internal growth due to its
presence in the information technology and telecommunications sectors. Further,
the Company believes that it can achieve significant economies of scale by
opening and clustering branch offices in new and existing markets through the
allocation of management, advertising, recruiting and training costs over a
larger revenue base. In addition, the Company has targeted selected areas of the
technical services markets which it believes have high growth and profit
potential.
Entrepreneurial Environment.
The Company believes its entrepreneurial business environment rewards
performance. The Company has established guidelines that offer its managers
latitude in operational areas such as hiring, pricing, training, sales and
marketing. In addition, the Company has established profit-based compensation
plans and intends to implement a broadly distributed stock option program to
provide further incentive to employees through ownership in the Company.
RightSourcing(TM)
The Company believes that its RightSourcing(TM) services, which includes a
vendor-on-premise program, provides an attractive opportunity to grow its
operating revenues. Although these programs tend to have slightly lower gross
margins than traditional staffing services, the Company's objective will be to
achieve higher volumes and proportionately lower operating costs which yield
attractive margins. Under these programs, the Company assumes administrative
responsibility for coordinating all temporary personnel services throughout a
client's organization or location. The program provides the Company with an
opportunity to establish long-term relationships with clients and a more stable
source of revenue while providing clients with a dedicated, on-site account
<PAGE>
manager who can more effectively meet the client's changing staffing needs.
Market Overview and Industry Demand
The staffing services industry was once used predominantly as a short-term
solution during peak production periods or to temporarily replace workers due to
illness, vacation or abrupt termination. Since the mid-1980s, the staffing
services sector has evolved into a permanent and significant component of the
human resource plans of many corporations. Corporate restructuring, downsizing,
government regulations, 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 employers to risk exposure of wrongful discharge has led to an
increase in companies using services such as the Company's Engagement Program as
a means of evaluating the qualifications of personnel before hiring them on a
full-time basis. Furthermore, many companies are adopting strategies which focus
on their core businesses and, as a result, are using outsourcing services such
as the Company's RightSourcing(TM) program to staff their non-core businesses.
The Company's core and ring approach to staffing is intended to provide its
customers with immediate access to a large pool of expertise while enabling them
to keep their fixed labor costs.
Telecommunications and information technology staffing services have become the
fastest growing segments of the staffing services industry, according to
Staffing Industry Analysts, a leading trade magazine. Demand for technical
project support, wireless development, software development and other computer
and telecommunications-related services has increased significantly during the
last decade, and the recent enactment of The Telecommunications Act of 1996,
which deregulates substantial portions of the telecommunications industry, as
well as the recent auction by the U.S. Government of radio frequency spectrum to
be utilized for personal communication services ("PCS") wireless communications,
are expected to further increase the demand for such services. Many employers
outsource their management information systems and computer departments or have
utilized the employees of staffing firms in an attempt to meet the increased
demand for computer-skilled personnel. According to Staffing Industry Analysts,
the information technology services sector is estimated to have had revenues of
approximately $7.1 billion in 1994, representing a 25% increase over 1993. This
publication estimates 1995 revenues in the information technology services
sector to have been $8.9 billion, again representing a 25% increase over the
prior year.
The Company believes that the staffing services industry is highly fragmented
and is currently experiencing a trend toward consolidation, primarily due to the
increasing demands by large companies for centralized staffing services, which
smaller staffing companies are unable to meet. The growth of national and
regional accounts resulting from the centralization of staffing decisions by
national and larger regional companies has increased the importance of staffing
companies being able to offer 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.
Sales and Marketing
The Company has developed a sales and marketing strategy which targets accounts
at the international, national and local levels. Such accounts are solicited
through personal sales presentations, telephone marketing, direct mail
solicitation, referrals from clients and advertising in a variety of local and
national media.
The Company's international and national sales and marketing effort is and will
continue to be coordinated by management at the corporate level, which enables
the Company to develop a consistent, focused strategy to pursue national account
opportunities. This strategy allows the Company to capitalize on the desire of
international and national clients to work with a limited number of preferred
vendors for their staffing requirements.
Customers
The significant customers of the Company vary from time to time and the Company
<PAGE>
is not dependent upon any single customer. During the calendar year ended
December 31, 1995, sales to Harris Corporation and Motorola accounted for
approximately 12% and 23%, respectively, of the revenues of the Company (from
its technical staffing business) and of YIELD TechniGlobal (for the period prior
to its acquisition by the Company). In addition, other major customers of that
accounted for less than 10% of the business the Company (and YIELD TechniGlobal)
during such period included Alcatel Network Systems, Hughes Network Systems,
Inc., Ericsson Radio Systems, Inc., AT&T, Bell Atlantic and Sprint
International.
Recruiting of Contract Employees
The Company's COMFORCE Global subsidiary maintains an extensive database of
telecommunications personnel. The Company recruits its contract employees
through an on-going program that primarily utilizes its existing database of
personnel, as well as local and national advertisements, job fairs and
recruiting on the World Wide Web. In addition, the Company has succeeded in
recruiting qualified employees through referrals from its existing labor force.
The Company believes this balanced recruiting strategy will continue to provide
it with high quality contract employees to meet its staffing demands.
In the information technology services sector, the demand for software engineers
and technology consultants significantly exceeds supply. In an effort to attract
a wide spectrum of employees, the Company offers diverse employment options and
training programs. The approaches the Company is utilizing to attract personnel
who are in high demand include offering (i) full-time employee status with an
annual salary irrespective of assignment or (ii) hourly contingent worker status
with compensation tied to the duration of the assignment. The Company intends to
tailor its employment practices to attract personnel in areas of high demand.
Assessment and Training of Employees
To better meet the needs and requirements of its customers and to enhance the
marketability and job satisfaction of its employees, the Company utilizes a
comprehensive system to assess and train its employees. The Company conducts
extensive background, drug and skills screening of potential temporary employees
and contract consultants. The Company also provides these employees with
orientation courses that are tailored to the practices and policies of specific
clients. In addition, the Company offers a broad spectrum of courses concerning
mainframe applications development and maintenance, client/server technology and
desktop-user support.
Competition
The technical staffing sector in which the Company competes is fragmented and
highly competitive, with limited barriers to entry, although it appears to be
experiencing a trend toward consolidation, primarily due to the increasing
demands by large companies for centralized staffing services. With local
markets, smaller firms actively compete with the Company for business, and in
most of these markets, no single company has a dominant share of the market.
Technical services companies have traditionally focused on aerospace and
military contracts; however, since the demilitarization of the U.S. economy,
there has been increased focus by technical services companies on the
telecommunications industry. The Company's ability to compete is dependent on
many factors, including its ability to attract technical personnel, its ability
to offer its services on a cost efficient basis and its ability to successfully
service and support its customers. The Company also competes with larger full-
service and specialized competitors in international, national, regional and
local markets.
Intellectual Property
The Company does not own any patents, registered trademarks or copyrighted
information that is registered. However, the Company considers its employee
database to be proprietary.
<PAGE>
Employees
As of March 31, 1996, the Company employed approximately 22 full-time staff
employees and 350 contract employees (on a full-time equivalency basis) in its
technical staffing business. During 1995, the Company had an average of
approximately 250 employees on assignment per week.
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 relating to its temporary employees. The Company does
not provide health insurance benefits to its temporary employees.
Centralized Business Operations
The Company provides temporary, contracting, and outsourcing services for
approximately 160 clients from its corporate headquarters located in Lake
Success, New York. COMFORCE Global has offices in New York, Washington D.C. and
Florida and plans to open offices in Texas, Illinois, California and Georgia
over the next twelve months. If the RRA acquisition is completed, the Company
expects to have additional offices in Arizona, New Mexico, California,
Washington State, Missouri and South Carolina.
Discontinued Jewelry Business
In September 1995, the Company adopted a plan to discontinue the Jewelry
Business and recorded a provision of $1 million for the estimated costs to
complete the disposal of this business, having earlier recorded a charge against
operations of $12.9 million to write-off the goodwill of the Jewelry Business at
June 30, 1995. In the fourth quarter of 1996, the Company revised its estimate
and provided an additional $600,000 to complete the disposition of the Jewelry
Business.
In conjunction with the COMFORCE Global acquisition, the Company and ARTRA
entered into an Assumption Agreement dated as of October 17, 1995 (the
"Assumption Agreement"), under which 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 is
entitled to receive the net proceeds, if any, from the sale thereof. On April
12, 1996, ARTRA sold the business and certain of the assets of the Company's
Lawrence subsidiary 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. 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.
<PAGE>
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. 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
that 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. The
Company declined to accept this settlement proposal, which was subsequently
withdrawn.
The plaintiffs have produced only limited testamentary evidence, and no
documentary evidence, linking the Company to this site, and the Company 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. Based on the foregoing, management of the Company does not believe
that it is probable that the Company will have any liability for the costs of
the clean-up of this site. The Company intends to vigorously defend itself in
this case.
Under the terms of the Assumption Agreement, 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.
No assurance can, however, be given that ARTRA will be financially capable of
satisfying its obligations under the Assumption Agreement.
Forward Looking and Other Statements
The statements above 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. Various factors could prevent the Company from realizing
these objectives, including the following:
Unfavorable economic conditions generally or in the telecommunications or
computing industries could cause potential users of technical and computing
services to decide to cancel or postpone capital expansion, research and
development or other projects which require the engagement of temporary
technical staff workers or the use of consulting and other technical expertise
offered by the Company.
The Company's ability to expand through acquisitions is dependent on its ability
to identify attractive acquisition opportunities and to finance such
acquisitions, and no assurance can be given that it will be successful in doing
so. Heightened competition in the staffing industry by existing or new
competitors could make such acquisitions uneconomic or otherwise more difficult
or costly. Unless the Company's operations are considered to be successful by
bank or other institutional lenders or investors, it is unlikely that the
Company will be able to finance its expansion through acquisitions.
The Company is seeking to expand rapidly in what its management perceives as a
"window of opportunity" in the market. Expansion undertaken at an accelerated
pace, principally through acquisitions, creates added risk that the analysis of
businesses acquired will fail to uncover business risks or adequately reveal
weaknesses in the markets, management or operations being considered.
Furthermore, the Company expects in many cases to retain existing management of
acquired companies to manage the businesses acquired. Compensation incentives
designed to enroll the existing management, which the Company expects to offer,
are difficult to structure in a manner so as to provide lasting benefits to the
acquiring company.
Heightened competition for customers as well as for technical personnel could
adversely impact the Company's margins. Heightened competition for customers
could result in the Company being unable to maintain its current fee scales
without being able to reduce its personnel costs. Shortages of qualified
technical personnel, which currently exist in some technical specialties and
could occur in others in the future, could result in the Company being unable to
fulfill its customers' needs or in the customers electing to employ technical
staff directly (rather than using the Company's services) to ensure the
availability of such personnel. Many of the Company's competitors have more
extensive financial and personnel resources than does the Company.
