COMFORCE CORPORATION
Supplement dated April 2, 1997 to
Prospectus dated February 18, 1997,
as supplemented March 6, 1997
Set forth in this Supplement is certain information included in the Annual
Report on Form 10-K for the year ended December 31, 1996 of COMFORCE Corporation
("COMFORCE" or the "Company"), including (i) Selected Financial Information
(page 3), (ii) Management's Discussion and Analysis of Financial Condition and
Results of Operation (page 7), and (iii) financial statements for the Company as
listed on page F-1 hereof and for RHO Company Incorporated as listed on page
F-36 hereof. In addition, updated information concerning the Company's sale of
Debentures is included herein (page 12). Capitalized terms not defined herein
shall have the meanings set forth in the Prospectus, as supplemented to date.
<PAGE>
[Intentionally left blank]
<PAGE>
Selected Financial Information
Selected Historical Financial Information
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues (1) $ 55,867 $2,387 $ -- $ -- $ --
Stock compensation charge (2) -- 3,425 -- -- --
Earnings (loss) from continuing operations 1,352 (4,332) (2,282) (1,456) (421)
Loss from discontinued operations (3) -- (17,211) (16,220) (216) (34,198)
Earnings (loss) before extraordinary credits 1,352 (21,543) (18,502) (1,672) (34,619)
Extraordinary credits (4) -- 6,657 8,965 22,057 --
Net earnings (loss) 1,352 (14,886) (9,537) 20,385 (34,619)
Dividends on Preferred Stock 325 -- -- -- --
Accretive Dividends on Series F
Preferred Stock 665 -- -- -- --
Income available for Common Stockholders 362 -- -- -- --
Earnings (loss) per share:
Continuing operations .03 (.95) (.72) (.39) (.13)
Discontinued operations -- (3.74) (5.08) (.06) (10.86)
Earnings (loss) before extraordinary .03 (4.69) (5.80) (.45) (10.99)
credits
Extraordinary credits -- 1.45 2.81 6.03 --
Net earnings (loss) .03 (3.24) (2.99) 5.58 (10.99)
Total assets (5) 43,366 8,536 18,704 40,174 42,818
Long-term debt -- -- -- -- 6,105
Receivable from (payable to) ARTRA(6) -- 1,046 (289) -- (16,025)
Liabilities assumed by ARTRA (6) -- 4,240 -- -- --
Liabilities subject to compromise -- -- -- -- 41,500
Debt subsequently discharged -- -- 7,105 -- --
Cash dividend 228 -- -- -- --
</TABLE>
- ------------
(1) Revenues for the year ended December 31, 1995 represent revenues of
COMFORCE Telecom from the date of its acquisition, October 17, 1995.
Revenues for the year ended December 31, 1996 represent revenues of
COMFORCE Telecom for the entire year, revenues from Williams from the
acquisition date of March 3, 1996 through December 31, 1996, revenues from
RRA from the
3
<PAGE>
acquisition date of May 10, 1996 through December 31, 1996, revenues from
Force Five from the effective date of acquisition of July 31, 1996 through
December 31, 1996, revenues from AZATAR from the effective date of
acquisition of November 1, 1996 through December 31, 1996, and revenues
from Continental from the effective date of acquisition of November 8, 1996
through December 31, 1996. The Company's jewelry operations were
discontinued effective as of September 30, 1995. Accordingly, selected
financial data of the Company's jewelry operations for each of the three
years in the period ended December 31, 1994 has been reclassified to
discontinued operations.
(2) Represents a non-recurring compensation charge related to the issuance of a
35% common stock interest in the Company to certain individuals to manage
the Company's entry into the technical staffing services business.
(3) The loss from discontinued operations for the year ended December 31, 1995
includes a charge to operations of $12.9 million to write-off the remaining
goodwill of the Company's discontinued jewelry operations effective June
30, 1995 and a provision of $1.6 million for loss on disposal of these
discontinued operations. The loss from discontinued operations for the year
ended December 31, 1994 includes a charge to operations of $10.8 million
representing a write-off of goodwill of the Company's former New Dimensions
subsidiary. The loss from discontinued operations for the year ended
December 31, 1992 includes charges to operations of $8.7 million
representing an impairment of goodwill at December 31, 1992 and $8.5
million representing increased reserves for markdown allowances and
inventory valuation.
(4) The 1995 and 1994 extraordinary credits represent gains from net discharge
of indebtedness under terms of the Company's debt settlement agreement with
its bank related to the discontinued jewelry operations. The 1993
extraordinary credit represents a gain from a net discharge of indebtedness
due to the reorganization of the Company's former New Dimensions
subsidiary. See Note 11 to the Company's consolidated financial statements
for the year ended December 31, 1996.
(5) As partial consideration for a debt settlement agreement, in December 1994,
the Company's bank lender received all of the assets of the Company's
former New Dimensions subsidiary.
(6) In conjunction with the COMFORCE Telecom acquisition, ARTRA, formerly the
parent of the Company, agreed to assume substantially all pre-existing
liabilities of the Company. During 1995, ARTRA received $399,000 of
advances from the Company. Subsequent to December 31, 1995, ARTRA repaid
the above advances and made net payments of $647,000 to reduce these
pre-existing liabilities. Such payments have been included in the Company's
consolidated financial statements at December 31, 1995 as amounts
receivable from ARTRA and as additional paid-in capital. To the extent
ARTRA makes subsequent payments, they will be recorded as additional
paid-in capital. In the fourth quarter of 1995, ARTRA exchanged all of its
shares of the Company's Series C Preferred Stock for 100,000 newly issued
shares of the Company's Common Stock. During 1994, ARTRA made net advances
to the Company of $2.5 million. Effective December 29, 1994, ARTRA
exchanged $2.2 million of its notes and advances for additional Series C
Preferred Stock. In February 1993, ARTRA transferred all of its notes to
the Company's capital account. See Notes 9, 10 and 11 to the Company's
consolidated financial statements for the year ended December 31, 1996 and
"Discontinued Operations" in the Prospectus.
4
<PAGE>
Selected Pro Forma Financial Information
The historical financial information for the Company presented in this
Supplement for December 31, 1995 and 1994 relates principally to the Company's
former jewelry operations which were discontinued September 30, 1995. This
historical financial information includes limited results of the Company's
technical staffing operations, all of which, except for COMFORCE Telecom, were
acquired since January 1, 1996. Consequently, a discussion and comparison of the
Company's historical results of operations may not be meaningful. In order to
provide a discussion of results which may be more meaningful than the historical
discussion, the Company has (i) presented below unaudited pro forma data of the
Company for the years ended December 31, 1995 and 1994 assuming that the
acquisition of COMFORCE Telecom (which was acquired by the Company in October
1995) and related financing and capital transactions had occurred as of January
1, 1994, and (ii) presented under "Management's Discussion and Analysis of
Financial Condition and Results of Operation" in this Supplement a comparison of
1996 historical results of operations with 1995 pro forma results, and of 1995
pro forma results with 1994 pro forma results.
<TABLE>
<CAPTION>
Year Ended December 31, 1995
(unaudited in thousands)
---------------------------------------------------------------------
COMFORCE Pro Forma
Historical Telecom(1) Adjustments ProForma
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $ 2,387 $ 9,568(2) $ 11,955
-------- -------- --------
Operating costs and expenses:
Cost of revenues 1,818 7,178 8,996
Stock compensation (5) 3,425 3,425
Spectrum corporate management
fees (4) 1,140 1,140
Other operating costs and expenses 823 1,397 $ 50(2) 2,270
-------- -------- -------- --------
6,066 9,715 50 15,831
-------- -------- -------- --------
Operating earnings (loss) (3,679) (147) (50) (3,876)
-------- -------- -------- --------
Interest and other non-operating
expenses (618) 7 410(3) (201)
-------- -------- -------- --------
(618) 7 410 (201)
-------- -------- -------- --------
Earnings (loss) from continuing
operations before income taxes (4,297) (140) (4,077)
(Provision) credit for income taxes (35) 21 360 (14)
-------- -------- -------- --------
Loss from continuing operations $ (4,332) $ (119) $ 460 $ (4,091)
======== ======== ======== ========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994
(unaudited in thousands)
----------------------------------------------------------------------------------------
COMFORCE Pro Forma
Historical Telecom (1) 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 (4) 803 803
Other operating costs and
expenses $ 966 1,134 $ 68(2) 2,168
------- ------- ------- -------
966 8,354 68 9,388
------- ------- ------- -------
Operating earnings (loss) (966) (109) (68) (1,143)
------- ------- ------- -------
Interest and other non-operating
expenses (1,316) 9 (1,307)
------- ------- ------- -------
(1,316) 9 (1,307)
------- ------- ------- -------
Loss from continuing operations
before income taxes (2,282) (100) (68) (2,450)
Provision for income taxes (15) (15)
------- ------- ------- -------
Loss from continuing operations $(2,282) $ (115) $ (68) $(2,465)
======= ======= ======= =======
</TABLE>
- ------------
Pro forma adjustments to the unaudited condensed consolidated of operations:
(1) The pro forma data presented for COMFORCE Telecom's operations is for the
periods prior to its acquisition on October 17, 1995, or January 1, 1995
through October 16, 1995 and January 1, 1994 through December 31, 1994,
respectively.
(2) Amortization of goodwill from the COMFORCE Telecom acquisition. The table
below reflects where amortization goodwill has been recorded.
1995 1994
-------- --------
Historical COMFORCE Telecom $ 51,000 $ --
Historical Telecom 142,000 175,000
Pro Forma Adjustments 50,000 68,000
-------- --------
Adjusted pro forma
per financial statements $243,000 $243,000
======== ========
(3) Reverse interest expense on notes and other liabilities assumed by ARTRA.
The interest adjustment in 1995 was for interest on notes directly related
to the jewelry operations and was incurred in 1995. These liabilities were
not outstanding during 1994 and, accordingly, a similar interest adjustment
is not required.
6
<PAGE>
(4) Corporate management fees from COMFORCE Telecom's former parent, Spectrum
Information Technologies, Inc. The amount of these management fees may not
be representative of costs incurred by COMFORCE Telecom on a stand alone
basis.
(5) Represents a non-recurring compensation charge related to the issuance of
the 35% common stock interest in the Company to certain individuals to
manage the Company's entry into and development of the telecommunications
and computer technical staffing business.
Management's Discussion and Analysis of Financial Condition and Results of
Operation
The discussion set forth below supplements the information found in the
consolidated financial statements and related notes. The matters discussed below
and elsewhere in the Prospectus, as supplemented, contain forward looking
statements that involve risks and uncertainties, many of which may be beyond the
Company's control. See "Risk Factors" in the Prospectus for a discussion of
certain of such risks and uncertainties.
Overview
The October 1995 acquisition of COMFORCE Telecom marked the Company's entry
into the technical staffing business, followed by the acquisition of six
additional technical staffing businesses through February 1997. Following is a
summary of these acquisitions, which are also discussed under "Acquisition
History" in the Prospectus:
<TABLE>
<CAPTION>
Fiscal 1995
Year Acquisition Revenue Current
Acquired Company Founded Date (millions) Offices Headquarters Market Served
---------------- ------- ---- ---------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
COMFORCE Telecom 1987 October 1995 $11.4 5 Lake Success, Telecommunications
NY
Williams 1991 March 1996 $4.2 1 Englewood, Telecommunications
FL
RRA 1964 May 1996 $52.0 8 Tempe, AZ Technical Services
Force Five 1993 August 1996 $7.1 4 Dallas, TX Information Technology
AZATAR 1980 November $7.1 2 Rochester, Information Technology
1996 NY
Continental 1965 November $9.9 2 Elmsford, NY Telecommunications
1996
RHO 1971 February 1997 $83.6 9 Redmond, Technical Services and
WA Information Technology
</TABLE>
All acquisitions made by the Company have been accounted for on a purchase
basis and the results of operations of each of the businesses acquired have been
included in the Company's consolidated financial statements from the date of
acquisition.
The Company's results of operations and financial condition reflect its
rapid growth through acquisitions. Amortization of intangibles, principally
goodwill, has also increased as a result of acquisitions. The Company has made
and continues to make investments in connection with the purchase and
integration of its acquired businesses in order to realize long-term
improvements in profitability; however, the costs of integration may have an
adverse
7
<PAGE>
effect on short-term operating results. Management believes that, as the Company
integrates its acquired businesses, the adverse effect of integration expenses
on profitability are expected to decline as are operating expenses as a
percentage of net sales. However, to the extent that the Company makes
additional acquisitions in the future, there can be no assurance that the
Company's results of operations will not be adversely affected by integration
costs. See "Risk Factors" in the Prospectus.
The Company serves customers in three principal sectors --
telecommunications, information technology and technical services. In the
telecommunications sector, the Company provides staffing for wireline and
wireless communications systems development, satellite and earth station
deployment, network management and plant modernization. In the information
technology sector, the Company provides staffing for specific projects requiring
highly specialized skills such as applications programming and development,
client/server development, systems software architecture and design, systems
engineering and systems integration. In the technical services sector, the
Company provides staffing for national laboratory research in such areas as
environmental safety, alternative energy source development and laser
technology, and provides highly-skilled labor meeting diverse commercial needs
in the avionics and aerospace, architectural, automotive, energy and power,
pharmaceutical, marine and petrochemical fields.
Gross margins on staffing services can vary significantly depending on
factors such as the specific services being performed, the overall contract size
and the amount of recruiting required. Margins on the Company's sales in the
technical services sector are typically significantly lower than those in the
telecommunications and IT sectors, although the trend in the IT staffing sector
has been toward lower gross margins generally as this sector matures and
consolidates. Additionally, in certain markets the Company has experienced
significant pricing pressure from some of its competitors. Consequently, changes
in the Company's sales mix can be expected to impact the overall gross margins
generated by the Company.
Staffing personnel placed by the Company are Company employees. The Company
is responsible for employee related expenses for its employees, including
workers' compensation, unemployment compensation insurance, Medicare and Social
Security taxes and general payroll expenses. The Company offers health, dental,
disability and life insurance to its billable employees.
The Company's quarterly operating results are affected primarily by the
number of billing days in the quarter and the seasonality of its customers'
businesses. Demand for services in the technical services sector has
historically been lower during the year-end holidays through January of the
following year, showing gradual improvement over the remainder of the year.
Although less pronounced than in technical services, the demand for services of
the telecommunications and IT sectors is typically lower during the first
quarter until customers' operating budgets are finalized. The Company believes
that the effects of seasonality will be less severe in the future as revenues
contributed by the information technology and telecommunications sectors
continue to increase as a percentage of the Company's consolidated revenues.
Results of Operations
The historical financial information for the Company presented in this
Supplement for December 31, 1995 and 1994 relates principally to the Company's
former jewelry operations which were discontinued September 30, 1995. This
historical financial information includes limited results of the Company's
technical staffing operations, all of which, except for COMFORCE Telecom, were
acquired since January 1, 1996. Consequently, a discussion and comparison of the
Company's historical results of operations may not be meaningful. In order to
provide a discussion of results which may be more meaningful than the historical
discussion, the Company has (i) presented under "Selected Financial Information"
in this Supplement unaudited pro forma data of the Company for the years ended
December 31, 1995 and 1994 assuming that the acquisition of COMFORCE Telecom
(which was acquired by the Company in October 1995) and related financing and
capital transactions had occurred as of January 1, 1994, and
8
<PAGE>
(ii) presented below a comparison of 1996 historical results of operations with
1995 pro forma results, and of 1995 pro forma results with 1994 pro forma
results.
Year Ended December 31, 1996 Compared to Pro Forma Year Ended December 31, 1995
Revenues of $55.9 million for the year ended December 31, 1996 were $43.9
million, or 367% higher than pro forma revenues for the year ended December 31,
1995. This increase in revenues is attributable to the acquisitions completed
during 1996 and growth in the telecommunications and information technology
sectors which were served by the Company in 1995 and 1996.
Cost of revenues for the year ended December 31, 1996 was 85.2% of revenues
compared to pro forma cost of revenues of 75.3% for the year ended December 31,
1995. The 1996 cost of revenues increase of 9.9% is a result of the Company's
expansion into more mature technical staffing sectors.
Selling, general and administrative expenses for the year ended December
31, 1996 decreased $1.0 million or 14.0% from the pro forma selling, general and
administrative expenses for the year ended December 31, 1995. The decrease in
selling, general and administrative expense is a result of the absence, in 1996,
of two nonrecurring charges that impacted 1995 pro forma selling, general and
administrative expenses. These charges included a stock compensation expense of
$3.4 million and management fees of $1.1 million paid by COMFORCE Telecom to its
former parent company prior to its acquisition by the Company.
Historical operating income for the year ended December 31, 1996 was $2.3
million compared to a pro forma operating loss of $3.9 million for the year
ended December 31, 1995. The improvement of $6.2 million was principally
attributable to the discontinuance in the 1996 period of the non-recurring
charges of $4.5 million recorded in 1995. The 1996 operating income was also
impacted by acquisitions completed during the year and increased margins on
revenue growth in the Company's telecommunications and information technology
sectors.
The income tax provision for the year ended December 31, 1996 was $900,000
on income of $2.3 million compared with pro forma income taxes of $14,000 (on
pro forma loss before income taxes of $4.1 million) for the year ended December
31, 1995.
Pro Forma Year Ended December 31, 1995 Compared to Pro Forma Year Ended
December 31, 1994
Pro forma revenues of $12.0 million for the year ended December 31, 1995
were $3.7 million or 45% higher than pro forma revenues for the year ended
December 31, 1994. The increase in 1995 pro forma revenues is attributable to
growth in sectors serviced by the Company-telecommunications and information
technology services.
Pro forma cost of revenues for the year ended December 31, 1995 was 75.3%
of pro forma revenues compared to pro forma cost of revenues of 77.8% for the
year ended December 31, 1994. Although the pro forma cost of revenues increased
by $2.6 million for the year ended December 31, 1995 as compared to the year
ended December 31, 1994 due to increased revenues during 1995, on a percentage
basis, the 1995 pro forma cost of revenues decreased by 2.5% as a result of a
more favorable sales mix in 1995.
Pro forma selling, general and administrative expenses for the year ended
December 31, 1995 increased $3.9 million, over the pro forma selling, general
and administrative expenses for the year ended December 31, 1994. This increase
was principally related to a non-recurring stock compensation charge of $3.4
million.
Pro forma operating results for the year ended December 31, 1994 were
negatively impacted by a non-recurring charge of $803,000 related to management
fees paid by COMFORCE Telecom to its former parent company prior to its
acquisition by the Company. Pro forma operating results for the year ended
December 31, 1995 included a charge of $1.1 million for management fees paid by
COMFORCE Telecom to its former parent Company prior to
9
<PAGE>
its acquisition by the Company as well as a $3.4 million charge related to
non-recurring stock compensation expense. The net impact of these non-recurring
charges on the 1995 pro forma results was $4.5 million as compared to $803,000
for 1994.
Pro forma operating loss for the year ended December 31, 1995 was $3.9
million compared to a pro forma operating loss of $1.1 million for the year
ended December 31, 1994. The increase in operating loss of $2.8 million was
principally attributable to increased management fees and stock compensation
charges of $3.8 million recorded in 1995 as compared to 1994, partially offset
by increased margin contributions resulting from revenue growth experienced in
1995.
Pro forma other expense, principally net interest expense, for the year
ended December 31, 1995 decreased $1.1 million as compared to the year ended
December 31, 1994. The 1995 decrease is principally due to the 1994 and 1995
discharge of indebtedness under terms of the bank loan agreements related to the
Company's discontinued jewelry operations.
As a result of the discontinuance of its jewelry operations, it has been
determined that the Company will be unable to utilize losses from those
businesses in the future.
Financial Condition, Liquidity and Capital Resources
During 1996, the Company's primary sources of funds to meet working capital
needs were from operations and borrowings under the $10.0 million Chase Credit
Facility. In addition, in connection with the RHO acquisition in February 1997,
the Company entered into a short-term credit facility with U.S. Bank of
Washington, National Association (the "U.S. Bank Credit Facility"), providing
for up to $7.5 million in availability for working capital purposes. Since the
fourth quarter of 1995, the Company has funded its strategy of growth through
acquisitions principally through private debt or equity financing, including its
sale of $25.2 million of convertible debentures in February and March 1997. See
note 20 to the Company's consolidated financial statements for the year ended
December 31, 1996. In March 1997, a portion of the proceeds from the debenture
offering were used to retire the Chase Credit Facility. The Company is presently
seeking to obtain a credit facility providing for term loan and revolving credit
availability of from $50 million to $75 million to fund additional acquisitions,
to retire the U.S. Bank Credit Facility (which matures in July 1997) and to
finance working capital needs (to replace the Chase Credit Facility and the U.S.
Bank Credit Facility). In respect of its working capital requirements, the
Company typically pays its billable employees weekly for their services before
receiving payment from its customers. As new offices are established or
acquired, or as existing offices expand and revenues are increased, there will
be greater requirements for cash resources to fund current operations.
Management believes that such a replacement credit facility will be
sufficient to meet its anticipated level of business activity in 1997. However,
the Company can give no assurance that such a credit facility will be available
or, if available, that it will be available on terms acceptable to the Company.
Although management believes that the funds provided by operations, the U.S.
Bank Credit Facility and funds remaining under the $25.2 million debt placement
will be sufficient to meet its present working capital requirements through July
1997, the Company's inability to obtain a new credit facility could require the
Company to delay, scale back or eliminate all or some of its market development
and acquisition projects and could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is obligated under various acquisition agreements to make
earn-out payments to the sellers of acquired companies, subject to the acquired
companies' achieving specified earnings targets. The maximum amount of these
potential earn-out payments is $717,000 in cash payable in 1997 and $5 million
in cash and $4.5 million in stock payable in the three-year period from 1998 to
2000. The Company cannot currently estimate whether it will be obligated to pay
the maximum amount; however, the Company anticipates that the cash generated by
the operations
10
<PAGE>
of the acquired companies will provide all or a substantial part of the capital
required to fund the cash portion of the earn-out payments.
Cash and cash equivalents increased $3 million during 1996. Cash flows of
$25.3 million provided by financing activities exceeded cash flows of $5.8
million used in operating activities and cash flows of $16.5 million used by
investing activities. Cash flows used by operating activities were principally
attributable to temporary need to fund Williams, RRA, Force Five, AZATAR and
Continental accounts receivable and their carrying costs due to the purchase of
Williams in March 1996, RRA in May 1996, Force Five in August 1996 (effective
July 31, 1996), AZATAR in November 1996, and Continental in November 1996. Cash
flows used in investing activities are principally related to the purchase of
Williams, RRA, Force Five, AZATAR and Continental for a total of $15.8 million,
including directly related costs, as well as loans made to certain officers of
the Company pursuant to their employment contracts in the amount of $373,000 and
the purchase of fixed assets in the amount of $329,000. Cash flows from
financing activities were attributable to net borrowings under the Chase Credit
Facility of $3.9 million, the exercise of warrants in the amount of $2.0
million, the issuance of Series D, E and F Preferred Stock in the amount of $6.4
million, $4.6 million and $3.0 million, respectively, and the proceeds from the
sale of Common Stock and associated payment rights of $6.4 million, partially
offset by dividend payments of $228,000, repayments on notes of $500,000 and
registration costs of $300,000.
In the technical staffing industry, administrative, accounting and other
"back office" operations are often provided on a centralized basis. The Company
believes that its management information systems responsible for these functions
are capable of supporting additional levels of business in the future at low
incremental costs. The Company currently intends to integrate the administrative
functions of its recent and future acquisitions into the systems of previously
acquired companies to seek to improve operating efficiencies.
During the year ended December 31, 1996, the Company eliminated its working
capital deficiency and, at December 31, 1996, had excess working capital of $8.0
million. The increase in working capital is principally attributable to the
Company's increase in accounts receivable due to the acquisition of Williams,
RRA, Force Five, AZATAR and Continental and the reduction in the liabilities
assumed by ARTRA.
As of December 31, 1996, approximately $24.8 million, or 57% of the
Company's total assets were intangible assets, which will increase substantially
with the inclusion of RHO's assets. These intangible assets substantially
represent amounts attributable to goodwill recorded in connection with the
Company's acquisitions and will be amortized over a five to forty year period,
resulting in an annual charge of in excess of $1 million with the inclusion of
RHO. Various factors could impact the Company's ability to generate the earnings
necessary to support this amortization schedule, including fluctuations in the
economy, the degree and nature of competition, demand for the Company's
services, and the Company's ability to integrate the operations of acquired
businesses, to recruit and place staffing professionals, to expand into new
markets and to maintain gross margins in the face of pricing pressures. The
failure of the Company to generate earnings necessary to support the
amortization charge may result in an impairment of the asset. The resulting
write-off could have a material adverse effect on the Company's business,
financial condition and results of operations.
Other Matters
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), which requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Impairment
is evaluated by comparing future cash flows (undiscounted and without interest
charges) expected to result from the use or sale of the asset and its eventual
disposition to the carrying amount of the asset.
11
<PAGE>
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), in 1996. As permitted by
SFAS 123, the Company continues to measure compensation cost in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but provides pro forma disclosures of net income and earnings per
share as if the fair value method (as defined in SFAS 123) had been applied
beginning in 1995.
The Company does not believe that its adoption of either SFAS 121 or SFAS
123 will have a material impact on its financial statements and the Company will
comply with the related disclosure requirements.
Sale of Convertible Debentures
The Debentures. From February 27 to March 21, 1997, the Company sold its
Subordinated Convertible Debentures ("Debentures") to certain institutional
investors for cash or in exchange for shares of the Company's Series F Preferred
Stock, as described below, in the principal amount of $25.2 million. The
Debentures bear interest at the rate of 8% per annum during the 180 day period
following Closing (as defined below) and thereafter at the rate of 10% per annum
continuing until fully paid or converted. Interest on the Debentures is payable
quarterly in cash or in Common Stock of the Company, at the Company's option.
The Debentures may be redeemed by the Company at any time from and after the
date of issuance, in whole or in part, within 360 days after any disbursement to
the Company of net proceeds from the sale of Debentures (each a "Closing"), at a
redemption price equal to the sum of (i) the principal amount thereof, (ii) all
accrued, unpaid interest thereon and (iii) premiums ranging from 5% (2.5% in the
case of Debentures exchanged for Series F Preferred Stock) for Debentures
redeemed within 60 days after Closing to 25% for Debentures redeemed between 181
and 360 days after Closing.
The Company has also effected the repurchase of 2,750 of the 3,250
outstanding shares of its Series F Preferred Stock by issuing additional
debentures in the original principal amount of 115% of the liquidation value of
the Series F Preferred Stock to the holders thereof (the "Series F Holders") in
exchange for the Series F Preferred Stock. The Debentures received by the Series
F Holders may be redeemed by the Company, at any time from and after the
Closing, in whole or in part, at a redemption price equal to the redemption
price for the Debentures, except that the redemption premium is 50% of the
Debenture premium for redemptions effected through 90 days after Closing.
Conversion. The Debentures may be converted, in whole or in part, at the
option of the respective holder thereof (each a "Buyer") beginning 181 days
following the Closing. The Company has the option to make the requested
conversion in either cash or in shares of the Company's Common Stock, or in any
combination thereof. Cash conversions are payable at 125% of face value (plus
accrued interest). Stock conversions are payable at 100% of face value (plus
accrued interest) in Common Stock valued at 75% of the average closing bid price
for the five trading days ending on the trading day before the conversion. Any
portion of any Debenture which remains outstanding on the 360th day following
the Closing will be automatically converted to cash or shares of Common Stock,
or any combination thereof, as determined by the Company. Under certain
circumstances, the aggregate number of shares of Common Stock issuable upon
exercise of the Warrants and the Additional Warrants (described below under
"--Warrants") or upon conversion of the Debentures is limited, which could
require that the Company effect certain conversions through cash payments.