The Company's proposed acquisition of the assets of RRA is subject to the
Company's completion, and satisfaction with the results, of its due diligence
review of RRA, the Company's receipt of consents to the assignment of contracts
<PAGE>
Item 2. Properties
The Company and its COMFORCE Global subsidiary maintain their headquarters in a
2,500 square foot facility in Lake Success, New York under a lease which expires
in 2000. COMFORCE Global also maintains offices in New York, Washington D.C. and
Florida in leased facilities of from 750 to 2,000 square feet. The Company
believes that its facilities are adequate for their present and reasonably
anticipated future business requirements.
The Company's discontinued Lawrence Jewelry Corporation subsidiary (certain
assets of which were sold on April 12, 1996) maintains an 86,000 square foot
distribution facility in Woonsocket, Rhode Island under a lease which expires in
October 1996, and a 32,000 square foot distribution facility in Plymouth,
Minnesota under a lease which expires in 2003.
Item 3. Legal Proceedings
The Company is involved in a proceeding described above under "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. The Company is presently
soliciting quotations to obtain directors' and officers' liability insurance and
errors and omissions coverage.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the Company's security holders for consideration
during the fourth quarter of 1995.
<PAGE>
PART II
Item 5. Market For the Registrant's Common Equity and Related Shareholder
Matters
The Company's Common Stock, $.01 par value, is traded on the American Stock
Exchange ("AMEX"). The high and low sales prices for the Company's Common Stock,
as reported by the AMEX during the past two years, were as follows:
1996 1995 1994
-------------- --------------- ---------------
High Low High Low High Low
---- --- ---- --- ---- ---
First Quarter $10-3/8 $6 $3-7/8 $1-15/16 $6 $5
Second Quarter 3-1/2 2 7-1/8 3-1/8
Third Quarter 4-3/4 1- 9/16 8-1/8 5-1/4
Fourth Quarter 9-1/4 3- 1/4 6-3/8 1-7/8
COMFORCE anticipates that earnings, if any, will be retained for expansion of
its technical staffing and consulting services business at least through 1996
and, therefore, does not anticipate that dividends will be paid in 1996. Lori
did not pay dividends in 1995.
As of March 31, 1996, there were approximately 5,600 shareholders of record.
<PAGE>
Item 6. Selected Financial Data.
Following is a consolidated summary of selected financial data of the Company
for each of the five years in the period ended December 31, 1995. Certain
selected financial data for each of the four years in the period ended December
31, 1994 has been reclassified to reflect the discontinuance of the Company's
fashion costume jewelry business effective September 30, 1995. Selected
financial data for the year ended December 31, 1995 includes the operations of
COMFORCE Global from the date of its acquisition, completed on October 17, 1995.
Certain pro forma selected financial data for the year ended December 31, 1995
is presented as if COMFORCE Global had been acquired as of January 1, 1995.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues (A) $ 2,387 $ -- $ -- $ -- $ --
Stock compensation charge (B) 3,425 -- -- -- --
Loss from continuing operations (4,332) (2,282) (1,456) (421) (5,129)
Loss from discontinued operations (C) (17,211) (16,220) (216) (34,198) (1,970)
Loss before extraordinary credits (21,543) (18,502) (1,672) (34,619) (7,099)
Extraordinary credits (D) 6,657 8,965 22,057 -- --
Net earnings (loss) (14,886) (9,537) 20,385 (34,619) (7,099)
Earnings (loss) per share:
Loss from continuing operations (.95) (.72) (.39) (.13) (1.62)
Loss from discontinued operations (3.74) (5.08) (.06) (10.86) (.63)
Loss before extraordinary credits (4.69) (5.80) (.45) (10.99) (2.25)
Extraordinary credits 1.45 2.81 6.03 -- --
Net earnings (loss) (3.24) (2.99) 5.58 (10.99) (2.25)
Total assets (E) 8,536 18,704 40,174 42,818 66,877
Long-term debt -- -- -- 6,105 23,548
Receivable from (payable to) ARTRA (F) 1,046 (289) -- (16,025) (15,981)
Liabilities to be assumed by ARTRA (F) 4,240 -- -- -- --
Liabilities subject to compromise -- -- -- 41,500 --
Debt subsequently discharged -- 7,105 -- --
Cash dividends -- -- -- -- --
</TABLE>
<PAGE>
(A) Revenues for the year ended December 31, 1995 represent revenues of
COMFORCE Global from the date of its acquisition, October 17, 1995.
Selected financial data of the Company's fashion costume jewelry business
for the nine months ended September 30, 1995 and for each of the four
years in the period ended December 31, 1994 has been reclassified to
discontinued operations.
(B) 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 services business.
(C) The loss from discontinued operations for the year ended December 31, 1995
includes a charge to operations of $12,930,000 to write-off the remaining
goodwill of the Company's fashion costume jewelry operations effective
June 30, 1995 and a provision of $1,600,000 for loss on disposal of the
Company's fashion costume jewelry operations. The loss from discontinued
operations for the year ended December 31, 1994 includes a charge to
operations of $10,800,000 representing a write-off of New Dimensions
goodwill. The loss from discontinued operations for the year ended
December 31, 1992 includes charges to operations of $8,664,000
representing an impairment of goodwill at December 31, 1992 and $8,500,000
representing increased reserves for markdowns allowances and inventory
valuation.
(D) 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. The 1993 extraordinary credit represents a gain from a net
discharge of indebtedness due to the reorganization of the Company's New
Dimensions subsidiary. See Note 7 to the Company's Consolidated Financial
Statements.
(E) As partial consideration for a debt settlement agreement, in December,
1994 the Company's bank lender received all of the assets of Lori's former
New Dimensions subsidiary. See Note 7 to the Company's Consolidated
Financial Statements.
(F) In conjunction with the COMFORCE Global acquisition, ARTRA agreed to
assume substantially all pre-existing Lori liabilities. 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 pre-existing Lori 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 is able to make 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 cumulative preferred stock for
100,000 newly issued shares of the Company's common stock. During 1994,
ARTRA made net advances to Lori of $2,531,000. Effective December 29,
1994, ARTRA exchanged $2,242,000 of its notes and advances for additional
Lori preferred stock. In February 1993, ARTRA transferred all of its notes
to Lori's capital account. See Notes 9 and 15 to the Company's
Consolidated Financial Statements.
<PAGE>
On October 17, 1995, the Company completed the acquisition of all of the capital
stock of COMFORCE Global, a provider of telecommunications and computer
technical staffing and consulting services. Due to a pattern of reduced sales
volume resulting in continuing operating losses, in September 1995, the Company
adopted a plan to discontinue its Jewelry Business. The Company's consolidated
financial statements have been reclassified to report separately results of
operations of the discontinued Jewelry Business. Therefore, a comparison of the
Company's consolidated results of operations for the years ended December 31,
1995 and 1994 is not meaningful. The following tables present unaudited pro
forma results of continuing operations for the years ended December 31, 1995 and
1994 as if the acquisition of COMFORCE Global had been consummated as of January
1, 1994.
<TABLE>
<CAPTION>
Year Ended December 31 1995
(unaudited in thousands)
---------------------------------------------------
COMFORCE Pro Forma
Historical Global(A) Adjustments Pro Forma
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 2,387 $ 9,568(C) $ 11,955
------- ------- -------
Operating costs and expenses:
Cost of revenues 1,818 7,178 8,996
Stock compensation (E) 3,425 3,425
Spectrum corporate management fees (D) 1,140 1,140
Other operating costs and expenses 823 1,397 $ 50(B) 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(C) (201)
------- ------- -------- -------
(618) 7 410 (201)
------- ------- -------- -------
Earnings (loss) from continuing operations
before income taxes (4,297) (140) 360 (4,077)
(Provision) credit for income taxes (35) 21 (14)
------- ------- -------- -------
Loss from continuing operations $ (4,232) $ (119) $ 460 $ (4,091)
======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 1994
(unaudited in thousands)
---------------------------------------------------
(A) COMFORCE Pro Forma
Historical Global(B) Adjustments Pro Forma
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 8,245 $ 8,245
------- -------
Operating costs and expenses:
Cost of revenues 6,417 6,417
Spectrum corporate management fees (D) 803 803
Other operating costs and expenses $ 966 1,134 $ 68(B) 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)
======= ======= ======== =======
</TABLE>
<PAGE>
Pro forma adjustments to the unaudited condensed consolidated statement of
operations:
(A) The pro forma data presented for COMFORCE Global'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.
(B) Amortization of goodwill arising from the COMFORCE Global
Acquisition. The table below reflects where amortization of
goodwill has been recorded.
1995 1994
-------- --------
Historical Lori (Comforce Corp.) $ 51,000 $ -
Historical Global` 142,000 175,000
Proforma Adjustments 50,000 68,000
-------- --------
Adjusted proforma per financial
statements $243,000 $243,000
======== ========
(C) Reverse interest expense on notes and other liabilities to be
assumed by ARTRA. The interest adjustment in 1995 was for
interest on notes directly related to Lori Corporation activities
and were incurred in 1995. These liabilities were not outstanding
during 1994 and, accordingly, a similar interest adjustment is
not required.
(D) Corporate management fees from COMFORCE Global's former parent,
Spectrum Information Technologies,Inc. The amount of these
management fees may not be representative of costs incurred by
COMFORCE Global on a stand alone basis.
(E) 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.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion supplements the information found in the consolidated
financial statements and related notes:
Change in Business
From 1985 until September 1995, the Company, under the name The Lori Corporation
("Lori"), designed and distributed fashion costume jewelry. Due to continuing
losses in the Jewelry Business and the erosion of the markets for its products,
Lori 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, the Company acquired 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 Global Inc.
("COMFORCE Global")), a provider of technical staffing and consulting services
in the information technology and telecommunications sectors. Accordingly, on
October 17, 1995, the Company became a provider of technical staffing and
consulting services. Prior to its acquisition by COMFORCE, COMFORCE Global was a
wholly owned subsidiary of Spectrum Information Technologies, Inc. In connection
with its new business direction, the Company changed its name to COMFORCE
Corporation. As discussed under "Discontinued Jewelry Business" in this Item 7,
effective September 30, 1995, the Company adopted a plan to discontinue the
Jewelry Business.
The price paid by the Company for the COMFORCE Global 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 $700,000, including a fee of $500,000 to a related party,
and 500,000 shares of the Company's Common Stock 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 an 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 $6.4 million purchase price to the seller.
Current management of the Company has questioned its obligation to issue the
150,000 shares to Peter Harvey and the 100,000 shares to ARTRA in consideration
of their guarantees. However, for purposes of presenting earnings per share
data, the Company is recognizing these shares as being issued and outstanding
pending resolution of the disagreement among the parties.
In order to facilitate the COMFORCE Global acquisition, ARTRA agreed to exchange
all of the Series C Preferred Stock of the Company then held by it (9,701
shares, which constituted all of the issued and outstanding Preferred Stock of
the Company) for 100,000 shares of the Company's Common Stock. The liquidation
value of the Series C Preferred Stock was $19.5 million in the aggregate. In
addition, the Company and ARTRA entered into an Assumption Agreement dated as of
October 17, 1995 (the "Assumption Agreement"), under which 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 is
entitled to receive the net proceeds, if any, from the sale thereof. On April
12, 1996, ARTRA sold the business and certain of the assets of the Company's
Lawrence subsidiary for a selling price of $252,000 plus certain proceeds
subsequently realized from the sale of existing invetory, 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.