Warrants. From February 27 to March 21, 1997, the Company issued or agreed
to issue warrants ("Warrants") to purchase 504,000 shares of its Company's
Common Stock to the Buyers, which Warrants are exercisable as follows: (a)
Warrants to purchase 100,800 shares become exercisable beginning 6 months after
Closing and ending three years thereafter; (b) if the Debentures are not
redeemed within 60 days after Closing, Warrants to purchase 100,800 shares
become exercisable beginning 6 months after Closing and ending three years
thereafter; (c) if the Debentures are not redeemed within 90 days after Closing,
Warrants to purchase 100,800 shares become exercisable beginning 6 months after
Closing and ending three years thereafter; (d) if the Debentures are not
redeemed within 120 days after Closing, Warrants to purchase 100,800 shares
become exercisable beginning 6 months after
12
<PAGE>
Closing and ending three years thereafter; and (e) if the Debentures are not
redeemed within 150 days after Closing, Warrants to purchase 100,800 shares
become exercisable beginning 6 months after Closing and ending three years
thereafter. The exercise price of the Warrants issued ranges from $6.85 to $7.65
per share, which is equal to the average closing bid price of the Company's
Common Stock for the five-day trading period ending on the day prior to each
Closing.
The Company is also required to issue additional warrants ("Additional
Warrants") to purchase 504,000 shares of the Company's Common Stock to the
Buyers, which Additional Warrants become exercisable to the extent that
Debentures are not redeemed within 180 days following Closing, beginning on the
later of (i) the date the Replacement Debentures are required to be issued or
(ii) the effective date of the registration statement described below under
"--Registration" and ending three years thereafter. The Additional Warrants will
have an exercise price equal to the average closing bid price of the Company's
Common Stock over the five-day trading period ending 179 days after the Closing.
Registration. The Company is required to cause the shares issuable upon
conversion of the Debentures (or payable as interest thereon) or upon the
exercise of the Warrants and Additional Warrants to be registered for resale
under a registration statement filed with the Securities and Exchange Commission
under the Securities Act of 1933 within six months after Closing.
13
<PAGE>
Comforce Corporation and Subsidiaries
Index to Financial Statements
Page
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-7
Notes to Financial Statements F-9
Schedule II Valuation and Qualifying Accounts F-35
F-1
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of Comforce Corporation, Inc.:
We have audited the accompanying consolidated financial statements and the
financial statement schedule of Comforce Corporation and Subsidiaries (the
"Company") as listed in the index on page F-1 of this registration statement.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Comforce Corporation and Subsidiaries as of December 31, 1996 and 1995, and
consolidated the results of their operations and their cash flows for the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
January 30, 1997, except as to Note 20
for which the date is March 21, 1997.
F-2
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Balance Sheets
as of December 31, 1996 and 1995 (in thousands)
Assets
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3608 $ 649
Accounts receivable, net 12042 1698
Prepaid expenses 243
Other assets 373 117
Receivable from ARTRA GROUP Incorporated 1046
Deferred income tax 278
--------- --------
Total current assets 16,544 3,510
Property and equipment, net 744 90
Intangible assets, net 24,756 4,801
Other assets 1,322 135
--------- --------
Total assets $ 43,366 $ 8,536
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ 3,850
Notes payable $ 500
Accounts payable 1,398 75
Accrued expenses 2,930 719
Income taxes 354 214
Liabilities to be assumed by ARTRA GROUP Incorporated, and
net liabilities of discontinued operations 3,699
--------- --------
Total current liabilities 8,532 5,207
--------- --------
Noncurrent liabilities to be assumed by ARTRA GROUP Incorporated 541
Obligations expected to be settled by the issuance of common stock 550
Deferred income tax 90
--------- --------
Total liabilities 8,622 6,298
--------- --------
Commitments and contingencies
Stockholders' Equity:
Series D senior convertible preferred stock, $.01 par value; 15,000 shares authorized,
7,002 shares issued and outstanding, liquidation value of $1,000 per share
($7,002,000) 1
Series F convertible preferred stock, $.01 par value; 10,000 shares
authorized, 3,250 shares issued and outstanding, liquidation value of
$1,000 per share ($3,250,000) 1
Common stock, $.01 par value; 100,000,000 shares authorized, 12,701,934 shares
issued and outstanding in 1996 and 9,309,000 shares issued and outstanding in 1995 127 92
Additional paid-in capital 34,253 95,993
Accumulated deficit (93,847)
Retained earnings, since January 1, 1996 362
--------- --------
Total stockholders' equity 34,744 2,238
--------- --------
Total liabilities and stockholders' equity $ 43,366 $ 8,536
========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Comforce Corporation and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31, 1996, 1995 and 1994 (in thousands, except per share data)
1996 1995 1994
<S> <C> <C> <C>
Net sales $ 55,867 $ 2,387
-------- --------
Costs and expenses:
Cost of goods sold 47,574 1,818
Stock compensation 3,425
Selling, general and administrative expenses 5,266 461 $ 966
Depreciation and amortization 614 362
-------- -------- --------
Total costs and expenses 53,454 6,066 966
-------- -------- --------
Operating income (loss) 2,413 (3,679) (966)
Other income (expense):
Interest expense (201) (585) (1,316)
Other income (expense), net 40 (33)
-------- -------- --------
(161) (618) (1,316)
Income (loss) from continuing operations before income taxes
and extraordinary credit 2,252 (4,297) (2,282)
Provision for income taxes (900) (35)
-------- -------- --------
Income (loss) from continuing operations 1,352 (4,332) (2,282)
Loss from discontinued operations (17,211) (16,220)
-------- -------- --------
Income (loss) before extraordinary credit 1,352 (21,543) (18,502)
Extraordinary credit, net discharge of indebtedness 6,657 8,965
-------- -------- --------
Net income (loss) 1352 (14,886) (9,537)
Dividends on preferred stock 325
-------- -------- --------
Accretive dividend on Series F preferred stock 665
-------- -------- --------
Income (loss) available to common stockholders $ 362 $(14,886) $ (9,537)
======== ======== ========
Income (loss) per share:
Continuing operations before accretive dividend $ .08 $ (0.95) $ (0.72)
Discontinued operations (3.74) (5.08)
-------- -------- --------
Income (loss) before extraordinary credit and accretive
dividend .08 (4.69) (5.80)
Extraordinary credit 1.45 2.81
Accretive dividend on Series F preferred stock (.05)
-------- -------- --------
Net income (loss) per share $ .03 $ (3.24) $ (2.99)
======== ======== ========
Weighted average shares outstanding 12,991 4,596 3,195
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Comforce Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 (in thousands, except share amounts)
Restricted
Preferred Stock Common Stock Common Stock
----------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------- ------- --------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 7,459 $17,273 3,162,772 $31
Net loss
ARTRA capital contributions
Lori preferred stock issued in exchange for
ARTRA notes and advances 2,242 2,242
Common stock issued under terms of debt settlement agreement
settlement agreement 100,000 1
Restricted common stock 100,000 $(700)
Exercise of stock options and warrants 2,500
Fractional shares purchased (253)
------- ------- --------- ----- -------- --------
Balance at December 31, 1994 9,701 19,515 3,265,019 32 100,000 (700)
Net earnings
Common stock issued as consideration for debt restructuring 150,000 2
Common stock issued as additional consideration for short-term
borrowings 141,176 1
Common stock issued to pay liabilities 115,098 1
Common stock sold through private placements 1,946,667 19
Common stock issued under compensation agreements with
individuals to manage the Company's telecommunications and
computer technical staffing services business 3,091,304 31
Common stock issued as additional consideration for Telecom
purchase guarantee 350,000 3
Common stock issued as compensation for Telecom acquisition fees 150,000 2
Common stock issued to ARTRA in exchange for the Company's
entire preferred stock issue (9,701) (19,515) 100,000 1
Restricted common stock issued as additional consideration for
short-term borrowings (100,000) 700
Liabilities assumed by ARTRA
Fractional shares purchased (66)
------- ------- --------- ----- -------- --------
Balance at December 31, 1995 -- -- 9,309,198 92 -- --
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
-------- -------- -------
<S> <C> <C> <C>
Balance at December 31, 1993 $60,680 $(69,424) $8,560
Net loss (9,537) (9,537)
ARTRA capital contributions 4,000 4,000
Lori preferred stock issued in exchange for
ARTRA notes and advances 2,242
Common stock issued under terms of debt settlement agreement
settlement agreement 699 700
Restricted common stock (700)
Exercise of stock options and warrants 13 13
Fractional shares purchased
-------- -------- -------
Balance at December 31, 1994 65,392 (78,961) 5,278
Net earnings (14,886) (14,886)
Common stock issued as consideration for debt restructuring 335 337
Common stock issued as additional consideration for short-term
borrowings 229 230
Common stock issued to pay liabilities 374 375
Common stock sold through private placements 5,820 5,839
Common stock issued under compensation agreements with
individuals to manage the Company's telecommunications and
computer technical staffing services business 2,844 2,875
Common stock issued as additional consideration for Telecom
purchase guarantee 587 590
Common stock issued as compensation for Telecom acquisition fees 251 253
Common stock issued to ARTRA in exchange for the Company's
entire preferred stock issue 19,514
Restricted common stock issued as additional consideration for
short-term borrowings 700
Liabilities assumed by ARTRA 647 647
Fractional shares purchased
-------- -------- -------
Balance at December 31, 1995 95,993 (93,847) 2,238
</TABLE>
F-5
Continued
<PAGE>
<TABLE>
<CAPTION>
Comforce Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended December 31, 1996, 1995 and 1994 (in thousands, except share amounts)
Series E Series D
Common Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
------------ -------- ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 9,309,198 $92
Quasi-Reorganization as of January 1, 1996
Exercise of stock options 4,500 1
Exercise of stock warrants 449,445 5
Issuance of Series E convertible preferred stock 8,871 $1
Conversion of Series E preferred to common stock 887,100 9 (8,871) (1)
Issuance of Series D senior convertible preferred stock 7,002 $1
Issuance of Series F preferred stock
Common stock sold through private placement 810,000 8
SEC registration fees
Common stock issued as consideration for the
purchase of Force Five 27,398 1
Common stock issued as consideration for the
purchase of AZATAR 243,211 2
Common stock issued as consideration for the purchase
of Continental 36,800 1
Common stock issued to pay liabilities assumed by ARTRA 137,500 1
Liabilities assumed by ARTRA
Common stock issued to management for anti-dilution provision 796,782 7
Net earnings
Dividends:
Series E preferred stock
Series D preferred stock
Series F preferred stock
Accretive dividend on Series F preferred stock
------------ -------- ------ ------ -------- ------
12,701,934 $127 -- $ -- 7,002 $1
============ ======== ====== ====== ======== ======
<CAPTION>
Retained
Series F Earnings
Preferred Stock Additional Since Total
--------------- Paid-in Accumulated January 1, Stockholders'
Shares Amount Capital Deficit 1996 Equity
------ ------ ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $95,993 $(93,847) $2,238
Quasi-Reorganization as of January 1, 1996 (93,847) 93,847
Exercise of stock options 22 23
Exercise of stock warrants 2,041 2,046
Issuance of Series E convertible preferred stock 4,635 4,636
Conversion of Series E preferred to common stock (8)
Issuance of Series D senior convertible preferred stock 6,415 6,416
Issuance of Series F preferred stock 33 $1 2,957 2,958
Common stock sold through private placement 6,362 6,370
SEC registration fees (300) (300)
Common stock issued as consideration for the
purchase of Force Five 499 500
Common stock issued as consideration for the
purchase of AZATAR 4,118 4,120
Common stock issued as consideration for the purchase
of Continental 574 575
Common stock issued to pay liabilities assumed by ARTRA 275 276
Liabilities assumed by ARTRA 3,318 3,318
Common stock issued to management for anti-dilution provision 534 541
Net earnings $1,352 1,352
Dividends:
Series E preferred stock (18) (18)
Series D preferred stock (280) (280)
Series F preferred stock (27) (27)
Accretive dividend on Series F preferred stock 665 (665)
---- --- ------- -------- ------ -------
33 $1 $34,253 $ -- $362 $34,744
==== === ======= ======== ====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,352 $(14,886) $ (9,537)
Adjustments to reconcile net earnings (loss) to cash flows from
operating activities:
Extraordinary gain from net discharge of indebtedness (6,657) (8,965)
Provision for disposal of fashion costume jewelry business 1,600
Depreciation of property, plant and equipment 139 101 438
Amortization of excess of cost over net assets acquired 475 261 1,018
Impairment of goodwill 12,930 10,800
Amortization of other assets 374 648
Common stock compensation 3,657
Allowance for doubtful accounts 212
Deferred taxes (189)
Changes in assets and liabilities, net of the effects of
acquisitions and the discontinued fashion costume
jewelry business (in 1995 and 1994):
(Increase) decrease in receivables (10,500) 913 2,117
Decrease in receivable from ARTRA 400
Decrease in inventories 2,105 1,098
Increase in prepaid expenses and other current assets (59) (56)
(Increase) decrease in other noncurrent assets (1,183) 170 153
Increase (decrease) in payables and accrued expenses 3,637 (2,127) (513)
Decrease in income taxes (60)
Decrease in other current and noncurrent
liabilities (408) (468)
-------- -------- --------
Net cash used by operating activities (5,776) (2,023) (3,211)
-------- -------- --------
Cash flows from investing activities:
Acquisition of COMFORCE Global, net of cash acquired (5,580)
Acquisition of Williams, RRA, Force Five, Continental and
Azatar, net of cash acquired (15,834)
Additions to property, plant and equipment (329) (656) (697)
Increase in receivable from officers (373)
Payment of liabilities with restricted cash 550 (550)
-------- -------- --------
Net cash used by investing activities (16,536) (5,686) (1,247)
-------- -------- --------
</TABLE>
F-7
Continued
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing activities:
Payment of note payable (500)
Net increase (decrease) in short-term debt 2,486 (138)
Proceeds from line of credit 4,750
Repayment on line of credit (900)
Proceeds from issuance of preferred stock 14,010
Proceeds from exercise of stock options 23
Proceeds from exercise of warrants 2,046
Payment of registration costs (300)
Dividends paid (228)
Proceeds from long-term borrowings 1,241
Reduction of long-term debt (750) (444)
Proceeds from private placement of common stock 6,370 5,839
ARTRA capital contribution 1,500
Notes and advances from ARTRA 2,531
Other 11
-------- -------- --------
Net cash from financing activities 25,271 7,575 4,701
-------- -------- --------
Increase (decrease) in cash and cash equivalents 2,959 (134) 243
Cash and cash equivalents, beginning of year 649 783 540
-------- -------- --------
Cash and cash equivalents, end of year $ 3,608 $ 649 $ 783
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 157 $ 273 $ 435
Income taxes paid, net 934 7 24
Supplemental schedule of noncash investing and financing activities:
Quasi-reorganization (93,848)
Common stock issued in connection with acquisitions 5,195 843
Accretive dividend on preferred stock 665
Common stock issued to settle liabilities 550 374
Amounts assumed by ARTRA 3,594
Accrued dividends 97
Common stock issued as consideration for debt
restructuring and short-term loans 567
ARTRA common stock issued to Lori's bank lender
under terms of the debt settlement agreement
2,500
Transfer New Dimensions assets, net of cash of $674 to Lori's
bank lender under terms of the debt settlement agreement
6,475
Lori preferred stock issued in exchange for ARTRA notes
and advances 2,242
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
Comforce Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation:
COMFORCE Corporation ("COMFORCE" or the "Company"), formerly The Lori
Corporation ("Lori"), is a provider of telecommunications and computer
technical staffing and consulting services worldwide and maintains an
extensive global database of technical specialists. As discussed in Note 4,
in September 1995, the Company adopted a plan to discontinue its jewelry
business ("Jewelry Business") conducted by its two wholly-owned
subsidiaries, Lawrence Jewelry Corporation ("Lawrence") and Rosecraft, Inc.