In October and November 1995, in order to fund the acquisition of COMFORCE
Global and meet certain working capital requirements, the Company sold 1,946,667
shares of its Common Stock in a private offering in units consisting of one
share of Common Stock with a detachable warrant to purchase one-half share of
Common Stock (973,333 shares in the aggregate) for a selling price of $3.00 per
unit. The gross proceeds from the offering were $5,840,000. The warrants have an
exercise price of $3.375 per share and are exercisable for a period of five
years from the date of grant commencing June 1, 1996 (except for certain
<PAGE>
warrants which were subsequently amended to provide for immediate exercise, as
described below).
The acquisition of COMFORCE Global was accounted for by the purchase method and,
accordingly, the assets and liabilities of COMFORCE Global were included in the
Company's financial statements at their estimated fair market value at the date
of acquisition.
In March 1996, the Company acquired all of the assets of Williams Communication
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 was funded by a revolving line
of credit with Chase Manhattan Bank.
In April 1996, the Company entered into an agreement to purchase the assets of
RRA Inc. and certain affiliated entities ("RRA"). The purchase price of the
assets of RRA is $4.75 million, with a three year contingent payout based on
earnings of RRA. The value of the contingent payout will not exceed $1 million,
for a total purchase price not to exceed $5.75 million. The proposed acquisition
of RRA is subject to various conditions and no assurance can be given that it
will be completed. See "1996 Plan of Operations" in this Item 7.
In April 1996, the Company amended the warrants held by two unaffiliated
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 (in the case of warrants to purchase 241,667 shares not immediately
exercisable) and to provide for the issuance of one supplemental warrant at an
exercise price of $9.00 per share for each warrant exercised on or before April
12, 1996. Warrants to purchase all 301,667 shares were exercised in April 1996
for an aggregate exercise price of $943,000. The Company intends to use the
proceeds from the exercise of these warrants for working capital purposes.
1996 Plan of Operations
The Company believes that it is currently a leading provider of
telecommunications and information technology staffing services. The Company
established its telecommunications staffing business with the acquisition of
COMFORCE Global in October 1995, and further strengthened its base with the
acquisition of Williams in March 1996. COMFORCE Global provides
telecommunications and computer specialists and expertise on a project
outsourcing basis, primarily to Fortune 500 companies worldwide. It offers
manpower on a contract basis to the telecommunications and computer industries,
on both a short-term and long-term basis, to meet its customers' needs for
virtually every staffing level within these industries, including wireless
infrastructure services, network management, engineering, design and technical
support.
The Company intends to establish its technical services platform with the
acquisition of RRA, and is actively seeking an acquisition of a platform company
servicing the information technology market sector. Upon completion of the
acquisition of RRA, COMFORCE Technical Services will provide specialists for
supplemental staffing assignments as well as outsourcing and vendor-on-premises
programs, primarily in the electronics, aviation, telecommunications and
information technology business sectors. As described below, the proposed
acquisition of RRA is subject to various conditions and no assurance can be
given that it will be completed.
The Company has identified the area of skilled technical contract labor and
consulting for the telecommunications and information technology sectors as a
potentially high growth, profitable market niche that could benefit from new
opportunities in the wireless telephone industry and growth in networked
information systems and the "information superhighway." The Company believes
that it is positioned to capitalize on the anticipated continued growth in the
telecommunications and information technology and technical sectors due to its
size, and industry expertise in providing a wide range of staffing services. The
Company will seek to grow significantly through strategic
<PAGE>
acquisitions, the opening of offices in new and existing markets and aggressive
recruiting, training, and marketing of industry specialists with a wide range of
technical expertise.
The Company's growth strategy includes the acquisition of established,
profitable regional staffing companies in markets with attractive growth
opportunities. These "platform" companies are intended to serve as a basis for
future growth and, therefore, must have the management infrastructure and other
operating characteristics necessary to significantly expand the Company's
presence within a specific market sector or geographic area. In addition, the
Company has as an objective acquisitions of smaller companies the operations of
which supplement and can be integrated into the established platform companies
to increase market share and profits with minimal incremental expense.
The Company believes it can also increase revenues though internal growth due to
its presence in the information technology and telecommunications sectors.
Further, the Company believes that it can achieve significant economies of scale
by opening and clustering branch offices in new and existing markets through the
allocation of management, advertising, recruiting and training costs over a
larger revenue base. In addition, the Company has targeted selected areas of the
technical services markets which it believes have high growth and profit
potential.
The statements above 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. Various factors could prevent the Company from realizing
these objectives, including the following:
Unfavorable economic conditions generally or in the telecommunications or
computing industries could cause potential users of technical and computing
services to decide to cancel or postpone capital expansion, research and
development or other projects which require the engagement of temporary
technical staff workers or the use of consulting and other technical expertise
offered by the Company.
The Company's ability to expand through acquisitions is dependent on its ability
to identify attractive acquisition opportunities and to finance such
acquisitions, and no assurance can be given that will be successful in doing so.
Heightened competition in the staffing industry by existing or new competitors
could make such acquisitions uneconomic or otherwise more difficult or costly.
Unless the Company's operations are considered to be successful by bank or other
institutional lenders or investors, it may be difficult for the Company to
finance its expansion through acquisitions.
The Company is seeking to expand rapidly in what its management perceives as a
"window of opportunity" in the market. Expansion undertaken at an accelerated
pace, principally through acquisitions, creates added risk that the analysis of
businesses acquired will fail to uncover business risks or adequately reveal
weaknesses in the markets, management or operations being considered.
Furthermore, the Company expects in many cases to retain existing management of
acquired companies to manage the businesses acquired. Compensation incentives
designed to enroll the existing management, which the Company expects to offer,
are difficult to structure in a manner so as to provide lasting benefits to the
acquiring company.
Heightened competition for customers as well as for technical personnel could
adversely impact the Company's margins. Heightened competition for customers
could result in the Company being unable to maintain its current fee scales
without being able to reduce its personnel costs. Shortages of qualified
<PAGE>
technical personnel, which currently exist in some technical specialties and
could occur in others in the future, could result in the Company being unable to
fulfill its customers' needs or in the customers electing to employ technical
staff directly (rather than using the Company's services) to ensure the
availability of such personnel. Many of the Company's competitors have more
extensive financial and personnel resources than does the Company.
The Company's proposed acquisition of the assets of RRA is subject to the
Company's completion, and satisfaction with the results, of its due diligence
review of RRA, the Company's receipt of consents to the assignment of contracts
(and, in the case of certain government contracts, governmental clearances) from
certain significant customers of RRA, the satisfaction of RRA and its principals
of the short-term financing required to complete the acquisition as well as the
Company's long-term financing plans, and other customary contingencies, and no
assurance can be given that such conditions and contingencies will be satisfied.
Results of Operations
On October 17, 1995, the Company completed the acquisition of all of the capital
stock of COMFORCE Global, a provider of technical staffing and consulting
services in the information technology and telecommunications sectors. Due to a
pattern of reduced sales volume resulting in continuing operating losses, in
September 1995, the Company adopted a plan to discontinue its Jewelry Business.
The Company's consolidated financial statements have been reclassified to report
separately results of operations of the discontinued Jewelry Business.
Therefore, a comparison of the Company's consolidated results of operations for
the years ended December 31, 1995 and December 31, 1994 or of December 31, 1994
and December 31, 1993 is not meaningful. See "Discontinued Jewelry Business" in
this Item 7 for a discussion of the discontinued operations.
Pro Forma 1995 Compared to Pro Forma 1994
Set forth below is a discussion of the Company's pro forma results of continuing
operations for the years ended December 31, 1995 and December 31, 1994. The
Company's pro forma results of continuing operations for the years ended
December 31, 1995 and December 31, 1994 are presented in Item 6 of this Report
as if the acquisition of COMFORCE Global had been consummated as of January 1,
1994.
Pro forma revenues of $11,955,000 for the year ended December 31, 1995 were
$3,710,000, or 45.0%, higher than pro forma revenues for the year ended December
31, 1994. The increase in 1995 pro forma revenues is attributable to the overall
growth and expansion of COMFORCE Global's telecommunications and computer
technical staffing services business. Pro forma cost of revenues of $8,996,000
for the year ended December 31, 1995 increased $2,578,000 as compared to pro
forma cost of revenues for the year ended December 31, 1994. Pro forma cost of
revenues in the year ended December 31, 1995 was 75.2% of pro forma revenues
compared to a pro forma cost of revenues percentage of 77.8% for the year ended
December 31, 1994. The 1995 pro forma cost of revenues increase is principally
attributable to the increase in sales volume as noted above. The 1995 pro forma
cost of revenues percentage decrease of 2.6% is primarily attributable to
certain consulting fees incurred in 1994.
Corporate management fees from COMFORCE Global's former parent, Spectrum
Information Technologies, Inc., reflect an allocation of corporate overhead;
however, such charges will no longer continue as a result of COMFORCE Global's
acquisition by the Company in October 1995. In the opinion of management, the
amount of these fees are not representative of costs incurred by COMFORCE Global
on a stand alone basis.
Pro forma operating expenses for the year ended December 31, 1995 increased
$3,580,000 as compared to pro forma operating expenses for the year ended
December 31, 1994. The 1995 increase in pro forma operating expenses is
principally attributable to a compensation charge of $3,425,000 related to the
issuance of a 35% interest in the Company as additional compensation for certain
individuals to enter into employment or consulting services agreements to manage
the Company's entry into and development of the telecommunications and computer
technical staffing services business.
Pro forma operating loss in the year ended December 31, 1995 was $3,989,000 as
compared to pro forma operating loss of $1,143,000 in the year ended December
31, 1994. The increased 1995 pro forma operating loss is principally
attributable to a compensation charge of $3,425,000 related to the issuance of a
35% interest in
<PAGE>
the Company as additional compensation for certain individuals to enter into
employment or consulting services agreements to manage the Company's entry into
and development of the telecommunications and computer technical staffing
services business and Increased Corporate Management fees as discussed above,
partially offset by an increased pro forma gross margin attributable to the
overall growth and expansion of COMFORCE Global's telecommunications and
computer technical staffing services business.
Pro forma other expense, principally interest, net for the year ended December
31, 1995 decreased $1,106,000 as compared to the year ended December 31, 1994.
The 1995 decrease is principally due to the 1994 and 1995 discharges of
indebtedness under terms of the bank loan agreements of Lori and its fashion
costume jewelry subsidiaries.
Due to the Company's tax loss carryforwards and the uncertainty of future
taxable income, no income tax benefit was recognized in connection with the
Company's 1995 and 1994 pre-tax losses from continuing operations.
Liquidity and Capital Resources
Management believes that the Company will generate cash flow from operations
which, together with proceeds from the exercise of certain warrants of $943,000
in April 1996, will be sufficient to fund its telecommunications and computer
technical staffing services business for the remainder of 1996; however, the
Company does not expect to have sufficient liquidity or capital resources to
fund its planned expansion through acquisitions and other means. The Company
intends to seek debt and/or equity financing to fund such planned expansion. See
"Change in Business" and "1996 Plan of Operations" in this Item 7.
Cash and cash equivalents provided by the Company, COMFORCE Global, from October
17, 1995 through December 31, 1995 are as follows:
The net increase in cash and cash equivalents of $313,000 is comprised of net
cash provided by operating activities of $317,000 and cash used in investing
activities of $4,000. Cash flows used in investing activities is attributable to
purchase of equipment for the new COMFORCE Global offices.
Cash and cash equivalents for the Company on a consolidated basis for the years
1995 and 1994 are as follows:
Cash and cash equivalents decreased $134,000 during the year ended December 31,
1995. Cash flows used by operating activities of $2,023,000 and cash flows used
by investing activities of $5,686,000 exceeded cash flows from financing
activities of $7,575,000. Cash flows used by operating activities were
principally attributable to the Company's loss from operations, exclusive of the
effect of a charge to operations of $12,930,000 representing an impairment of
goodwill at the Company's discontinued Jewelry Business, a compensation charge
to continuing operations of $3,425,000 representing the issuance in aggregate of
a 35% interest in the Company as additional consideration under employment or
consulting services agreements with certain individuals to manage the Company's
entry into and development of the telecommunications and computer technical
staffing services business, and the effects of other non-cash charges. Cash
flows from investing activities consisted of a down payment and certain other
acquisition related costs aggregating $5,580,000 in connection with the COMFORCE
Global acquisition completed in October 1995, expenditures for retail fixtures
for the discontinued Jewelry Business of $631,000 and expenditures for equipment
of $25,000, less $550,000 deposited in trust in December 1994 used to fund an
installment payment in January 1995 for court-ordered payments arising from the
<PAGE>
May 1993 reorganization of the former New Dimensions subsidiary. Cash flows from
financing activities were attributable to proceeds from a private placement of
the Company's common stock (used principally to fund the COMFORCE Global
acquisition) and a net increase in short-term borrowings used principally to
fund working capital requirements.
During the year ended December 31, 1995, the Company's working capital
deficiency increased by $851,000. The increase in working capital deficiency is
principally attributable to net liabilities of the discontinued Jewelry Business
and a short-term loan used to fund the down payment for the COMFORCE Global
acquisition.
Discontinued Jewelry Business
In conjunction with the COMFORCE Global acquisition, the Company and ARTRA
entered into an Assumption Agreement dated as of October 17, 1995 (the
"Assumption Agreement"), under which 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 is
entitled to receive the net proceeds, if any, from the sale thereof. On April
12, 1996, ARTRA sold the business and certain of the assets of the Company's
Lawrence subsidiary for a selling price of $252,000 plus certain proceeds
subsequently realized from the sale of existing invetory, 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.
At March 31, 1995 and at December 31, 1994, Lori's business plan had anticipated
that the restructuring of its debt, along with a consolidation and restructuring
of its Jewelry Business, would permit it to obtain a sufficient level of
borrowings to fund its capital requirements in 1995 and beyond. However, due to
the continued losses from operations and its inability to obtain conventional
bank financing, management of Lori determined in September 1995 to discontinue
the Jewelry Business. The Company recorded a provision of $1 million for the
estimated costs to complete the disposal of this business, having earlier
recorded a charge against operations of $12.9 million to write-off the goodwill
of the Jewelry Business at June 30, 1995. In the fourth quarter of 1996, the
Company revised its estimate and provided an additional $600,000 to complete the
disposition of the Jewelry Business.
Environmental Matters
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 (see "History" in 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 that 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. The Company declined to accept this settlement proposal,
which was subsequently withdrawn.
The plaintiffs have produced only limited testamentary evidence, and no
documentary evidence, linking the Company to this site, and the Company 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. Based on the foregoing, management of the Company does not believe
that it is probable that the Company will have any liability for the costs of
the clean-up of this site. The Company intends to vigorously defend itself in
this case.
Under the terms of the Assumption Agreement, ARTRA has agreed to pay and
discharge substantially all of the Company's pre-existing liabilities and
obligations, including environmental liabilities. Consequently, the Company is
entitled to indemnification from ARTRA for any environmental liabilities
associated with the Gary, Indiana site. No assurance can, however, be given that
ARTRA will be financially capable of satisfying its obligations under the
Assumption Agreement.
See "Environmental Matters" in Item 1.
Net Operating Loss Carryforwards
At December 31, 1995, the Company and its subsidiaries had Federal income tax
loss carryforwards of approximately $53,000,000 available to be applied against
future taxable income, if any, expiring principally in 1996 - 2010. Section 382
of the Internal Revenue Code of 1986 limits a corporation's utilization of its
Federal income tax loss carryforwards when certain changes in the ownership of a
corporation's Common Stock occurs. The Company has recently issued a significant
number of shares of its Common Stock in conjunction with the COMFORCE Global
<PAGE>
acquisition and certain related transactions. Accordingly, the Company is
currently subject to significant limitations regarding the utilization of its
Federal income tax loss carryforwards.
Seasonality
The Company's recently acquired technical staffing and consulting services
business is not subject to significant seasonal fluctuations.
Recently Issued Accounting Pronouncements
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," 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. This new accounting principle is effective for the
Company's fiscal year ending December 31,1996. The Company believes that
adoption will not have a material impact on its financial statements.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based on new fair value
accounting rules. Although expense recognition for employee stock based
compensation is not mandatory, the pronouncement requires companies that choose
not to adopt the new fair value accounting to disclose the pro-forma net income
and earnings per share under the new method. This new accounting principle is
effective for the Company's fiscal year ending December 31, 1996. The Company
believes that adoption will not have a material impact on its financial
statements as the Company will not adopt the new fair value accounting, but
instead comply with the disclosure requirements.
Impact of Inflation and Changing Prices
Inflation has become a less significant factor in the economy; however, to the
extent permitted by competition, the Company generally passes increased costs to
its customers.
Item 8. Financial Statements and Supplementary Data
Financial Statements and Schedules as listed on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
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 29, 1996.
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 29, 1996.
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 29, 1996.
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 29, 1996.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements as listed on Page F-1.
2. Financial Statement Schedules as listed on Page F-1.
3. Exhibits as listed on Page E-1.
(b) Reports on Form 8-K.
The following reports were filed by the Company during the
fourth quarter of 1995:
On October 11, 1995 the Company filed a Current Report on
Form 8-K to report that the Company had entered into (i) a
stock purchase agreement under which the Company agreed to
participate in the acquisition of COMFORCE Global, and (ii)
employment and consulting services agreements with certain
individuals to manage the Company's entry into and
development of the telecommunications and computer technical
staffing services business.
On October 31, 1995 the Company filed a Current Report on
Form 8-K to report the completion of the acquisition of
COMFORCE Global.
On December 28, 1995 the Company filed an Amendment No. 1 to
its Form 8-K dated October 17, 1995 to file 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.
<PAGE>
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: September 24, 1996
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
COMFORCE CORPORATION AND SUBSIDIARIES
Report of Independent Accountants
Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations
for the years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Schedules:
II. Valuation and Qualifying Accounts
Schedules other than those listed are omitted as they are not applicable or
required or equivalent information has been included in the financial statements
or notes thereto.
COMFORCE GLOBAL, INC.
Financial Statements as of September 30, 1995 and for the
nine month period ended September 30, 1995 and
Financial Statements as of December 31, 1994 and
for the year ended December 31, 1994
Report of Independent Accountants
Balance Sheets
Statements of Operations and Retained Earnings (accumulated deficit)
Statements of Cash Flows
Notes to Combined Financial Statements
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
COMFORCE Corporation
We have audited the consolidated financial statements and the financial
statement schedules of COMFORCE Corporation (formerly The Lori Corporation) and
Subsidiaries as listed in the index on page F-1 of this Form 10-K. These
financial statements and financial statement schedules are the responsibility of
COMFORCE Corporation's management. Our responsibility is to express an opinion
on these financial statements and financial statement schedules 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, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 15, 1996
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, December 31,
1995 1994
-------- --------
ASSETS
Current assets:
Cash and equivalents $649 $783
Restricted cash and equivalents - 550
Receivables, including $151 of
unbilled revenue in 1995 and
allowance for doubtful accounts
and markdowns of $1,338 in 1994 1,754 814
Inventories - 2,105
Other 61 260
Receivable from ARTRA GROUP Incorporated 1,046 -
--------- ---------
Total current assets 3,510 4,512
--------- ---------
Property and equipment
Equipment 97 1,376
Leasehold improvements - 187
--------- ---------
97 1,563
Less accumulated depreciation and amortization 7 1,119
--------- ---------
90 444
--------- ---------
Other assets:
Excess of cost over net assets acquired,
net of accumulated amortization of
$51 in 1995 and $3,415 in 1994 4,801 13,140
Other 135 608
--------- ---------
4,936 13,748
--------- ---------
$8,536 $18,704
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, December 31,
1995 1994
-------- --------
LIABILITIES
Current liabilities:
Notes payable $500
Current maturities of long-term debt - $750
Accounts payable, including $289 due to
ARTRA GROUP Incorporated in 1994 75 3,703
Accrued expenses, including $250 due to
a related party in 1995 719 905
Income taxes 214 -
Liabilities to be assumed by
ARTRA GROUP Incorporated,
and net liabilities of
discontinued operations 3,699 -
--------- ---------
Total current liabilities 5,207 5,358
--------- ---------
Debt subsequently discharged - 7,105
--------- ---------
Noncurrent liabilities to be
assumed by ARTRA GROUP Incorporated 541 -
--------- ---------
Obligations expected to be settled by
the issuance of common stock 550 -
--------- ---------
Other noncurrent liabilities - 963
--------- ---------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value,
authorized 1,000 shares,
all series; Series C, issued 10 shares in 1994,
including accrued dividends - 19,515
Common stock, $.01 par value;
authorized 10,000 shares;
issued 9,309 shares in 1995
and 3,265 shares in 1994 92 32
Less restricted common stock (100 shares) - (700)
Additional paid-in capital 95,993 65,392
Accumulated deficit (93,847) (78,961)
--------- ---------
2,238 5,278
--------- ---------
$8,536 $18,704
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMFORCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
(In thousands, except per share data)
1995 1994* 1993*
--------- --------- ---------
Revenues $2,387
---------
Costs and expenses:
Cost of revenues 1,818