("Rosecraft").
Effective January 1, 1996, the Company effected a quasi-reorganization
through the application of $93,847,000 of its $95,993,000 additional
paid-in capital account to eliminate its accumulated deficit. The Company's
Board decided to effect a quasi-reorganization given that the Company
achieved profitability following its entry into the technical staffing
business and discontinuation of its unprofitable Jewelry Business. The
Company's accumulated deficit at December 31, 1995 is primarily related to
the discontinued operations and is not, in management's view, reflective of
the Company's current financial condition.
ARTRA Group Incorporated ("ARTRA"), a public company whose shares are
traded on the New York Stock Exchange, was formerly the Company's parent
prior to October 17, 1995. At December 31, 1996, ARTRA owned less than 20%
of the Company's stock. ARTRA owns its shares of Common Stock in the
Company through a wholly-owned subsidiary, Fill-Mor Holding, Inc.
("Fill-Mor").
On October 17, 1995, Lori acquired one hundred percent of the capital stock
of COMFORCE Telecom Inc. ("COMFORCE Telecom"), formerly Spectrum Global
Services, Inc., d/b/a Yield Global, a wholly-owned subsidiary of Spectrum
Information Technologies, Inc. ("Spectrum"). In connection with the
re-focus of Lori's business, Lori changed its name to COMFORCE Corporation.
Since October 17, 1995, the Company has acquired a number of staffing and
consulting business throughout the United States. See Note 3.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of COMFORCE
Corporation, COMFORCE Telecom, Inc. COMFORCE Technical Services, Inc.
("CTS") and COMFORCE Information Technology, Inc. ("CIT"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
F-9
<PAGE>
Notes to Consolidated Financial Statements, Continued
Revenue Recognition
Revenue for providing staffing services is recognized at the time such
services are rendered.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid short-term investments with
an original maturity of three months or less. Cash equivalents consists
primarily of money market funds.
Accounts Receivable and Unbilled Accounts Receivable
Accounts receivable consists of those amounts due to the Company for
staffing services rendered to various customers. The Company's allowance
for doubtful accounts was $213,000 as of December 31, 1996. Unbilled
receivables consists of revenues earned and recoverable costs for which
billings have not yet been presented to the customers as of the balance
sheet date. Unbilled accounts receivable was $1,148,000 and $151,000 as of
December 31, 1996 and 1995, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
primarily on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the life
of the lease or of the improvement. Maintenance and repairs are charged to
income as incurred and betterments that extend the useful life are
capitalized. Upon retirement or sale, the cost and accumulated depreciation
are eliminated from the respective accounts, and the gain or loss, if any,
is included in income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the
long-lived asset, an impairment loss is recognized. To date, no impairment
losses have been recognized.
Intangibles
The net assets of a purchased business are recorded at their fair value at
the date of acquisition. At December 31, 1996, the excess of purchase price
over the fair value of net assets acquired (primarily goodwill) is
reflected as an intangible asset and amortized on a straight-line basis
over a period of 20-40 years. (See Note 5.)
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through forecasted future operations.
Impairment is evaluated by comparing future cash flows (undiscounted and
without interest charges) expected to result from the use or sale of the
asset and its eventual disposition, to the carrying amount of the asset. To
date, no impairment losses have been recognized.
F-10
<PAGE>
Notes to Consolidated Financial Statements, Continued
Income Taxes
The Company recognizes deferred income taxes for the tax consequences in
future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense consists of the tax payable for
the period and the change during the period in deferred tax assets and
liabilities.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates relate to the
realizability of accounts receivable, long-lived assets and deferred tax
assets. Actual results could differ from those estimates.
Fair Values of Financial Instruments
Cash and cash equivalents and fixed rate debt obligations are reflected in
the accompanying consolidated balance sheets at amounts considered by
management to reasonably approximate fair value.
Management is not aware of any factors that would significantly affect the
value of these amounts.
Accounting for Long-Lived Assets
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges)
expected to result from the use or sale of the asset and its eventual
disposition, to the carrying amount of the asset.
Accounting for Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), in 1996. As
permitted by SFAS 123, the Company continues to measure compensation cost
in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," but provides pro forma disclosures of net
income and earnings per share as if the fair value method (as defined in
SFAS 123) had been applied beginning in 1995.
F-11
<PAGE>
Notes to Consolidated Financial Statements, Continued
Earnings Per Share Calculation
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), which establishes standards for computing and presenting
earnings per share (EPS). SFAS No. 128 will be effective for financial
statements issued for periods ending after December 15, 1997. Earlier
application is not permitted. Management has not yet evaluated the effects
of this change on the Company's financial statements.
Reclassification
Certain items in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
3. Certain Acquisitions:
On October 17, 1995, Lori acquired one hundred percent of the capital stock
of COMFORCE Telecom. The price paid by the Company for the COMFORCE Telecom
stock and related acquisition costs was approximately $6.4 million, net of
cash acquired. This consideration consisted of cash to the seller of
approximately $5.1 million, fees of approximately $950,000, including a fee
of $750,000 to a related party, and 500,000 shares of the Company's common
stock valued at $843,000 (at a price per share of $1.68) issued as
consideration for various fees and guarantees associated with the
transaction. The 500,000 shares issued by the Company consisted of (i)
100,000 shares issued to a then unrelated party for guaranteeing the
purchase price to the seller, (ii) 100,000 shares issued to ARTRA, then the
majority stockholder of the Company, in consideration of its guaranteeing
the purchase price to the seller and agreeing to enter into the Assumption
Agreement, (iii) 150,000 issued to two unrelated parties for advisory
services in connection with the acquisition, and (iv) 150,000 shares issued
to Peter R. Harvey, then a Vice President and director of the Company, for
guaranteeing the payment of the purchase price to the seller and other
guarantees to facilitate the transaction. Additionally, in conjunction with
the COMFORCE Telecom acquisition, ARTRA agreed to assume substantially all
pre-existing Lori liabilities and indemnify COMFORCE in the event any
future liabilities arise concerning pre-existing environmental matters and
business related litigation.
COMFORCE Telecom provides telecommunications and computer technical
staffing services worldwide to Fortune 500 companies and maintains an
extensive, global database of technical specialists with an emphasis on
wireless communications capability. The acquisition of COMFORCE Telecom was
accounted for by the purchase method and, accordingly, the assets and
liabilities of COMFORCE Telecom were included in the Company's financial
statements at their estimated fair market value at the date of acquisition
and COMFORCE Telecom's operations are included in the Company's statement
of operations from the date of acquisition. (See Note 5.)
The acquisition of COMFORCE was funded principally by private placements of
approximately 1,950,000 shares of the Company's common stock at $3.00 per
share plus detachable warrants to
F-12
<PAGE>
Notes to Consolidated Financial Statements, Continued
purchase approximately 970,000 shares of the Company's common stock at
$3.375 per share. The warrants expire five years from the date of issue.
On March 3, 1996, the Company acquired all of the assets of Williams
Communications Services, Inc. ("Williams"), a regional provider of
telecommunications and technical staffing services. The purchase price for
the assets of Williams was $2 million with a four year contingent payout
based on earnings of Williams. The value of the contingent payouts will not
exceed $2 million, for a total purchase price not to exceed $4 million. The
acquisition of Williams was accounted for by the purchase method and,
accordingly, Williams' operations are included in the Company's statement
of operations from the date of acquisition. (See Note 5.)
On May 10, 1996, the Company purchased all of the stock of Project Staffing
Support Team, Inc. and substantially all of the assets of RRA Inc. and
Datatech Technical Services, Inc. (collectively, "RRA") for an aggregate
purchase price of $5,100,000, plus acquisition costs and contingent
payments payable over three years in an aggregate amount not to exceed
$650,000. RRA is in the business of providing contract employees to other
businesses. The Company's headquarters are located in Tempe, Arizona. The
acquisition of RRA enables the Company, through its COMFORCE Technical
Services, Inc. subsidiary ("CTS"), to provide specialists for supplemental
staffing assignments as well as outsourcing and vendor-on-premises
programs, primarily in the electronics, avionics, telecommunications and
information technology business sectors. The acquisition was accounted for
by the purchase method and, accordingly, its operations are included in the
Company's statement of operations from the date of acquisition. (See Note
5.)
Effective July 31, 1996, the Company purchased all of the stock of Force
Five, Inc. ("Force Five") for an aggregate purchase price of $2,000,000,
payable in $1,500,000 cash, and 27,398 shares of the Company's Common Stock
valued at $500,000, plus a three-year contingent payout based on future
earnings of Force Five in an aggregate amount not to exceed $2,000,000.
Force Five, renamed COMFORCE Information Technologies, Inc. ("CIT"),
located in Dallas, Texas, provides information technology consulting
services to leading companies nationwide. The acquisition of Force Five was
accounted for under the purchase method and, accordingly, Force Five's
operations are included in the Company's statement of operations from the
date of acquisition. (See Note 5.)
On November 1, 1996, COMFORCE IT Acquisition Corp., a wholly-owned
subsidiary of the Company, merged with Azatar Computer Systems, Inc.
("Azatar") pursuant to the terms of an Agreement and Plan of Reorganization
entered into by such parties and W. Mark Holbrook, formerly the controlling
stockholder of Azatar (the "Merger Agreement"). Under the terms of the
Merger Agreement, the stockholders of Azatar received cash payments of
$1.03 million, 243,211 shares of the Company's common stock valued at $4.12
million, and contingent payments payable over three years in an aggregate
amount not to exceed $1.2 million payable in stock. Azatar is in the
business of information technology consulting. The acquisition of Azatar
was accounted for under the purchase method and, accordingly, Azatar's
operations are included in the Company's statement of operations from the
date of acquisition. (See Note 5.)
On November 8, 1996, the Company, through its subsidiary, COMFORCE Telecom
Inc., purchased, substantially all of the assets of Continental Field
Services Corporation and its affiliate, Progressive Telecom, Inc.,
(collectively "Continental") for a purchase price of $4.425 million in
F-13
<PAGE>
cash, 36,800 shares of the Company's common stock valued at $575,000, and
contingent payments payable over three years in an aggregate amount not to
exceed $1.02 million. The acquisition of Continental was accounted for
under the purchase method and, accordingly, Continental's operations are
included in the Company's statement of operations from the date of
acquisition. (See Note 5.)
The aforementioned acquisitions were acquired through funding raised from
the issuance of common stock, preferred stock and bank borrowings.
The following unaudited proforma summary presents the consolidated results
of operations as if the acquisition has occurred on January 1, 1995 and
does not purport to be an indication of what would have occurred had the
acquisition been made as of that date or of results which may occur in the
future (in thousands).
Year Ended December 31,
1996 1995
(Unaudited) (Unaudited)
Revenue $ 98,692 $ 91,571
Net income (loss) from continuing operations 2,015 (1,934)
Loss from discontinued operations -- (17,211)
Extraordinary credits, net discharge of indebtedness -- 6,657
---------- --------
Net income (loss) $ 2,015 $(12,488)
========== ========
Income (loss) per share from continuing operations $ .07 $ (.22)
Income (loss) per share from discontinued operations (1.74)
Extraordinary credits .67
---------- --------
Net income (loss) per share $ .07 $ (1.29)
========== ========
The above proforma data assume the issuance of Series F preferred stock and
the borrowing under the revolving line of credit to finance these
transactions. Proforma adjustments include an interest cost increase of
$96,000 in 1996, a reduction of interest expense of $126,000 in 1995,
additional goodwill amortization of $290,000 and $619,000 in the 1996 and
1995 periods, respectively, and the related income tax effect.
F-14
<PAGE>
Notes to Consolidated Financial Statements, Continued
4. Fixed Assets:
Fixed assets consist of (in thousands):
Estimated
Useful Lives
in Years 1996 1995
Office equipment 3-5 $ 225 $ 97
Furniture, fixtures and vehicles 3-7 592
Leasehold improvements 3-7 73
----- ----
890 97
Less, accumulated depreciation and amortization (146) (7)
----- ----
$ 744 $ 90
===== ====
Depreciation expense was $139,000, $101,000 and $438,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
5. Intangibles:
Intangibles as of December 31, 1996 and 1995 consisted of (in thousands):
Estimated
Useful
Lives
in Years 1996 1995
Excess of cost over net assets acquired (goodwill) 20-40 $ 24,547 $4,852
Non-compete covenants 5 730
Other 5 5
25,282 4,852
-------- ------
Less accumulated amortization (526) (51)
-------- ------
$ 24,756 $4,801
======== ======
Amortization expense was $475,000, $261,000 and $1,081,000 in the years ended
December 31, 1996, 1995 and 1994, respectively.
F-15
<PAGE>
Notes to Consolidated Financial Statements, Continued
6. Accrued Expenses:
Accrued expenses consist of the following (in thousands):
1996 1995
Payroll and payroll taxes $ 969
Pension plan 660
Vacation 324
Professional fees 288 $320
Medical insurance 171
Management fees 178
Other 518 221
------ ----
$2,930 $719
====== ====
7. Income Taxes:
The provision (benefit) for income taxes as of December 31, 1996 consists
of (in thousands):
1996 1995
Current:
Federal $ 867
State 222 35
Deferred (189)
----- ----
$ 900 $ 35
===== ====
The 1995 and 1994 extraordinary credits represent net gains from discharge
of bank indebtedness under the loan agreements of Lori and its discontinued
fashion costume jewelry subsidiaries. No income tax expense is reflected in
the Company's financial statements resulting from the extraordinary credits
due to the utilization of tax loss carryforwards.
The difference between the statutory Federal income tax rate and the
effective income tax rate is reconciled as follows (in thousands):
1996 1995 1994
Statutory Federal tax rate provision (benefit) $34.0 $(34.0) $(34.0)
State and local taxes, net of Federal benefit 5.0 .3 .1
Current year tax loss not utilized 4.7
Impairment of goodwill 30.0 38.6
Amortization of goodwill .9 .6 3.6
Previously unrecognized benefit from utilizing tax
loss carryforwards (8.2)
----- ----- ------
$39.9 $ 1.6 $ .1
===== ===== ======
F-16
<PAGE>
Notes to Consolidated Financial Statements, Continued
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the
deferred tax liabilities and deferred tax assets at December 31, 1996 and
1995 (in thousands) are as follows:
1996 1995
Deferred tax assets:
Bad debt reserve $ 89
Accrued liabilities and other 189 $ 800
Net operating loss 16,400
-------- --------
Total deferred tax asset 278 17,200
-------- --------
Deferred tax liability:
Deductible intangibles 90
Machinery and equipment 100
-------- --------
Total deferred tax liability 90 100
-------- --------
Valuation allowance (17,100)
-------- --------
Net deferred tax asset $ 188 $ --
======== ========
At December 31, 1995, the Company and its subsidiaries had Federal income
tax loss carryforwards of approximately $42,000,000 available to be applied
against future taxable income. As a result of the discontinuance of the
Jewelry business it has been determined that the Company will be unable to
utilize losses from those businesses in the future.
In 1995, the Company recorded a valuation allowance with respect to the
future tax benefits and the net operating loss reflected in deferred tax
assets as a result of the uncertainty of their ultimate realization.
8. Debt:
On July 22, 1996, the Company and certain subsidiaries entered into a $10
million Revolving Credit Agreement (the "Credit Agreement") with the Chase
Manhattan Bank ("Chase") to provide working capital for the Company's
operations. The Company, COMFORCE Telecom and COMFORCE Technical Services,
Inc. are co-borrowers under the Credit Agreement and Project Staffing
Support Team, Inc. ("PSST") is a guarantor of the obligations. Principal
outstanding under the Credit Agreement is due June 30, 1998. Chase agreed
to make revolving credit loans outstanding as prime rate loans or LIBOR
loans, provided that, during the occurrence and continuance of an event of
default, the Company and its subsidiaries could not elect, and Chase had no
obligation to make, LIBOR loans. Interest on LIBOR loans is payable in the
amount of the LIBOR rate plus 2.0% per annum. Interest on the prime rate
loans is payable in the amount of Chase's prime rate as announced from time
to time (8.25% at December 31, 1996). The amount outstanding at December
31, 1996 was $3,850,000. As of December 31, 1996, the Company was not in
compliance with certain loan covenants. In March 1997, the Company repaid
its debt to Chase in full. (See Note 20.)
F-17
<PAGE>
Notes to Consolidated Financial Statements, Continued
At December 31, 1995, notes payable and long-term debt (in thousands)
consisted of:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
<S> <C> <C>
Outstanding debt:
Revolving credit borrowings $ 3,850
Amount due to a former related party, interest at
the prime rate plus 1% $ 750
Accounts receivable credit facility, discontinued operations 1,535
Other, interest principally at 15% 1,736
Less:
Liabilities to be assumed by ARTRA (1,986)
Liabilities included with discontinued operations (1,535)
------- -------
$ 3,850 $ 500
======= =======
</TABLE>
As discussed in Note 11, ARTRA, Fill-Mor, Lori and Lori's fashion costume
jewelry subsidiaries entered into an agreement with Lori's bank lender to
settle obligations due the bank. As partial consideration for the debt
settlement agreement the bank received a $750,000 Lori note payable due
March 31, 1995.
The $750,000 note due the bank was paid and the remaining indebtedness of
Lori and Fill-Mor was discharged, resulting in an additional extraordinary
gain to Lori of $6,657,000 in 1995. The $750,000 note payment was funded
with the proceeds of a $850,000 short-term loan from a former director of
the Company. The loan provided for interest at the prime rate plus 1%. As
consideration for assisting with the debt restructuring, the former
director received 150,000 shares of the Company's common stock valued at
$337,500 ($2.25 per share) based upon the closing market value on March 30,
1995. The $337,500 represented additional compensation for debt
restructuring and, as such, was charged against the extraordinary gain from
debt restructuring in 1995. The principal amount of the loan was reduced to
$750,000 at July 31, 1995. The remaining loan principal was not repaid on
its scheduled maturity date of July 31, 1995. Per terms of the loan
agreement, the former director received an additional 50,000 of the
Company's common stock as compensation for the non-payment of the loan at
its originally scheduled maturity. The additional 50,000 shares at a value
of approximately $82,000 has been charged to interest expense in 1995. At
December 31, 1995, the $750,000 note was classified in the Company's
consolidated balance sheet as liabilities to be assumed by ARTRA. The loan
was paid in full in March 1996 by ARTRA pursuant to the assumption
agreement as discussed in Note 9.
During the second and third quarters of 1995, Lori entered into a series of
agreements with certain unaffiliated lenders that provided for short-term
loans with interest at 15%. As additional compensation certain lenders
received an aggregate of 91,176 shares of the Company's common stock valued
at approximately $149,000 (which amount was included in interest expense in
1995) and certain lenders received warrants to purchase an aggregate of
195,000 shares of the Company's common stock at prices ranging from $2.00
per share to $2.50 per share, the fair market value at the dates of grant.
The warrants expire five years from the date of issue. The proceeds from
these loans were used to fund the September $500,000 down payment on the
COMFORCE Global
F-18
<PAGE>
Notes to Consolidated Financial Statements, Continued
acquisition, with the remainder used to fund working capital requirements
of the Company's discontinued Jewelry Business. At December 31, 1995,
short-term loans with an aggregate principal balance of $1,236,000 were
classified in the Company's consolidated balance sheet as liabilities to be
assumed by ARTRA.
In August 1995, Lori obtained a credit facility for the factoring of the
accounts receivable of its discontinued Jewelry Business. The credit
facility provides for advances of 80% of receivables assigned, less
allowances for markdowns and other merchandise credits. The factoring
charge, a minimum of 1.75% of the receivables assigned, increased on a
sliding scale if the receivables assigned were not collected within 45
days. Borrowings under the credit facility were collateralized by the
accounts receivable, inventory and equipment of Lori's discontinued fashion
costume jewelry subsidiaries and guaranteed by Lori. At December 31, 1995,
outstanding borrowings under this credit facility of $1,535,000, along with
other net liabilities of the discontinued Jewelry Business, were classified
in the Company's consolidated balance sheet as liabilities to be assumed by
ARTRA and net liabilities of the discontinued Jewelry Business.
In 1996, ARTRA completed the assumption of the agreed upon recorded
liabilities (see Note 9).
9. Liabilities to be Assumed by ARTRA Group Incorporated:
Under the Assumption Agreement between ARTRA and the Company in October
1995 (the "Assumption Agreement") entered into in connection with the
COMFORCE Telecom acquisition (see Note 3), ARTRA agreed to assume
substantially all pre-existing Lori liabilities and indemnify COMFORCE in
the event any future liabilities arise concerning pre-existing
environmental matters and business related litigation. Additionally, ARTRA
agreed to acquire all of the assets and assume all liabilities of the
Company's discontinued Jewelry Business aggregating a net liability of
$4,240,000 as of December 31, 1995. In April 1996, ARTRA sold the business
and certain assets of the Jewelry Business.
At December 31, 1995, liabilities to be assumed by ARTRA and net
liabilities of the discontinued Jewelry Business (in thousands) consist of:
Current:
Liabilities to be assumed by ARTRA
Notes payable $1,986
Court ordered payments 990
Accrued expenses 349
------
3,325
Net liabilities of the discontinued Jewelry Business 374
$3,699
======
Noncurrent:
Liabilities to be assumed by ARTRA Court ordered payments $ 541
======
As of December 31, 1996, ARTRA paid or assumed all of the above
liabilities. ARTRA continues to assume certain contingent liabilities
relating to outstanding litigation (see Note 16).
F-19
<PAGE>
Notes to Consolidated Financial Statements, Continued
On December 19, 1996, the Company and ARTRA agreed to settle various
differences in the interpretation of the Assumption Agreement dated October
1995. In addition, ARTRA has agreed to deposit into an escrow account
125,000 shares of COMFORCE common stock to collateralize its obligation
with respect to (1) a warrant to a lender to purchase 50,000 shares of
common stock at $5 per share with a put option for $500,000, which the
Company and ARTRA believe is no longer effective, (2) potential liability
for clean-up costs, if any, or other damages in connection with the Gary,
Indiana site as discussed in Note 16, and (3) the remaining assumed
liabilities of the jewelry operations of $350,000 due to certain creditors.
10. Discontinued Operations:
In September 1995, the Company adopted a plan to discontinue its Jewelry
Business. A provision of $1,000,000 was recorded in September 1995 and an
additional provision of $600,000 was recorded during the fourth quarter of
1995 for the estimated costs to complete the disposal of the Jewelry
Business. The Jewelry Business was disposed of in 1996 with no cost to the
Company.
The Company's 1995 consolidated financial statements have been reclassified
to report separately results of operations of the discontinued Jewelry
Business. Additionally, in conjunction with the Comforce Telecom
acquisition (see Note 3), ARTRA agreed to assume substantially all
pre-existing liabilities of the Company and its discontinued Jewelry
Business and indemnify Comforce in the event any future liabilities arise
concerning pre-existing environmental matters and business related
litigation. Accordingly, the Company's 1995 consolidated balance sheet has
been reclassified to report separately the remaining net liabilities to be
assumed by ARTRA, including net liabilities of the discontinued Jewelry
Business. (See Note 9.)
The operating results of the discontinued Jewelry Business for the years
ended December 31, 1995 and 1994 (in thousands) consists of:
Year Ended December 31,
------------------------
1995 1994
Net sales $ 10,588 $ 34,431
======== ========
Loss from operations before income taxes $(15,606) $(16,210)
Provision for income taxes (5) (10)
-------- --------
Loss from operations (15,611) (16,220)
-------- --------
Provision for disposal of business (1,600)
Provisions for income taxes
-------- --------
Loss on disposal of business (1,600)
-------- --------
Loss from discontinued operations $(17,211) $(16,220)
======== ========
F-20
<PAGE>
Notes to Consolidated Financial Statements, Continued
11. Extraordinary Gains Related to Discontinued Operations:
In accordance with the terms of the debt settlement agreement, borrowings
due a bank under the loan agreements of Lori and its fashion costume
jewelry subsidiaries and Fill-Mor (approximately $25,000,000 as of December
23, 1994), plus amounts due the bank for accrued interest and fees, were
reduced to $10,500,000 (of which $7,855,000 pertained to Lori's obligation
to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank).
Upon the satisfaction of certain conditions of the Amended Settlement
Agreement in March 1995, the balance of this indebtedness was discharged.
(See Note 12.)
The Company recognized an extraordinary gain of $8,965,000 ($2.81 per
share) in December 1994 as a result of the reduction of amounts due the
bank under the loan agreements of Lori and its operating subsidiaries and
Fill-Mor to $10,500,000 (of which $7,855,000 pertained to Lori's obligation
to the bank and $2,645,000 pertained to Fill-Mor's obligation to the bank)
as of December 23, 1994. The 400,000 shares of ARTRA common stock issued as
consideration for the debt settlement agreement (with a fair market value
of $2,500,000 based upon the closing market price on the date of issue)
were contributed by ARTRA to Lori's capital account. The extraordinary gain
was calculated (in thousands) as follows:
<TABLE>
<S> <C>
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
========
</TABLE>
On March 31, 1995, the $750,000 note due the bank was paid and the
remaining indebtedness of Lori and Fill-Mor was discharged, resulting in an
additional extraordinary gain to the Company of $6,657,000 ($1.45 per
share) in the first quarter of 1995. The $750,000 note payment was funded
with the proceeds of a $850,000 short-term loan from a former director of
the Company. As consideration for assisting in the debt restructuring, the
former director received 150,000 shares of the Company's common stock
valued at $337,500 ($2.25 per share) based upon the Company's closing
market value on March 30, 1995. The first quarter 1995 extraordinary gain
was calculated (in thousands) as follows:
F-21
<PAGE>
Notes to Consolidated Financial Statements, Continued
Amounts due the bank under loan agreements of Lori and its
operating subsidiaries $ 7,855
Less, amounts due the bank applicable to Lori (561)
-------
Bank debt discharged 7,294
Less fair market value of the Company's common stock issued as
consideration for the debt restructuring (337)
Other fees and expenses (300)
-------
Net extraordinary gain $ 6,657
=======
12. Related Party Transactions:
During 1996, the Company made loans of $367,000 in the aggregate to Michael
Ferrentino, the President and a Director of the Company, Christopher P.