Stock compensation 3,425
Selling, general and administrative 823 $966 $701
--------- --------- ---------
6,066 966 701
--------- --------- ---------
Operating loss (3,679) (966) (701)
--------- --------- ---------
Other expense:
Interest expense (585) (1,316) (754)
Other expense, net (33) - (1)
--------- --------- ---------
(618) (1,316) (755)
--------- --------- ---------
Loss from continuing operations
before income taxes (4,297) (2,282) (1,456)
Provision for income taxes (35) - -
--------- --------- ---------
Loss from continuing operations (4,332) (2,282) (1,456)
Loss from discontinued operations (17,211) (16,220) (216)
--------- --------- ---------
Loss before extraordinary credits (21,543) (18,502) (1,672)
Extraordinary credits,
net discharge of indebtedness 6,657 8,965 22,057
--------- --------- ---------
Net earnings (loss) ($14,886) ($9,537) $20,385
========= ========= =========
Earnings (loss) per share:
Continuing operations ($0.95) ($0.72) ($0.39)
Discontinued operations (3.74) (5.08) (0.06)
--------- --------- ---------
Loss before extraordinary credits (4.69) (5.80) (0.45)
Extraordinary credits 1.45 2.81 6.03
--------- --------- ---------
Net earnings (loss) ($3.24) ($2.99) $5.58
========= ========= =========
Weighted average number of shares
of common stock and common
stock equivalents outstanding 4,596 3,195 3,656
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
- -----------------------------------------------
* As reclassified for discontinued operations.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1995, 1994 and 1993
(In thousands, except share data)
<TABLE>
<CAPTION>
Restricted Total
Preferred Stock Common Stock Common Stock Additional Shareholders'
----------------- ------------------- ---------------- Paid-in Accumulated Equity
Shares Dollars Shares Dollars Shares Dollars Capital (Deficit) (Deficit)
------- --------- ---------- ------- -------- ------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 7,459 $17,273 3,148,526 $31 $44,626 ($89,809) ($27,879)
Net earnings - - - - - 20,385 20,385
Transfer of notes payable
to ARTRA to Lori's
capital account - - - - 15,990 - 15,990
Exercise of stock
options and warrants - - 9,250 - 38 - 38
Common stock issued to
pay liabilities - - 5,532 - 32 - 32
Fractional shares purchased - - (536) - (6) - (6)
------- --------- ---------- ------- -------- ---------- -----------
Balance at December 31, 1993 7,459 17,273 3,162,772 31 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 2,242 - - - - 2,242
Common stock issued under terms
of debt settlement agreement - - 100,000 1 699 - 700
Restricted common stock - - - 100,000 ($700) - - (700)
Exercise of stock
options and warrants - - 2,500 - - - 13 - 13
Fractional shares purchased - - (253) - - - - - -
------- --------- ---------- ------- -------- ------- -------- ---------- -----------
Balance at December 31, 1994 9,701 19,515 3,265,019 32 100,000 (700) 65,392 (78,961) 5,278
Net earnings - - - - - - - (14,886) (14,886)
Common stock issued as
consideration for
debt restructuring - - 150,000 2 - - 335 - 337
Common stock issued as
additional consideration for
short-term borrowings - - 141,176 1 - - 229 - 230
Common stock issued
to pay liabilities - - 115,098 1 - - 374 - 375
Common stock sold through
private placements - - 1,946,667 19 - - 5,820 - 5,839
Common stock issued under
compensation agreements with
individuals to manage the
Company's telecommunications
and computer technical
staffing services business - - 3,091,304 31 - - 2,844 - 2,875
Common stock issued as
additionalconsideration for
Global purchase guarantee - - 350,000 3 - - 587 - 590
Common stock issued as
compensation for
Global acquisition fees - - 150,000 2 - - 251 - 253
Common stock issued to ARTRA
in exchange for the Company's
entire preferred stock issue (9,701) (19,515) 100,000 1 - - 19,514 - -
Restricted common stock issued
as additonal consideration
for short-term borrowings - - - - (100,000) 700 - - 700
Liabilities assumed by ARTRA - - - - - - 647 - 647
Fractional shares purchased - - (66) - - - - - -
------- --------- ---------- ------- -------- ------- -------- ---------- -----------
Balance at December 31, 1995 - - 9,309,198 $92 - - $95,993 ($93,847) $2,238
======= ========= ========== ======= ======== ======= ======== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMFORCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ($14,886) ($9,537) $20,385
Adjustments to reconcile net earnings (loss)
to cash flows from operating activities:
Extraordinary gain from net discharge of indebtedness (6,657) (8,965) (22,057)
Provision for disposal of fashion costume jewelry business 1,600 - -
Depreciation of property, plant and equipment 101 438 503
Amortization of excess of cost over net assets acquired 261 1,018 1,018
Impairment of goodwill 12,930 10,800 -
Amortization of other assets 374 648 217
Common stock compensation 3,657 - -
Changes in assets and liabilities, net of the effects of
the acquisition of COMFORCE Global and
the discontinued fashion costume jewelry business:
(Increase) decrease in receivables 857 2,117 (1,503)
Decrease in inventories 2,105 1,098 1,453
Decrease in other current and noncurrent assets 170 153 574
Decrease in payables and accrued expenses (2,127) (513) (616)
Increase (decrease) in other current and noncurrent liabilities (408) (468) (521)
--------- --------- ---------
Net cash flows used by operating activities (2,023) (3,211) (547)
--------- --------- ---------
Cash flows from investing activities:
Acquisition of COMFORCE Global, net of cash acquired (5,580) - -
Additions to property, plant and equipment (25) (32) (108)
Retail fixtures (631) (665) (951)
Payment of liabilities with restricted cash 550 (550) -
--------- --------- ---------
Net cash flows used by investing activities (5,686) (1,247) (1,059)
--------- --------- ---------
Cash flows from financing activities:
Net increase in short-term debt 2,486 (138) (12)
Proceeds from long-term borrowings - 1,241 4,863
Reduction of long-term debt (750) (444) (3,587)
Proceeds from private placement of common stock 5,839 - -
ARTRA capital contribution - 1,500 -
Notes and advances from ARTRA - 2,531 -
Other - 11 49
--------- --------- ---------
Net cash flows from financing activities 7,575 4,701 1,313
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (134) 243 (293)
Cash and equivalents, beginning of year 783 540 833
--------- --------- ---------
Cash and equivalents, end of year $649 $783 $540
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMFORCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest $273 $435 $1,421
Income taxes paid (refunded), net 7 24 12
Supplemental schedule of noncash investing and financing activities:
Common stock issued as consideration for
debt restructuring and short-term loans $567 - -
Common stock issued for fees and costs
in conjunction with the acquisition of COMFORCE Global 843 - -
Issue common stock to pay liabilities 374 - -
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 -
Notes payable to ARTRA transferred to Lori's capital account - - $15,990
Debt refinanced - - 6,105
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of COMFORCE Corporation
("COMFORCE" or the "Company"), formerly The Lori Corporation ("Lori") are
presented on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company currently operates in one industry segment as a provider of
telecommunications and computer technical staffing and consulting services
worldwide. 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").
At December 31, 1994, ARTRA GROUP INCORPORATED ("ARTRA"), a public company whose
shares are traded on the New York Stock Exchange, owned, through its
wholly-owned subsidiary Fill-Mor Holding, Inc. ("Fill-Mor"), approximately 62.9%
of the common stock and all of the outstanding preferred stock of the Company.
As discussed in Note 15, at December 31, 1995, ARTRA owned approximately 25% of
the Company's common stock.
As discussed in Note 3, on September 11, 1995, Lori signed a stock purchase
agreement to participate in the acquisition of one hundred percent of the
capital stock of COMFORCE Global Inc. ("COMFORCE Global"), formerly Spectrum
Global Services, Inc. d/b/a YIELD Global, a wholly owned subsidiary of Spectrum
Information Technologies, Inc. COMFORCE Global provides telecommunications and
computer technical staffing and consulting services worldwide to Fortune 500
companies and maintains an extensive, global database of technical specialists,
with an emphasis on wireless communications capability. On October 17, 1995,
Lori completed the acquisition of one hundred percent of the capital stock of
COMFORCE Global. In connection with the re-focus of Lori's business, Lori
changed its name to COMFORCE Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Intercompany accounts and
transactions are eliminated.
B. Cash Equivalents
Short-term investments with an initial maturity of less than ninety days are
considered cash equivalents.
As required under terms of a debt settlement agreement (see Note 7), at December
31, 1994, the Company maintained a deposit in trust of $550,000 to fund the
installment payment due December 31, 1994 for unsecured claims arising from the
May 3, 1993 reorganization of the Company's former New Dimensions Accessories,
Ltd., ("New Dimensions") subsidiary. The installment payment was made in
January, 1995.
C. Accounts Receivable and Unbilled Accounts Receivable
Accounts receivable consists of those amounts due to the Company for staffing
services rendered to various customers. Accrued revenue consists of revenues
earned and recoverable costs for which billings have not yet been presented to
the customers as of the balance sheet date.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
D. Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operations as incurred and expenditures for major
renovations are capitalized. Depreciation is computed on the basis of estimated
useful lives principally by the straight line method for financial statement
purposes and principally by accelerated methods for tax purposes. Leasehold
improvements are amortized over the shorter of the estimated useful life of the
asset or the period covered by the lease.
The costs of property retired or otherwise disposed of are applied against the
related accumulated depreciation to the extent thereof, and any profit or loss
on the disposition is recognized in earnings.
E. Intangible Assets and Other Assets
The net assets of a purchased business are recorded at their fair value at the
date of acquisition. At December 31, 1995, the excess of purchase price over the
fair value of net assets acquired (goodwill) is reflected as an intangible asset
and amortized on a straight-line basis over a period of 20 years.
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.
F. Revenue Recognition
Revenue for providing staffing services is recognized at the time such services
are rendered.
G. Income Taxes
Income taxes are accounted for as prescribed in Statement of Financial
Accounting Standards No. 109 - Accounting for Income Taxes. Under the asset and
liability method of Statement No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities, and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years those
temporary differences are expected to recovered or settled.
H. Use of Estimates In Preparation of Financial Statements
The preparation of the 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. Actual results could differ from those estimates.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
I. Recently Issued Accounting Pronouncements
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", 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. This new accounting principle is effective for the
Company's fiscal year ending December 31, 1996. The Company believes that
adoption will not have a material impact on its financial statements.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does
not require, companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based on new fair value
accounting rules. Although expense recognition for employee stock based
compensation is not mandatory, the pronouncement requires companies that choose
not to adopt the new fair value accounting, to disclose the pro-forma net income
and earnings per share under the new method. This new accounting principle is
effective for the Company's fiscal year ending December 31, 1996. The Company
believes that adoption will not have a material impact on its financial
statements as the Company will not adopt the new fair value accounting, but
instead comply with the disclosure requirements.
3. COMFORCE GLOBAL ACQUISITION
On September 11, 1995, Lori signed a stock purchase agreement to participate in
the acquisition of one hundred percent of the capital stock of COMFORCE Global,
Inc. ("COMFORCE Global"), formerly Spectrum Global Services, Inc. d/b/a YIELD
Global, a wholly owned subsidiary of Spectrum Information Technologies, Inc.
("Spectrum") for consideration of approximately $6.4 million, net of cash
acquired. This consideration consisted of cash to the seller of approximately
$5.1 million, fees of approximately $700,000, including a fee of $500,000 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 an 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. Current management of the Company has
questioned its obligation to issue the 150,000 shares to Peter Harvey and the
100,000 shares to ARTRA in consideration of their guarantees. However, for
purposes of presenting earnings per share data, the Company is recognizing these
shares as being issued and outstanding pending resolution of the disagreement
among the parties. Additionally, in conjunction with the COMFORCE Global
acquisition, ARTRA agreed to pay and discharge 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 Global 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 Global, completed on October 17, 1995,
was accounted for by the purchase method and, accordingly, the assets and
liabilities of COMFORCE Global were included in the Company's financial
statements at their estimated fair market value at the date of acquisition and
of COMFORCE Global's operations are included in the Company's statement of
operations from the date of acquisition. The excess of purchase price over the
fair value of COMFORCE Global's net assets acquired (goodwill) of $4,852,000 is
being amortized on a straight-line basis over twenty years. In connection with
the re-focus of the Company's business, Lori changed its name to COMFORCE
Corporation.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The acquisition of COMFORCE Global was funded principally by private placements
of approximately 1,950,000 shares of the Company's common stock at $3.00 per
share (total proceeds of approximately $5,800,000) plus detachable warrants to
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.
The following unaudited pro forma condensed consolidated statements of
operations for the years ended December 31, 1995 and 1994, present the Company's
results of operations as if the acquisition of COMFORCE Global and the related
private placement of the Company's common stock had been consummated as of
January 1, 1994.
COMFORCE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
COMFORCE Pro Forma
Historical Global (A) Adjustments Pro Forma
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 2,387 $ 9,568 $ 11,955
---------- ---------- ----------
Operating Costs and Expenses
Stock compensation (E) 3,425 3,425
Spectrum corporate management fees (D) 1,140 1,140
Other operating costs and expenses 2,641 8,575 $ 50 (B) 11,266
---------- ---------- ------ ----------
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 (C) (201)
---------- ---------- ------ ----------
(618) 7 410 (201)
---------- ---------- ------ ----------
Earnings (loss) from continuing operations
before income taxes (4,297) (140) 460 (4,077)
(Provision) credit for income taxes (35) 21 (14)
---------- ---------- ------ ----------
Loss from continuing operations $ (4,332) $ (119) $ 460 $ (4,091)
========== ========== ====== ==========
Loss per share from continuing operations $ (.95) $ (.44)
========== ==========
Weighted average shares outstanding (F) 4,596 9,309
========== ==========
</TABLE>
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
COMFORCE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1994
(In thousands)
<TABLE>
<CAPTION>
COMFORCE Pro Forma
Historical Global (A) Adjustments Pro Forma
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 8,245 $ 8,245
---------- ----------
Operating Costs and Expense:
Spectrum corporate management fees (D) 803 803
Other operating costs and expenses $ 966 $ 7,551 $ 68(B) 8,585
========== ========== ====== ==========
8,354 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)
========== ========== ====== ==========
Loss per share from continuing operations $ (.72) $ (.28)
========== ==========
Weighted average shares outstanding (F) 3,195 8,833
========== ==========
</TABLE>
Pro forma adjustments to the unaudited condensed consolidated statement of
operations:
(A) The pro forma data presented for COMFORCE Global'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.
(B) Amortization of goodwill arising from the COMFORCE Global
Acquisition. The table below reflects where amortization of
goodwill has been recorded.
1995 1994
-------- --------
Historical Lori (COMFORCE) $ 51,000 $ -
Historical COMFORCE Global' 142,000 175,000
Proforma Adjustments 50,000 68,000
-------- --------
Adjusted proforma per financial
statements $243,000 $243,000
======== ========
(C) Reverse interest expense on notes and other liabilities to be
assumed by ARTRA. The interest adjustment in 1995 was for
interest on notes directly related to The Lori Corporation
activities and were incurred in 1995. These liabilities were not
outstanding during 1994 and, accordingly, a similar interest
adjustment is not required.
(D) Corporate management fees from COMFORCE Global's former parent,
Spectrum Information Technologies,Inc. The amount of these
management fees may not be representative of costs incurred by
COMFORCE Global on a stand alone basis.
(E) 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.
(F) Pro forma weighted average shares outstanding includes shares of
the Company's common stock issued in the private placement that
funded the COMFORCE Global transaction, including 100,000 shares
issued to a non-related party, and 150,000 shares issued to Peter
Harvey, then a Vice President of the Company, for guaranteeing
the payment of the purchase price to the seller and other
guarantees associated with the COMFORCE Global acquisition, and
shares issued to certain individuals to manage the Company's
entry into and development of the telecommunications and computer
technical staffing business. Current management of the Company
has questioned its obligation to issue the 150,000 shares to
Peter Harvey and the 100,000 shares to ARTRA in consideration of
their guarantees. However, for purposes of presenting earnings
per share data, the Company is recognizing these shares as being
issued and outstanding pending resolution of the disagreement
among the parties.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. 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 Company's consolidated financial statements have been reclassified to report
separately results of operations of the discontinued Jewelry Business.
Additionally, in conjunction with the COMFORCE Global acquisition (see Note 3),
ARTRA has agreed to assume sustantially 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 at December 31, 1995, the Company's
consolidated balance sheet has been reclassified to report separately the net
liabilities to be assumed by ARTRA, including net liabilities of the
discontinued Jewelry Business (see Note 9). The December 31, 1994 consolidated
balance has not been reclassified.
The operating results of the discontinued Jewelry Business for the nine months
ended September 30, 1995 and the years ended December 31, 1994 and 1993 (in
thousands) consists of:
1995 1994 1993
---------- ---------- ----------
Net sales $ 10,588 $ 34,431 $ 46,054
========== ========== ==========
Loss from operations before
income taxes $ (15,606) $ (16,210) $ (183)
Provision for income taxes (5) (10) (33)
---------- ---------- ----------
Loss from operations (15,611) (16,220) (216)
---------- ---------- ----------
Provision for disposal
of business (1,600) - -
Provision for income taxes - - -
---------- ---------- ----------
Loss on disposal of business (1,600) - -
---------- ---------- ----------
Loss from discontinued operations $ (17,211) $ (16,620) $ (216)
========== ========== ==========
In April 1996, ARTRA sold the business and certain assets of the Jewelry
Business. As discussed above, ARTRA has agreed to assume any liabilities of the
discontinued Jewelry Business and will be entitled to the net proceeds, if any
from this disposition.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. INVENTORIES
At December 31, 1994 inventories of the Company's discontinued Jewelry Business
(in thousands) consisted of:
Raw materials and supplies $ 115
Work in process 19
Finished goods 1,971
-------
$ 2,105
=======
Inventories were stated at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.
6. CONCENTRATION OF RISK
The accounts receivable of the Company's COMFORCE Global subsidiary at December
31, 1995 consist primarily of amounts due from telecommunication companies. As a
result, the collectibility of these receivables is dependent, to an extent, upon
the economic condition of the telecommunications industry. At December 31, 1995,
COMFORCE Global had 9 customers with accounts receivable balances that
aggregated 67% of the Company's total trade accounts receivable. Percentages of
total revenues from significant customers from the date of COMFORCE Global's
acquisition (October 17, 1995) through December 31, 1995 are summarized as
follows:
Customer 1 17.3%
Customer 2 12.6%
Customer 3 10.1%
The Company's COMFORCE Global subsidiary maintains cash in bank accounts which
at times may exceed federally insured limits. COMFORCE Global has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on its cash balances. Management believes it mitigates
such risk by investing its cash through major financial institutions.
7. EXTRAORDINARY GAINS RELATED TO DISCONTINUED OPERATIONS
Per terms of a 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, as discussed below, the
balance of this indebtedness was discharged.
In conjunction with the debt settlement agreement, 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 the bank as
discussed below. The loan, due June 30, 1995, with interest payable monthly at
10%, was collateralized by 100,000 shares of the
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Company's common stock. The 100,000 shares of the Company's common stock,
originally issued to the bank under terms of a debt 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 shares of the
Company's common stock as consideration for the loan extension. The loan was
repaid by ARTRA in February, 1996.
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:
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
========
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The reorganization of Lori's former New Dimensions subsidiary resulted in a 1993
extraordinary gain of $22,057,000 ($6.03 per share) from a net discharge of
indebtedness calculated (in thousands) as follows:
Amount due on New Dimensions' 12.75% Senior Notes,
including accrued interest $ 22,822
Trade liabilities and accrued expenses 3,231
--------
Total unsecured claims 26,053
Less present value of payments
due to unsecured creditors (2,725)
Less present value of bank
restructuring loan fee (1,271)
--------
Net extraordinary gain $ 22,057
========
8. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt (in thousands) consists of:
December 31, December 31,
1995 1994
------ ------
Notes payable
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
4,021
Less:
Liabilities to be assumed by ARTRA (1,986)
Liabilities included with
discontinued operations (1,535)
------
$ 500
======
Long-term debt
Amounts due a bank term under terms of
a debt settlement agreement $ 7,855
Current scheduled maturities (750)
Debt subsequently discharged (7,105)
------
$ -
======
In October 1995, COMFORCE Global entered into an agreement with a bank that
provides for a revolving line of credt with interest at the prime rate plus
1/2%. Borrowings, collateralized by the assets of COMFORCE Global and an
unlimited guarantee of COMFORCE, are limited to a a borrowing base, as defined
in the agreement, up to a maximum of $800,000. As of December 31, 1995, COMFORCE
Global had not yet utilized any funds available under the revolving credit loan.
The fair value of the Company's notes payable is estimated based on the quoted
market prices of the same or similar issues or on the current rates offered to
the Company for notes of the same remaining maturity.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As discussed in Note 7, 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 $750,000 at July 31, 1995. The remaining loan principle was
not repaid on its scheduled to 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 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, increases on a sliding scale if the
receivables assigned are not collected within 45 days. Borrowings under the
credit facility are 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.
9. LIABILITIES TO BE ASSUMED BY ARTRA GROUP INCORPORATED AND NET
LIABILITIES OF DISCONTINUED OPERATIONS
In conjunction with the COMFORCE Global 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 assume all of the assets and liabilities of the Company's discontinued
Jewelry Business. In April 1996, ARTRA sold the business and certain assets of
the Jewelry Business.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 1995 liabilities to be assumed by ARTRA GROUP Incorporated 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 noted in the table above, as of December 31, 1995, ARTRA has agreed to assume
$3,866,000 of pre-existing Lori liabilities. Subsequent to December 31, 1995
ARTRA made net payments of $647,000 to reduce pre-existing Lori 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 is able to make subsequent
payments, they will be recorded as additional paid-in capital. The ability of
ARTRA to satisfy these obligations is uncertain. The financial statements of
ARTRA include an explanatory paragraph indicating substantial doubt about the
ability of ARTRA to continue as a going concern. The amounts receivable from
ARTRA, exclusive of subsequent payments have not been reflected in the Company's
financial statements at December 31, 1995. No collateral has been provided in
support of these obligations.
At December 31, 1995, liabilities to be assumed by ARTRA included $1,531,000 of
court ordered payments arising from the May 3, 1993 reorganization of New
Dimensions. As of April 15, 1996, the $541,000 installment payment due December
31, 1995 has not been paid.
10. PREFERRED STOCK
The Company's Series C cumulative preferred stock, 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 exchanged
its Series C cumulative preferred stock for 100,000 newly issued shares of the
Company's common stock. The issuance of these shares of the Company's common
stock to ARTRA is subject to ratification by the Company's shareholders.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. 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 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.