Franco, an Executive Vice President of the Company, Kevin W. Kiernan, an
employee of the Company, and James L. Paterek, a consultant to the Company,
to cover their tax liabilities resulting from the issuance of the Company's
common stock to them as inducements to direct the Company's entry into the
technical staffing business. Of this amount, $55,000 was advanced in 1995,
$38,000 was advanced in February 1996, $238,000 was advanced in April 1996,
and $36,000 was advanced in July 1996. Yield Industries, Inc., a
corporation wholly-owned by Messrs. Paterek and Ferrentino, earned a
delivery fee of $750,000 in connection with the Company's acquisition of
COMFORCE Telecom, $250,000 of which was paid in 1995 and the balance of
which was paid in 1996.
The Company paid L.H. Friskoff & Company, a certified public accounting
firm at which Richard Barber, a Director of the Company, is a partner,
approximately $104,000 in fees during 1996 for tax-related advisory
services.
Effective July 4, 1995, Lori's management agreed to issue up to a 35%
common stock interest in the Company to certain individuals to manage the
Company's entry into the technical staffing business (approximately
3,888,000 after certain anti-dilutive provisions). In October 1995, the
Company issued approximately 3,100,000 shares of its common stock to such
individuals. The remaining common shares due these individuals were issued
in 1996 after shareholder approval of an increase in the Company's
authorized common shares. The Company recognized a non-recurring
compensation charge of $3,425,0000 in 1995 related to the issuance of this
stock since these stock awards were 100% vested when issued, and were
neither conditioned upon these individuals' service to the Company as
employees nor the consummation of the COMFORCE Telecom's acquisition. The
cost of the remaining common shares of $500,000 is classified in the
Company's consolidated balance sheet at December 31, 1995 as obligations
expected to be settled by the issuance of common stock, and is classified
as equity as of December 31, 1996.
In conjunction with an agreement (see Note 11) to settle borrowings due a
bank under the loan agreements of Lori and its fashion costume jewelry
subsidiaries and Fill-Mor, ARTRA entered into a $1,850,000 short-term loan
agreement with a non-affiliated corporation, the proceeds of which were
advanced to Lori and used to fund amounts due Lori's bank. The loan, due
June 30, 1995,
F-22
<PAGE>
Notes to Consolidated Financial Statements, Continued
was collateralized by 100,000 shares of Lori common stock. These 100,000
Lori common shares, originally issued to the bank under terms of the August
18, 1994 Settlement Agreement, were carried in the Company's consolidated
balance sheet at December 31, 1994 as restricted common stock. In August
1995, the loan was extended until September 15, 1995 and the lender
received the above mentioned 100,000 Lori common shares as consideration
for the loan extension. The loan was repaid by ARTRA in February, 1996.
Accordingly, the carrying value of these 100,000 Lori common shares was
transferred to ARTRA as reduction of amounts due to ARTRA.
In the fourth quarter of 1995, ARTRA agreed to exchange its interest in the
entire issue of the Company's Series C cumulative preferred stock for
100,000 newly issued shares of the Company's common stock. During 1995,
ARTRA received $399,000 of advances from the Company. In 1996, the Company
advanced ARTRA an additional $54,000. ARTRA repaid the above advances and
paid down $647,000 of the pre-existing Lori liabilities it assumed in
conjunction with the COMFORCE Global acquisition as discussed in Note 9.
The $399,000 advance to ARTRA and the $647,000 payment on pre-existing Lori
liabilities made by ARTRA have been classified in the Company's
consolidated financial statements at December 31, 1995 as amounts
receivable from ARTRA.
Through 1995, ARTRA had provided certain financial, accounting and
administrative services for the Company's corporate entity. Additionally,
the Company's corporate entity had leased its administrative office space
from ARTRA. During 1995 and 1994, fees for these services amounted to
$91,000 and $151,000, respectively.
During 1994, ARTRA made net advances to Lori of $2,531,000. The advances
consisted of a $1,850,000 short-term note with interest at 10%, the
proceeds of which were used to fund the $1,900,000 cash payment to the bank
in conjunction with the Amended Settlement Agreement with Lori's bank
lender, and certain non-interest bearing advances used to fund Lori working
capital requirements.
Effective December 29, 1994, ARTRA exchanged $2,242,000 of its notes and
advances for additional Lori Series C preferred stock. Additionally, the
August 18, 1994 Settlement Agreement required ARTRA to contribute cash of
$1,500,000 and ARTRA common stock with a fair market value of $2,500,000 to
Lori's capital account.
13. Equity:
In March 1996, 4,500 stock options were exercised at an average price of $5
per share.
In April 1996, 301,667 warrants were exercised at an average price of $3.12
per share.
In April 1996, in conjunction with the purchase of RRA, the Company sold
8,871 shares of Series E Preferred Stock at a selling price of $550 per
share for 8,470 shares and $750 per share for 401 shares. Each share of
Series E Preferred Stock will be automatically converted into 100 shares of
common stock on the date the Company's Certificate of Incorporation is
amended so that the Company has a sufficient number of authorized and
unissued shares of common stock to effect the conversion and any accrued
and unpaid dividends have been paid in full. Holders of shares of Series E
Preferred Stock are entitled to dividends equal to those declared on the
common stock, or
F-23
<PAGE>
Notes to Consolidated Financial Statements, Continued
if no dividends are declared on the common stock, nominal cumulative
dividends payable only if the Series E Preferred Stock fails to be
converted into common stock by September 1, 1996. The Series E Preferred
Stock has a liquidation preference of $100 per share ($887,100 in the
aggregate for all outstanding shares). Effective as of October 28, 1996,
each share of Series E Preferred Stock was automatically converted into 100
shares of common stock.
In May 1996, the Company sold 7,002 shares of Series D Preferred Stock at a
selling price of $1,000 per share. The holder of each share of Series D
Preferred Stock has the right to convert such shares into 83.33 fully paid
and nonassessable shares of common stock at any time subsequent to the date
the Company's Certificate of Incorporation is amended so that the
Corporation has sufficient number of authorized and unissued common stock
to effect the conversion. Holders of the shares of Series D Preferred Stock
are entitled to cumulative dividends of 6% per annum, payable quarterly in
cash on the first day of February, May, August and November in each year.
The Series D Preferred Stock has a liquidation preference of $1,000 per
share ($7,002,000 in the aggregate for all outstanding shares).
In May 1996, 16,667 warrants were exercised at an average price of $3.38
per share.
In July 1996, the Company issued 137,500 shares of common stock to pay
certain liabilities.
In August 1996, 20,000 warrants were exercised at an average price of $2.00
per share.
In September 1996, 27,398 common shares were issued as partial
consideration for the purchase of Force Five. (See Note 3.)
On October 25, 1996, the Board authorized the issuance of up to 10,000
shares of Preferred Stock, par value $0.01 per share, designated the Series
F Convertible Preferred Stock ("Series F Preferred Stock"). As subsequently
modified by agreement of the Company and the holders, each share of Series
F Preferred Stock will, (i) at the option of the holder or (ii)
automatically on the second anniversary of the date of issuance, be
converted into such number of shares of Common Stock determined by dividing
$1,000 plus all accrued, unpaid dividends thereon by the per share
conversion price. The conversion price is 83% of the average closing bid
price of the Common Stock for the five trading days immediately preceding
the conversion date, subject to certain limitations. Holders of shares of
Series F Preferred Stock are entitled to cumulative dividends of 5% per
annum, payable quarterly on the first day of March, June, September, and
December in each year, payable in cash or Common Stock (valued at the
closing price on the date of declaration), at the Company's election. The
Series F Preferred Stock has a liquidation preference over the Common Stock
in the event of any liquidation or sale of the Company. Except as otherwise
provided by law, the holders of Series F Preferred Stock will not be
entitled to vote. As of December 31, 1996, there were 3,250 shares of
Series F Preferred Stock outstanding. The Company recorded an accretive
dividend on Series F Preferred Stock related to the discount noted above of
$665,000.
In connection with the sale of the Series F Preferred Stock, the Company
issued warrants to purchase 15,000 shares of Common Stock at an exercise
price of $24.00 per share as a placement fee, which warrants expire in
October 1998.
F-24
<PAGE>
Notes to Consolidated Financial Statements, Continued
At the Company's annual meeting held on October 28, 1996, the Company's
stockholders ratified or approved, among other matters, (i) the Company's
issuance of 3,091,302 shares of its common stock and its agreement to issue
796,782 additional shares to certain individuals in consideration of their
agreement to direct the Company's entry into the technical staffing
business; (ii) the Company's entering into the technical staffing business
and exiting the fashion jewelry business and transactions related thereto,
including (a) its acquisition of all of the capital stock of Spectrum
Global Services, Inc. (formerly d/b/a/Yield Global and, following its
acquisition by the Company, renamed COMFORCE Telecom, Inc.), (b) its
issuance of 1,946,667 shares of its common stock plus detachable warrants
to purchase 973,333 shares of its common stock in a private placement, (c)
its issuance of 100,000 shares and 150,000 shares, respectively, of its
common stock to ARTRA, and Peter R. Harvey, formerly a director of the
Company, in consideration of their guarantees in connection with the
transactions, (d) its exchange of 100,000 shares of its common stock to
ARTRA for the 9,701 shares of the Company's Series C Preferred Stock held
by ARTRA, and (e) its disposition of its discontinued fashion jewelry
operations; (iii) an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
capital stock from 10,000,000 shares to 100,000,000 shares of common stock
and from 1,000,000 shares to 10,000,000 shares of Preferred Stock (upon
which approval, the 8,871 shares of Series E Preferred Stock which were
outstanding automatically converted to 8,871,000 shares of common stock);
(iv) an amendment to the Company's Certificate of Incorporation to
eliminate cumulative voting; (v) and to amend the Company's Long-Term Stock
Investment Plan (a) to increase the maximum number of shares which may be
issued under such Plan from 1,500,000 to 4,000,000 shares, (b) the grant of
options to non-employee directors, and (c) in various other respects,
principally designed to permit the Plan administrator additional
flexibility in structuring option grants.
In November 1996, 111,111 warrants were exercised at a price of $9 per
share.
In November 1996, the Company issued 243,211 shares and 36,800 shares as
partial consideration for the purchase of Azatar Computer Systems, Inc. and
Continental Field Services, Inc.
Effective December 26, 1996, the Company sold 460,000 shares of its Common
Stock, together with a related payment right, for $3.5 million. This
payment right requires the Company to make a payment to the investors in
either cash or Common Stock, at the Company's option, equal to the amount,
if any, by which $10.00 per share exceeds the average closing bid price for
the ten trading days prior to a specified payment date (not later than
April 1, 1997). See Note 20 for additional rights given to these holders of
Common Stock.
In addition, effective December 26, 1996, the Company sold 350,000 shares
of its Common Stock, together with a related payment right, for $3.5
million. This payment right requires the Company to make a payment to the
investors in either cash or Common Stock, at the Company's option, equal to
the amount, if any, by which $12.05 per share exceeds the average closing
bid price for the ten trading days prior to a specified payment date (not
later than May 1, 1997). In lieu of this amount, a payment of $2.05 per
share will be payable if, among other things, as of April 1, 1997, such
average trading price is between $10.00 and $15.00 and the Company's daily
trading volume does not meet specified levels.
F-25
<PAGE>
Notes to Consolidated Financial Statements, Continued
In connection with this private placement of Common Stock, the Company
issued warrants to purchase 198,928 shares of Common Stock at $19 per share
which expire on December 26, 1999. In addition, the Company paid a
placement fee of 8,000 shares of Common Stock and warrants to purchase
25,000 shares of Common Stock at $14.25 per share (market price) which
expire on December 26, 1999.
The Company's Series C cumulative preferred stock, which was owned in its
entirety by ARTRA, accrued dividends at the rate of 13% per annum on its
liquidation value. Book value and accumulated dividends of $7,011,000 on
this stock aggregated $19,515,000 at December 31, 1994. In the fourth
quarter of 1995, ARTRA agreed to exchange its Series C cumulative preferred
stock for 100,000 newly issued shares of the Company's common stock.
14. Earnings Per Share:
Earnings per common share is computed by dividing net earnings available
for common shareholders, by the weighted average number of shares of common
stock and common stock equivalents (stock options and warrants),
outstanding during each period. Common stock equivalents relate to
outstanding stock options and warrants. For this computation, shares of the
Series F Preferred Stock are anti-dilutive and as such are not considered
common stock equivalents for this calculation. The shares of Series D
Preferred Stock are not considered common stock equivalents and are
excluded from primary earnings per share. The dividends accrued or paid on
the Series D Preferred Stock of $175,000, Series E Preferred Stock of
$18,000, Series F Preferred Stock of $27,000, and accretive dividends on
Series F Preferred Stock of $665,000, have been deducted for computing
earnings available to common shareholders. Fully diluted earnings per share
have not been presented as the result is anti-dilutive or does not differ
from primary earnings per share. Primary earnings per share is calculated
as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Earnings (loss) available for common shareholders $ 362 $ (14,886) $ (9,537)
======== ======== ========
Weighted average number of shares outstanding
for the period 11,049 4,596 3,195
Dilutive effect of common stock equivalents 1,942
-------- -------- --------
$ 12,991 $ 4,596 $ 3,195
======== ======== ========
Primary earnings (loss) per share $ .03 $ (3.24) $ (2.99)
======== ======== ========
</TABLE>
15. Stock Options and Warrants:
Long-Term Stock Investment Plan
On December 16, 1993, Lori's stockholders approved the Long-Term Stock
Investment Plan (the "1993 Plan"), effective January 1, 1993, which
authorizes the grant of options to purchase
F-26
<PAGE>
Notes to Consolidated Financial Statements, Continued
the Company's common stock to executives, key employees and non-employee
consultants and agents of the Company and its subsidiaries. The 1993 Plan
authorizes the awarding of Stock Options, Incentive Stock Options and
Alternative Appreciation Rights. The 1993 Plan reserved 1,500,000 shares of
the Company's common stock for grant on or before December 31, 2002. In
October 1996, the Stock Option Plan was amended to allow for the issuance
of an additional 2,500,000 options under the plan for a total of 4,000,000
shares.