As of March 16, 1993, the Company's Board of Directors approved the issuance of
non-qualified options to purchase an aggregate of 555,628 shares of the
Company's common stock at an exercise price of $1.125 per share (the closing
price of Lori common stock on March 15, 1993) to a corporation controlled by the
former vice chairman , president and director of the Company and to an agent of
the Company. The options were granted in connection with management agreements
entered into with them pursuant to which they agreed to provide managerial and
supervisory services to the Company and its discontinued fashion costume jewelry
subsidiaries. Additionally, as of March 16, 1993, the Company's Board of
Directors approved the issuance of options to purchase an aggregate of 370,000
shares of the Company's common stock at an exercise price of $1.125 per share
(the closing price of the Company's common stock on March 15, 1993) to then
certain executives, key employees, agents and a director of the Company. The
options were granted under the Company's 1982 Stock Option Plan (the "1982
Plan"), subject to stockholder approval of the amendment of the 1982 Plan.
Subsequent thereto, counsel to the Company advised the Board that the 1982 Plan,
which had expired, could not be amended and extended.
Accordingly, on October 12, 1993, the Board of Directors of the Company approved
a proposed Long-Term Stock Investment Plan of the Company (the "Plan" or the
"Option Plan") which authorizes the grant of options to purchase the Company's
common stock to executives, key employees and agents of the Company and its
subsidiaries. In connection with this approval, the Board approved the issuance
under the Plan (subject to the approval and adoption of the Plan by the
stockholders) of options on the same terms as the original March 16, 1993
options which it had previously authorized under the 1982 Plan. The Plan was
approved by the stockholders at the December 16, 1993 annual meeting, effective
as of January 1, 1993.
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. At December 31, 1995, options to purchase 4,500 shares of the Company's
common stock at $5.00 per share were outstanding. The options expire June 9,
1998.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summary of Options
A summary of stock option transactions for the years ended December 31
is as follows:
1995 1994 1993
--------- --------- ---------
Outstanding at January 1:
Shares 959,378 1,098,544 19,416
$ 1.125 $ 1.125 $ 5.00
Prices to to to
$ 5.00 $ 12.19 $ 12.19
Options granted:
Shares - - 1,079,628
$ 1.125
Prices - - to
$ 3.125
Options exercised:
Shares - (2,500) (500)
Price - $ 5.00 $ 5.00
Options canceled:
Shares (19,250) (136,666) -
$ 3.125 $ 3.125
Prices to to -
$ 5.00 $ 12.19
Outstanding at December 31:
Shares 940,128 959,378 1,098,544
========= ======== =========
$ 1.125 $ 1.125 $ 1.125
Prices to to to
$ 5.00 $ 5.00 $ 12.19
Options exercisable at December 31 940,128 940,710 18,916
========= ======== =========
Options available for future grant
at December 31 564,372 546,372 420,372
========= ======== =========
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Warrants
At December 31, 1995, warrants were outstanding to purchase a total of 1,184,583
of the Company's common shares at prices ranging from $2.00 per share to $4.00
per share. The warrants expire five years from the date of issue at various
dates through 2000.
The acquisition of COMFORCE Global 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. The warrants expire
five years from the date of issue.
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
share, the fair market value at the dates of grant. The warrants expire five
years from the date of issue.
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, warrants to purchase 16,250 shares of the Company's common
stock at $4.00 per share remained outstanding.
12. COMMITMENTS AND CONTINGENCIES
The Company's COMFORCE Global subsidiary leases certain office space and
equipment used in its telecommunications and computer technical staffing
services business. At December 31, 1995, future minimum lease payments under
operating leases that have an initial or remaining noncancellable term of more
than one year (in thousands) are:
Year
1996 $ 62
1997 64
1998 65
1999 63
2000 38
-------
$ 292
=======
Rental expense from continuing operations was $17,000 in 1995.
The aggregate commitment for future salaries at December 31, 1995, excluding
bonuses, during the remaining term of all management and employment agreements
is approximately $700,000.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. INCOME TAXES
A summary of the provision (credit) for income taxes relating to operations is
as follows:
1995 1994 1993
-------- -------- -------
(in thousands)
Continuing operations:
State $ 35 $ 10 $ 33
======== ======== ========
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. The 1993 extraordinary credit represents a gain
from a net discharge of indebtedness at the Company's former New Dimensions
subsidiary. 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:
% of Earnings (Loss)
Before Income Taxes
----------------------------
1995 1994 1993
------ ------ ------
Statutory Federal tax rate
Provision (Benefit) (34.0) (34.0) 35.0
State and local taxes,
net of Federal benefit .3 .1 .2
Current year tax loss not utilized 4.7 - -
Amortization of goodwill .6 3.6 .8
Impairment of goodwill 30.0 38.6 -
Previously unrecognized benefit from
utilizing tax loss carryforwards - (8.2) (35.8)
----- ----- -----
1.6 .1 .2
===== ===== =====
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. INCOME TAXES, 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, 1995 and 1994 and their
approximate tax effects (in thousands) are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ---------------------------
Temporary Tax Temporary Tax
Difference Difference Difference Difference
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Trade accounts receivable $ 500 $ 200 $ 1,300 $ 500
Inventories
700 300 300 100
Accrued other
900 300 400 200
Net operating loss 42,000 16,400 54,000 21,100
-------- ---------
Total deferred tax asset 17,200 21,900
-------- ---------
Machinery and equipment (200) (100) (400) (200)
-------- --------
Total deferred tax liability
(100) (200)
-------- --------
Valuation allowance (17,100) (21,700)
-------- --------
Net deferred tax asset $ - $ -
======== ========
</TABLE>
The Company has 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.
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, if any, expiring principally in 1996 - 2010. Section 382
of the Internal Revenue Code of 1986 limits a corporation's utilization of its
Federal income tax loss carryforwards when certain changes in the ownership of a
corporation's common stock occurs. The Company has recently issued a significant
number of shares of its common stock in conjunction with the COMFORCE Global
acquisition and certain related transactions. Accordingly, the Company is
currently subject to significant limitations regarding the utilization of its
Federal income tax loss carryforwards.
14. EARNINGS PER SHARE
Earnings (loss) per share is computed by dividing net earnings (loss) by the
weighted average number of shares of common stock and common stock equivalents
(options and warrants), unless anti-dilutive, outstanding during the year. Fully
diluted earnings per share is not presented since the result is equivalent to
primary earnings per share.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. RELATED PARTY TRANSACTIONS
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 telecommunications and computer technical staffing business
(approximately 3,700,000 after certain anti-dilutive provisions). In October
1996, the Company issued approximately 3,100,000 shares of its common stock to
the above individuals. The remaining common shares due the above individuals
will be 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 $3,425,000 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 Global acquisition. Accordingly, this compensation charge was
fully recognized in 1995. The cost of the remaining common shares to be issued
in 1996 ($550,000) 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. The shares of the Company's common stock issued and to be issued
in accordance with the above agreements were valued at $.93 per share.
Management valued the Company based on its discussions with market makers and
other advisors, taking into account (i) that the Jewelry Business, which was
discontinued at the end of the second quarter of 1995, had a negligible value,
and (ii) the value of the Company was principally related to the potential
effect that a purchase of COMFORCE Global, if successfully concluded, would have
market value of the Company's Common Stock. Management believes this value of
$.93 per share to be a fair and appropriate value based upon the Company's
financial condition as of the date the Company became obligated to issue these
shares. After the issuance of these common shares, plus the effects of the
issuance of common shares sold by private placements and other common shares
issued in conjunction with the COMFORCE Global acquisition, ARTRA's common stock
ownership interest in the Company was reduced to approximately 25% at December
31, 1995.
In December 1995 the Company made loans totaling $56,000 to the above named
individuals to cover income tax liabilities relating to the issuances of shares
of the Company's common stock. Subsequent to December 31, 1995, the Company made
additional loans to these individuals totaling $289,000. All loans are evidenced
by notes which bear interest at 6% per annum and mature December 10, 1997.
In connection with the COMFORCE Global acquisition, a $500,000 fee was earned by
the above mentioned consultant, of which $250,000 was paid in 1995.
In conjunction with an agreement (see Note 7) 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, 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 exchanged 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. The issuance of these shares of the
Company's common stock to ARTRA is subject to ratification by the Company's
shareholders. 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.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
In February, 1993, ARTRA transferred all of its notes (with a principal value of
$15,990,000) to Lori's capital account.
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, 1994 and 1993 fees for these services amounted to $91,000,
$151,000 and $115,000, respectively.
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. 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. The Company
declined to accept this settlement proposal, which was subsequently withdrawn.
The plaintiffs have produced only limited testamentary evidence, and no
documentary evidence, linking the Company to this site, and the Company 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. Based on the foregoing, management of the Company does not believe
that it is probable that the Company will have any liability for the costs of
the clean-up of this site. The Company intends to vigorously defend itself in
this case.
Under the terms of the Assumption Agreement, 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.
No assurance can, however, be given that ARTRA will be financially capable of
satisfying its obligations under the Assumption Agreement.
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 $500,00 in the case of foreign workers. The Company also maintains
fidelity insurance in the amount of $25,000 per claim. The Company is
presently soliciting quotations to obtain directors' and officers' liability
insurance and errors and omissions coverage.
17. SUBSEQUENT EVENTS
On March 1, 1996, COMFORCE Global, Inc., a wholly-owned subsidiary of COMFORCE
acquired substantially all of the assets of Williams Communication Services
("Williams"), a provider of telecommunications and technical staffing services
for consideration consisting of cash of $2,000,000 and contingent rights to
future payments based on earnings over a four year period. The acquisition of
Williams, funded principally by a $2.25 million revolving credit facility with a
bank, will be accounted for by the purchase method.
The Company has entered into an agreement to acquire the assets and business of
RRA Inc. ("RRA"), a provider of technical staffing services in the electronics,
telecommunications and information technology business sectors. The completion
of the acquisition of RRA is subject to certain contingencies which include the
completion of and satisfaction with due diligence, as well as satisfactory
financing to complete the acquisition.
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
----------------------
(1) (2)
Balance at Charged to Charged to
Beginning of Costs and Other Deductions Balance at
Description Period Expenses Accounts (Describe) End of Period
------------------- --------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1995:
Deducted from assets to which they apply:
Allowance for inventory valuation $ 207 $ 25 $ 232 $ -
======== ========= ======= ========
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
======== ========= ======= ========
For the year ended December 31, 1993:
Deducted from assets to which they apply:
Allowance for inventory valuation $ 4,900 $ 172 $ 922 (B) $ 4,150
======== ========= ======= ========
Allowance for markdowns $ 5,280 $ 5,722 $ 8,503 (C) $ 2,499
Allowance for doubtful accounts 557 335 460 (D) 432
-------- --------- ------- --------
$ 5,837 $ 6,057 $ 8,963 $ 2,931
======== ========= ======= ========
(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.
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors of COMFORCE Global, Inc.:
We have audited the accompanying balance sheets of COMFORCE Global, Inc.
(formerly Spectrum Global Services, Inc., the "Company") as of September 30,
1995 and December 31, 1994, and the related statements of operations and
retained earnings (accumulated deficit) and cash flows for the nine month period
ended September 30, 1995 and the year ended December 31, 1994. 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 Comforce Global, Inc. as of
September 30, 1995 and December 31, 1994, and the results of its operations and
its cash flows for the nine month period ended September 30, 1995 and the year
ended December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Melville, New York
December 1, 1995
<PAGE>
COMFORCE Global, Inc.
Balance Sheets
as of September 30, 1995 and December 31, 1994
September 30, December 31,
ASSETS: 1995 1994
------------ ------------
Current assets:
Cash and cash equivalents $ 1,186,868 $ 426,334
Accounts receivable 1,602,659 1,456,583
Unbilled accounts receivable 279,626 158,793
Prepaid expenses and other assets 23,173 32,664
------------ ------------
Total current assets 3,092,326 2,074,374
Property and equipment, net 93,708 55,877
Intangible assets 2,149,661 2,272,890
Other assets 14,491 25,477
------------ ------------
Total assets $ 5,350,186 $ 4,428,618
============ ============
LIABILITIES AND STOCKHOLDERS'EQUITY(DEFICIENCY):
Current liabilities (deficiency):
Accounts payable $ 42,792 $ 27,714
Accrued liabilities 423,580 229,703
Income taxes payable 24,453
Accounts payable - parent 978,855 178,106
Accounts payable - affiliates 30,980 30,086
------------ ------------
Total current liabilities 1,476,207 490,062
------------ ------------
Stockholders' equity (deficiency):
Capital stock 1 1
Additional paid-in capital 3,919,999 3,919,999
Retained earnings (accumulated deficit) (46,021) 18,556
------------ ------------
Total stockholders' equity 3,873,979 3,938,556
------------ ------------
Total liabilities and
stockholders' equity (deficiency) $ 5,350,186 $ 4,428,618
============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
COMFORCE Global, Inc.
Statements of Operations and Retained Earnings (Accumulated Deficit)
Nine month
period ended Year ended
September 30, December 31,
1995 1994
------------ ------------
Sales $ 9,007,461 $ 8,244,721
------------ ------------
Direct costs and expenses:
Cost of sales 6,764,942 6,417,395
Operating expenses 1,159,168 1,133,298
Overhead charges from parent (Note 9) 1,139,560 803,280
------------ ------------
Total direct costs and expenses 9,063,670 8,353,973
------------ ------------
(56,209) (109,252)
------------ ------------
Other income (expense):
Interest income 6,632 8,975
------------ ------------
Other income (expense) 6,632 8,975
------------ ------------
Loss before provision for income taxes (49,577) (100,277)
Income tax provision 15,000 14,740
------------ ------------
Net loss (64,577) (115,017)
Retained earnings, beginning of year 18,556 133,573
------------ ------------
Retained earnings(accumulated deficit),
end of period $ (46,021) $ 18,556
============ ============
The accompanying notes are an integral part of the financial statements.
COMFORCE Global, Inc.
Statements of Cash Flows
Nine month
period ended Year ended
September 30, December 31,
1995 1994
------------ ------------
Cash flows from operating activities:
Net (loss) income $ (64,577) $ (115,017)
Adjustments to reconcile net income to cash
flows provided by operating activities:
Depreciation 18,836 10,173
Amortization 123,229 164,305
Changes in operating assets and liabilities:
Accounts receivable (146,076) (256,348)
Unbilled accounts receivable (120,833) (158,793)
Prepaid expenses 9,491 (9,186)
Deposits 10,986 (24,360)
Accounts payable 15,078 22,645
Accrued liabilities 193,877 139,216
Accounts payable - parent 800,749 178,106
Income taxes payable (24,453) (18,657)
Accounts payable - affiliate 894 30,086
------------ ------------
Net cash provided by (used in)
operating activities 817,201 (37,830)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (56,667) (54,318)
------------ ------------
Net cash used in investing activities (56,667) (54,318)
------------ ------------
Net increase (decrease) in cash
and cash equivalents 760,534 (92,148)
------------ ------------
Cash and cash equivalents, beginning of year 426,334 518,482
------------ ------------
Cash and cash equivalents, end of period $ 1,186,868 $ 426,334
============ ============
Cash paid for:
Income taxes $ 35,371 $ 51,884
============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
COMFORCE Global, Inc.
Notes to Combined Financial Statements
1. Description of Business:
COMFORCE Global, Inc. (formerly Spectrum Global Services, Inc.) (the "Company"),
a Delaware Corporation, became a wholly owned subsidiary of Spectrum Information
Technologies, Inc. through an acquisition of the Company's assets on October 31,
1993. On October 17, 1995, 100% of the stock of Spectrum Global Services, Inc.
was sold to The Lori Corporation (now known as COMFORCE Corporation) ("Lori"),
at which time the Company changed its name to COMFORCE Global, Inc. The Company
provides telecommunications and computing staffing and consulting services
worldwide.
2. Summary of Significant Accounting Policies:
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. Accrued revenue consists of revenues
earned and recoverable costs for which billings have not yet been presented to
the customers as of the balance sheet dates.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operations as incurred. Expenditures for betterments and
major renewals are capitalized. The cost of assets sold or retired and the
related amounts of accumulated depreciation are eliminated from the accounts in
the year of disposal, with any resulting profit or loss included in income.
Depreciation and amortization of assets are provided using the straight-line
method over the estimated useful life of the asset.
Intangibles
Goodwill is amortized over 15 years on a straight line basis.
<PAGE>
Notes to Combined Financial Statements, Continued
Income Taxes
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse. A
valuation allowance is recorded to reduce deferred tax assets to their expected
realizable value. The cumulative effect of implementing SFAS No.
109 as of January 1, 1994 was not significant.
3. Purchase of Assets:
On October 31, 1993, Spectrum Information Technologies, Inc. purchased the
assets and assumed the liabilities of the Company (then known as Yield
Industries, Inc.) and Wintec Corporation ("Wintec"). Subsequent to
this, the name was changed to Spectrum Global Services, Inc. The acquisition has
been accounted for as a purchase. The fair value of the assets acquired,
including goodwill, was $4,120,000 and liabilities assumed totaled $199,000.
Goodwill of approximately $2,465,000 is being amortized over 15 years on a
straight-line basis.
4. Property and Equipment:
Property and equipment are summarized as follows:
Life of
equipment 1995 1994
--------- --------- ---------
Office equipment 3-5 years $ 61,311 $ 37,211
Furniture and fixtures 5-years 65,144 32,577
--------- ---------
126,455 69,788
Less, accumulated depreciation 32,747 13,911
--------- ---------
$ 93,708 $ 55,877
========= =========
<PAGE>
Notes to Combined Financial Statements, Continued
5. Income Taxes:
The provision for income taxes of $15,000 for the nine months ended September
30, 1995 and $14,740 for the year ended December 31, 1994 reflects minimum state
and local income taxes as the Company has state net operating losses on separate
Company returns. The Company files its federal income tax return as part of its
parent's consolidated return. Due to significant losses of the parent, the
Company has provided a full valuation on the potential future benefit from its
federal net operating losses. Net losses for financial reporting purposes do not
differ significantly from net losses for income tax purposes.
6. Concentration of Credit Risk:
The Company's accounts receivable as of September 30, 1995 and December 31, 1994
consist primarily of amounts due from telecommunication companies. As a result,
the collectibility of these receivables is dependent, to an extent, upon the
economic condition of the telecommunications industry. At September 30, 1995 and
December 31, 1994, the Company had four customers with accounts receivable
balances that aggregated 48% and 46%, respectively, of the Company's total
accounts receivable. Percentages of total revenues from significant customers
for the nine month period ended September 30, 1995 and the year ended December
31, 1994 are summarized as follows:
September 30, December 31,
1995 1994
------------ ------------
Customer 1 19.2% 19.9%
Customer 2 12.9% 12.8%
Customer 3 10.5% 9.9%
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.
7. Accrued Expenses:
Accrued expenses consist of the following:
1995 1994
------------ ------------
Payroll and payroll taxes $ 274,864 $ 143,449
Workers' compensation 70,000 70,000
Professional fees 42,408 7,531
Vacation 27,595 8,723
Other 8,713
------------ ------------
$ 423,580 $ 229,703
============ ============
<PAGE>
Notes to Combined Financial Statements, Continued
8. Commitments and Contingencies:
Leases
At September 30, 1995, future minimum annual rental commitments under
noncancelable operating leases are as follows:
1996 $ 57,388
1997 58,583
1998 60,703
1999 62,913
2000 54,111
----------
$ 293,698
==========
Total rent expense for the nine month period ended September 30, 1995 and the
year ended December 31, 1994 was $25,627 and $46,498, respectively.
9. Charges From Parent:
For the nine months ended September 30, 1995 and the year ended December 31,
1994, approximately $1,139,560 and $803,280, respectively, was charged to the
Company by its parent, Spectrum Information Technologies, Inc. as a management
charge which reflects an allocation of corporate overhead. Management expects
that such charges will no longer continue as a result of the sale of the Company
to Lori. Such charges may not represent expenses that would have been incurred
had the Company operated as a stand-alone entity. In addition, the Company was
charged by its parent company for insurance, rent, payroll, professional fees,
and other miscellaneous office expenses. Such charges amounted to $236,808 and
$506,113 for the nine month period ended September 30, 1995 and for the year
ended December 31, 1994, respectively, and are included in general and
administrative expenses. The Company purchased furniture and equipment and was
charged miscellaneous office expenses from its affiliates. Such charges amount
to $1,014 and $29,967 in 1995 and 1994, respectively.
10. Other Matters:
On January 26, 1995, Spectrum Information Technologies, Inc., filed petition for
relief under Chapter 11 of the Bankruptcy Code (the Company was not included in
such filing). The sale of the stock of the Company to Lori on October 17, 1995
was formally approved by the bankruptcy court.
<PAGE>
INDEX OF EXHIBITS
3.1 Restated Certificate of Incorporation of the Company (included as
an exhibit to the Company's Registration Statement on Form S-2
(Registration No. 2-98628) and incorporated herein by reference).
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company filed with the Delaware Secretary of State February 12,
1991 (included as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1990 and incorporated
herein by reference).
3.3 Bylaws of the Company, as amended and restated effective December
19, 1990 (included as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 1990 and
incorporated herein by reference).
3.4 Certificate of Ownership (Merger) of COMFORCE Corporation into
the Company.
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, regarding employment or
consulting services 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 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).
10.4 Purchase Agreement among COMFORCE Global, Inc., Williams
Communications Services, Inc. and Bruce Anderson (included as an
exhibit to the Company's Current Report on Form 8-K dated March
1, 1996 and incorporated herein by reference).
10.5 Loan Agreement between COMFORCE Global, Inc. and Chase Manhattan
Bank (included as an exhibit to the Company's Current Report on
Form 8-K dated March 1, 1996 and incorporated herein by
reference).
10.6 Amendment dated October 6, 1995 of Letter Agreement dated June
29, 1995, regarding employment or consulting services 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
11.1 Computation of earnings per share and equivalent share of Common
Stock for the three years ended December 31, 1995 (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 (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).