Incentive Stock Option Plan
Options to purchase common shares of the Company have been granted to
certain officers and key employees under the 1982 Incentive Stock Option
Plan (the "Plan"), which initially reserved 250,000 shares of the Company's
common stock. On December 19, 1990, the Company's stockholders approved an
increase in the number of shares available for grant under the plan to
500,000. The plan expired in 1992.
Summary of Options
A summary of stock option transactions for the year ended December 31, 1996
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Outstanding at January 1,
Shares 1,541,378 959,378 1,098,544
Prices $1.125 to $6.75 $1.125 to $5.00 $1.125 to $12.19
Options granted:
Shares 1,120,275 601,250 --
Price $6.75 to $27.00 $6.00 to $6.75 --
Options exercised:
Shares (4,500) -- (2,500)
Price $5.00 -- $5.00
Options cancelled:
Shares (565,628) (19,250) (136,666)
Price $1.125 $3.125 to $5.00 $3.125 to $12.19
Outstanding at December 31, 1996:
Shares 2,091,525 1,541,378 959,378
========= ========= =======
Price $1.125 to $22.75 $1.125 to $6.75 $1.125 to $5.00
Options exercisable at December 31, 1996 1,537,500 945,128 940,710
========= ======= =======
Options available for future grant at
December 31, 1996 778,475
=======
</TABLE>
Approximately 555,628 of the options shown as cancelled were exercisable as
of December 31, 1995 at an exercise price of $1.125 per share. The Company
maintains that these options
F-27
<PAGE>
Notes to Consolidated Financial Statements, Continued
terminated in 1996. The former option holders maintain that these options
continue to be exercisable. The Company is attempting to resolve this
dispute.
Warrants
On November 23, 1988, Lori issued warrants to purchase 25,000 of its common
shares, at $4.00 per share, to an investment banker as additional
compensation for certain financial and advisory services. During 1993, the
warrant holder exercised warrants to purchase 8,750 shares of the Company's
common stock. At December 31, 1995, such warrants to purchase 16,250 shares
of the Company's common stock at $4.00 per share remained outstanding.
Principally during the second and third quarters of 1995, Lori entered into
a series of agreements with certain unaffiliated investors that provided
for $1,800,000 of short-term loans that provide for interest at 15%. As
additional compensation certain lenders received an aggregate of 91,176
Lori common shares and certain lenders received warrants to an aggregate of
195,000 shares of the Company's common stock at prices ranging from $2.00
per share to $2.50 per shares, the fair market value at the dates of grant.
The warrants expire five years from the date of issue.
The acquisition of COMFORCE Telecom was funded principally by private
placements of approximately 1,950,000 of the Company's common shares at
$3.00 per share (total proceeds of approximately $5,800,000) plus
detachable warrants to purchase 973,333 Lori common shares at $3.375 per
share. In 1996, 36,667 warrants were exercised for $98,751. The warrants
expire five years from the date of issue.
In April 1996, the Company amended the warrants included above held by two
stockholders to purchase 301,667 shares of the Company's Common Stock at
exercise prices ranging from $2.125 to $3.375 per share to permit immediate
exercise and to provide for the issuance of supplemental warrants to
purchase 301,667 at an exercise price of $9.00 per share (market value) for
each warrant exercised on or before April 12, 1996. Warrants to purchase
all 301,667 shares were exercised in April 1996. The Company used the
proceeds from the exercise of the warrants for working capital purposes.
In connection with the sale of the Series F Preferred Stock, the Company
issued warrants to purchase 15,000 shares of Common Stock at an exercise
price of $24.00 per share as a placement fee, which warrants expire in
October 1998.
On December 26, 1996, the Company sold 810,000 shares through a private
placement. In connection with this private placement of common stock, the
Company issued warrants to purchase 198,928 shares of common stock at $19
per share which expire on December 26, 1999 In addition, the Company paid a
placement fee of 8,000 shares of common stock and warrants to purchase
25,000 shares of common stock at $14.25 per share (market price) which
expire on December 26, 1999.
At December 31, 1996 and 1995, total warrants were outstanding to purchase
a total of 1,371,844 and 1,184,583 of the Company's common shares at prices
ranging from $2.00 per share to $24.00 per share. The warrants expire three
to five years from the date of issue at various dates through 1999.
F-28
<PAGE>
Notes to Consolidated Financial Statements, Continued
As discussed in Note 1, the Company has applied the disclosure-only
provision SFAS 123. Had compensation cost been determined based on the fair
value at the grant date consistent with the provisions of SFAS 123, the
Company's net income (loss) and earnings (loss) per share would have been
reduced to the pro forma amounts indicated below for the years ended
December 31, 1996 and 1995:
1996 1995
(in thousands) (in thousands)
Net income (loss) attributable to common
shareholders as reported $ 362 $ (14,886)
========== ==========
Pro forma (loss) $ (1,898) $ (16,010)
========== ==========
Earnings (loss) per share as reported $ .03 $ (3.24)
========== ==========
Pro forma $ (.17) $ (3.48)
========== ==========
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the
following weighted average assumptions used for grants in 1996 and 1995,
respectively: no dividend yield; expected volatility of 60%; risk-free
interest rate (ranging from 5.25% - 6.64%); and expected lives ranging from
approximately 4.5 to 5.5 years. Weighted averages are used because of
varying assumed exercise dates.
A summary of the status of the Company's stock option plans as of December
31, 1996 and 1995, and changes during the years ended on those dates is
presented below (shares in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,541,378 $ 3.24 959,378 $ 1.21
Granted 1,120,275 9.35 601,250 6.48
Exercised (4,500) 5.00
Canceled (565,628) 1.13 (19,250) 5.00
----------- -----------
Outstanding at end of year 2,091,525 7.08 1,541,378 3.24
=========== ===========
Options exercisable at year end 1,537,500 945,128
=========== ===========
Weighted average fair value of options granted during the year $ 4.37 $ 2.38
=========== ===========
</TABLE>
F-29
<PAGE>
Notes to Consolidated Financial Statements, Continued
The following table summarizes information about stock options outstanding
at December 31, 1996 (shares in thousands):
Weighted
average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercisable
Prices Outstanding Life Price Exercisable Price
$1 360 6 $ 1 360 $ 1
$3 10 6 3 10 3
$6 to $7 1,431 9 7 1,138 7
$10 to $12 56 9 12
$17 to $19 152 9 18 30 17
$22 to $27 4 9 26
$14 to $17 79 9 16
------------ ------- ------- ---------- --------
$1 to $27 2,092 9 7 1,538 6
16. Litigation:
Prior to its entry into the Jewelry Business in 1985, the Company operated
in excess of 20 manufacturing facilities for the production of, inter alia,
photocopy machines, photographic chemical and paper coating. These
operations were sold or discontinued in the late 1970s and early 1980s.
Certain of these facilities may have used and/or generated hazardous
materials and may have disposed of the hazardous substances, particularly
before the enactment of laws governing the safe disposal of hazardous
substances, at an indeterminable number of sites. Although the controlling
stockholders and current management had no involvement in such prior
manufacturing operations, the Company could be held to be responsible for
clean-up costs if any hazardous substances were deposited at these
manufacturing sites, or at off-site waste disposal locations, under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), or under other Federal or state environmental laws now or
hereafter enacted. However, except for the Gary, Indiana site described
below, the Company has not been notified by the Federal Environmental
Protection Agency (the "EPA") that it is a potentially responsible-party
for, nor is the Company aware of having disposed of hazardous substances
at, any site.
In December 1994, the Company was notified by the EPA that it is a
potentially responsible party under CERCLA for the disposal of hazardous
substances at a site in Gary, Indiana. The alleged disposal occurred in the
mid-1970s at a time when the Company conducted operations as APECO
Corporation. In this connection, in December 1994, the Company was named as
one of approximately 80 defendants in a case brought in the United States
District Court for the Northern District of Indiana by a group of 14
potentially responsible parties who agreed in a consent order entered into
with the EPA to clean up this site. The plaintiffs have estimated the cost
of cleaning up this site to be $45 million and have offered to settle the
case with the Company for $991,445. This amount represents the plaintiffs'
estimate of the Company's pro rata share of the clean-up costs. At the
direction of ARTRA, which, as described below, is contractually obligated
to the Company for any environmental liabilities, the Company declined to
accept this settlement proposal, which was subsequently withdrawn.
F-30
<PAGE>
Notes to Consolidated Financial Statements, Continued
The evidence produced by the plaintiffs to date is the testamentary
evidence of four former employees of a waste disposal company that
deposited wastes at the Gary, Indiana site identifying the Company as a
customer of such disposal company, and entries in such disposal company's
bookkeeping ledgers showing invoices to the Company. The Company, however,
has neither discovered any records which indicate, nor located any current
or former employees who have advised, that the Company deposited hazardous
substances at the site. Management and its counsel cannot determine whether
a negative outcome is probable regarding the Company's potential liability
at this site. Accordingly, no provision has been made for the potential
liability related to this matter.
Under the terms of the Assumption Agreement and a subsequent agreement
entered into between ARTRA and the Company, ARTRA has agreed to pay and
discharge substantially all of the Company's pre-existing liabilities and
obligations, including environmental liabilities at any sites at which the
Company allegedly operated facilities or disposed of hazardous substances,
whether or not the Company is currently identified as a potentially
responsible party therefor. Consequently, the Company is entitled to
indemnification from ARTRA for any environmental liabilities associated
with the Gary, Indiana site. In addition, ARTRA has deposited 50,000 shares
of Common Stock in escrow as additional collateral to satisfy any judgment
adverse to the Company or to pay any agreed upon settlement amount with
respect to the Gary, Indiana site. Proceeds from the sale of the shares
held in escrow might not be sufficient to satisfy any such judgment or pay
any such settlement amount. While ARTRA is obligated to indemnify the
Company for any environmental liabilities, no assurance can be given that
ARTRA will be financially capable of satisfying its obligations with
respect to any liability in connection with the Gary, Indiana site or any
other environmental liabilities. ARTRA has advised that it intends to
vigorously defend this case.
In September 1996, the Company received notice of litigation from a
competitor who charged that RRA obtained and benefited from a list of
confidential data provided by a former employee of the competitor prior to
the acquisition of RRA. RRA has denied such charges. The Acquisition
Agreement provides for indemnification from any claims prior to the
acquisition.
The Company is a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are
believed by management to be material to the business, results of
operations or financial condition of the Company.
17. Savings Incentive and Profit Sharing Plan:
The Company participates in a savings incentive and profit sharing plan
(the "Plan"). All eligible employees may make contributions to the Plan on
a pre-tax salary reduction basis in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. No contributions were made by
the Company in 1996 and 1995.
Certain employees who work for governmental agencies are required to be
covered under a separate pension plan. During 1996, the Company recorded
approximately $700,000 of expense related to these benefits.
F-31
<PAGE>
Notes to Consolidated Financial Statements, Continued
18. Lease Commitments:
The Company leases certain office space and equipment in its
telecommunications and computer staffing service business. Rent expense for
all operating leases in 1996 and 1995 approximated $200,000 and $17,000,
respectively.
As of December 31, 1996, future minimum rent payments due under the terms
of noncancelable operating leases excluding any amount that will be paid
for operating costs are:
Year ending Total
December (in thousands)
1997 $ 425
1998 410
1999 287
2000 244
2001 218
Thereafter 24
------------
$ 1,608
============
The aggregate commitment for future salaries at December 31, 1996,
excluding bonuses, during the remaining term of all management and
employment agreements, are approximately:
Year ending Total
December (in thousands)
1997 $ 1,372
1998 1,010
1999 602
2000 17
-------------
$ 3,001
============
19. Concentration of Credit Risk:
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash and cash equivalents and trade receivables.
The Company maintains cash in bank accounts which at times may exceed
federally insured limits. The Company has not experienced any losses in
such accounts and believes they are not exposed to any significant credit
risk on their cash balances. The Company believes it mitigates such risk by
investing its cash through major financial institutions.
F-32
<PAGE>
Notes to Consolidated Financial Statements, Continued
At December 31, 1996, the Company had four customers, and at December 31,
1995, the Company had nine customers with accounts receivable balances that
aggregated 23% and 67% of the Company's total accounts receivable,
respectively. Percentages of total revenues from significant customers for
the years ended December 31, 1996 and from October 17, 1995 (entry into
staffing business) to December 31, 1995 are summarized as follows:
December 31, December 31
1996 1995
Customer 1 19.0% 17.3%
Customer 2 * 12.6%
Customer 3 * 10.1%
*Less than 10%.
20. Subsequent Events:
On February 28, 1997, the Company purchased all of the stock of RHO Company
Incorporated ("RHO") for $14.8 million payable in cash, plus a contingent
payout to be paid over three years based on future earnings of RHO payable
in stock in an aggregate amount not to exceed $3.3 million. The total
number of shares issuable under the contingent payout can not exceed
386,249 shares. The cash portion of the purchase price paid at closing was
principally funded through the Company's offering of convertible
debentures, as described below. RHO is a defendant in a lawsuit by its
former insurance carrier who alleges that RHO is obligated to repay to it
$1,600,000 that the carrier was required to pay in connection with a claim
settlement. The Company is defending against this claim and management
believes that the case is without substantial merit. However, in the event
of any adverse judgment in the case or if the Company determines to settle
the case, any payments relating to this pre-acquisition contingency will be
added to the purchase price of RHO.
From February 27 to March 21, 1997, the Company sold $25.2 million of its
Subordinated Convertible Debentures ("Debentures") to certain institutional
investors for cash or in exchange for shares of the Company's Series F
Preferred Stock (discussed below). The Debentures bear interest at the rate
of 8% per annum during the 180 day period following closing and thereafter
at the rate of 10% per annum continuing until fully paid or converted.
Interest on the Debentures is payable quarterly in cash or in common stock
of the Company, at the Company's option. The Debentures may be redeemed by
the Company in whole or in part at any time from the date of issuance,
within 360 days after any disbursement to the Company of net proceeds from
the sale of Debentures at a redemption price equal to the sum of (i) the
principal amount thereof, (ii) all accrued, unpaid interest thereon, and
(iii) premiums ranging from 5% (2.5% in the case of Debentures exchanged
for Series F Preferred Stock) for Debentures redeemed within 60 days after
closing increasing up to 25% for Debentures redeemed between 181 and 360
days after closing. The Company is currently seeking long-term financing to
redeem these Debentures and to provide capital for continued expansion of
its operations.
F-33
<PAGE>
Notes to Consolidated Financial Statements, Continued
From February 27 to March 21, 1997 the Company issued or agreed to issue
three year warrants ("Warrants") to purchase up to 504,000 share of its
Company's Common Stock to the Debenture holders. Warrants to purchase
100,800 shares of common stock were issued at the time of the offering and
become exercisable six months after closing. If the debt is not repaid in
60 days, the Company will issue additional warrants to purchase 100,800
shares of common stock for each additional 30 day period the debt is
outstanding up to issuing an aggregate of warrants to purchase 504,000
shares of common stock. The exercise price of the warrants issued ranges
from $6.85 to $7.65 per share. The Company is also required to issue
additional warrants ("Additional Warrants") to purchase 504,000 shares of
the Company's common stock if the Debentures are not redeemed within 180
days following closing. The Additional Warrants will have an exercise price
equal to the average closing price of the Company's common stock over the
five-day trading period ending 179 days after the closing.
On February 27, 1997, in connection with the sale of $5 million of
debentures to various holders of the Company's Common Stock purchased on
December 26, 1996, the Company issued a put option whereby, if such
debentures are not repaid by April 28, 1997, May 28, 1997, June 27, 1997 or
July 27, 1997, such stockholders will have the option to put back 115,000
shares of Common Stock at the above listed dates, at $10.00 per share
payable in cash, reduced by the value of any cash or stock issued under
payment rights.
As part of the issuance of the Debentures, the Company has also effected
the repurchase of 2,750 of the 3,250 outstanding shares of its Series F
Preferred Stock by issuing additional Debentures in the amount of 115% of
its original principal amount ($1,000 per share) for total Debentures
issued of $3,162,500. Approximately $3,900,000 of the proceeds from the
Debenture offering was utilized to repay the Company's bank debt.
<
F-34
<PAGE>
Comforce Corporation and Subsidiaries
Schedule II Valuation and Qualifying Accounts
for the years ended December 31, 1996, 1995 and 1994 (in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ----------------------------------------------- --------- --------------------- --------- --------
(1) (2)
Balance at Charged to Charged to Balance
Description Beginning Costs and Other Deductions at end of
of Period Expenses Accounts (Describe) Period
--------- -------- -------- ---------- ------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Deducted from assets to which they apply:
Allowance for inventory valuation $ -- $ -- $ -- $ --
====== ====== ====== ======
Allowance for markdowns $ -- $ -- $ -- $ --
Allowance for doubtful accounts -- 213 (D) 213
------ ------ ------ ------
$ -- $ 213 $ -- $ 213
====== ====== ====== ======
For the year ended December 31, 1995
Deducted from assets to which they apply:
Allowance for inventory valuation $ 207 $ 25 $ 232 (A) $ --
====== ====== ====== ======
Allowance for markdowns $ 835 $ 291 $1,126 (A) $ --
Allowance for doubtful accounts 503 424 927 (A) --
------ ------ ------ ------
$1,338 $ 715 $2,053 $ --
====== ====== ====== ======
For the year ended December 31, 1994:
Deducted from assets to which they apply:
Allowance for inventory valuation $4,150 $ 218 $4,161 (B) $ 207
====== ====== ====== ======
Allowance for markdowns $2,499 $4,799 $6,463 (C) $ 835
Allowance for doubtful accounts 432 269 198 (D) 503
------ ------ ------ ------
$2,931 $5,068 $6,661 $1,338
====== ====== ====== ======
</TABLE>
(A) Principally amounts reclassified to discontinued operations.
(B) Principally inventory written off, net of recoveries.
(C) Principally markdowns taken.
(D) Principally uncollectible accounts written off, net of recoveries.
F-35
<PAGE>
RHO Company Incorporated
Index to Financial statements
Page
Report of Independent Public Accountants F-37
Balance Sheets F-38
Statements of Income F-39
Statements of Changes in Shareholders,
Deficit F-40
Statements of Cash Flows F-41
Notes to Financial Statements F-42
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Rho Company Incorporated:
We have audited the accompanying balance sheets of Rho Company Incorporated (a
Washington Corporation) as of December 31, 1995 and 1996, and the related
statements of income, changes in shareholders' deficit and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rho Company Incorporated as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington,
January 24, 1997
F-37
<PAGE>
RHO COMPANY INCORPORATED
BALANCE SHEETS -- DECEMBER 31, 1995 AND 1996
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
ASSETS
1995 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 412 $ 287
Restricted cash 705 1,133
Escrow deposit -- 500
Accounts receivable, less allowance for doubtful accounts of
$200 and $180, respectively 8,725 7,572
Prepaid expenses 167 155
-------- --------
Total current assets 10,009 9,647
-------- --------
FURNITURE AND EQUIPMENT, less accumulated depreciation of $1,065
and $1,007 513 575
-------- --------
OTHER ASSETS 132 51
-------- --------
Total assets $ 10,654 $ 10,273
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - bank $ 6,253 $ 6,223
Current portion of long-term debt, related party 130 396
Accounts payable 329 218
Wages payable 844 647
Payroll taxes and withholdings payable 1,167 630
Accrued interest 147 113
Accrued vacations, bonuses and other 605 625
-------- --------
Total current liabilities 9,475 8,852
-------- --------
LONG-TERM DEBT, RELATED PARTY 9,956 9,268
-------- --------
SHAREHOLDERS' EQUITY:
Common stock; $1.00 par value; authorized 50,000 and 1,000,000
shares, respectively, issued and outstanding 50,000 shares 50 50
Other capital -- 2,680
Deferred stock option charge -- (1,920)
Retained deficit (8,827) (8,657)
-------- --------
Total shareholders' equity (8,777) (7,847)
-------- --------
Total liabilities and shareholders' equity $ 10,654 $ 10,273
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-38
<PAGE>
RHO COMPANY INCORPORATED
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollar amounts in thousands)
1994 1995 1996
------- ------- -------
REVENUES $76,170 $83,631 $85,746
COST OF OPERATIONS 69,157 74,978 76,457
------- ------- -------
Gross profit 7,013 8,653 9,289
GENERAL AND ADMINISTRATIVE EXPENSES 5,266 6,510 7,512
------- ------- -------
Income from operations 1,747 2,143 1,777
------- ------- -------
OTHER EXPENSES:
Stock option expense -- -- 260
Interest expense, net 1,435 1,643 1,317
------- ------- -------
Total other expenses 1,435 1,643 1,577
------- ------- -------
Net income $ 312 $ 500 $ 200
======= ======= =======
The accompanying notes are an integral part of these statements.
F-39
<PAGE>
RHO COMPANY INCORPORATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Deferred
Stock Total
Common Other Option Retained Shareholders'
Stock Capital Charge Deficit Deficit
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 $ 50 $ -- $ -- $(9,534) $(9,484)
Net income -- -- -- 312 312
------- ------- ------- ------- -------
BALANCE, December 31, 1994 50 -- -- (9,222) (9,172)
Net income -- -- -- 500 500
Dividends paid -- -- -- (105) (105)
------- ------- ------- ------- -------
BALANCE, December 31, 1995 50 -- -- (8,827) (8,777)
Net income -- -- -- 200 200
Dividends paid -- -- -- (30) (30)
Stock option granted -- 2,180 (2,180) -- --
Amortization of deferred
stock option charge -- -- 260 -- 260
Treasury stock subscribed -- (567) -- -- (567)
Common stock subscribed -- 1,067 -- -- 1,067
------- ------- ------- ------- -------
BALANCE, December 31, 1996 $ 50 $ 2,680 $(1,920) $(8,657) $(7,847)
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
RHO COMPANY INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollar amounts in thousands)
1994 1995 1996
------- ------- -------
OPERATING ACTIVITIES:
Net income $ 312 $ 500 $ 200
Depreciation 196 223 268
Amortization of intangible assets 4 4 35
Loss on retirement of furniture and fixtures -- 17 4
Deferred income taxes (37) -- --
Stock option expense -- -- 260
Net change in current assets and liabilities-
Accounts receivable and other (1,559) (1,778) 1,153
Prepaid expenses 214 (70) 12
Accounts payable 60 200 (111)
Wages payable 139 9 (197)
Payroll taxes and withholdings payable 72 296 (537)
Accrued interest 40 15 (34)
Accrued vacations, bonuses and other (56) 110 20
------- ------- -------
Cash flows from operating activities (615) (474) 1,073
------- ------- -------
INVESTING ACTIVITIES:
Purchase of furniture and equipment (136) (334) (334)
Decrease (increase) in other assets (8) (24) 46
------- ------- -------
Cash flows from investing activities (144) (358) (288)
------- ------- -------
FINANCING ACTIVITIES:
Increase in restricted cash (591) (35) (428)
(Decrease) increase in bank borrowings 1,482 1,302 (30)
Borrowings of long-term debt 114 168 --
Repayments of long-term debt (270) (266) (422)
Dividends paid -- (105) (30)
------- ------- -------
Cash flows from financing activities 735 1,064 (910)
------- ------- -------
(DECREASE) INCREASE IN CASH (24) 232 (125)
CASH, beginning of year 204 180 412
------- ------- -------
CASH, end of year $ 180 $ 412 $ 287
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 1,395 $ 1,628 $ 1,351
Income taxes 8 8 43
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
RHO COMPANY INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
The Company markets the services of temporary technical and clerical people to
various industries located primarily in the states of Washington and California.
Furniture and Equipment
Furniture and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided using the straight-line and accelerated methods over
expected useful lives of three to seven years.
Income Taxes
The Company has elected S-corporation status for reporting taxable income. Any
income or loss from the corporation is reportable on the personal returns of the
stockholders.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and those
differences could be significant.
Reclassifications
Certain reclassifications have been made to the prior year statements to conform
to the current year format.
2. RESTRICTED CASH:
Collections of accounts receivable are deposited in a restricted collateral
account used for repayment of advances under the Company's bank line of credit.
The balance in the collateral account at December 31, 1995 and 1996 was $705 and
$1,133, respectively, shown in the accompanying balance sheets. The remaining
cash balance is unrestricted.
F-42
<PAGE>
3. NOTE PAYABLE - BANK:
The Company has available a line of credit for up to $7.5 million in borrowings,
bearing interest at the bank's prime rate plus .875% (9.125% at December 31,
1996), collateralized by accounts receivable. The line of credit is limited to
75% of eligible accounts receivable and requires collections to be deposited in
a restricted collateral account. The outstanding balance on the line of credit
was $6,223 at December 31, 1996. The loan agreement contains various covenants,
including minimum levels of working capital and net worth. The loan agreement
expires June 15, 1997. Although there can be no assurance, the Company
anticipates it will be able to renew the line of credit. If it were not able to
renew the line of credit or obtain other acceptable financing, it then could
have adverse consequences, including possible cessation of operations.
4. LONG-TERM DEBT:
Long-term debt as of December 31, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Subordinated notes payable to former stockholder in monthly installments equal
to 55% of average monthly net income, as defined, or $50, whichever is
greater, with total minimum payments of $195 per quarter, including interest
at 6.6% (10.5% prior to January 1, 1996), collateralized by a stock pledge
agreement with shareholders of Rho Company Incorporated $ 6,882 $ 6,531
Subordinated note payable to former stockholder, 9.125%, collateralized by
accounts receivable, subordinate to the bank line of credit. Due on demand,
but stockholder does not intend to call the note before January 1, 1998 1,548 1,548
Subordinated note payable to stockholder, 9.125%, collateralized by
accounts receivable, subordinate to the bank line of credit
Due on demand, but stockholder does not intend to call the note
before January 1, 1998 1,369 1,369
Subordinated note payable to stockholder, 9.125%, collateralized by
accounts receivable, subordinate to the bank line of credit
Due on demand, but stockholder does not intend to call the note
before January 1, 1998 178 178
Other 109 38
-------- --------
10,086 9,664
Less- Current portion (130) (396)
-------- --------
$ 9,956 $ 9,268
======== ========
</TABLE>
All of the notes payable agreements are with related parties. Total interest
expense related to these notes was $987, $1,038 and $744 for the years ended
December 31, 1994, 1995 and 1996.
F-43
<PAGE>
Effective as of January 1, 1996, the Company's 10.5% subordinated notes were
modified to provide for a new interest rate of 6.6% and for accelerated payments
based on net income. The noteholder was granted an option to purchase up to 25%
of the Company's common stock (after giving effect to the exercise of the
option) at a price based on a formula. The noteholder has the right to use the
interest calculated using the difference between the old interest rate and the
new lower interest rate as a credit toward the option price. The Company has
valued the option using the fair value method. The option was valued at $2,180
based on the present value of the foregone interest payments under the modified
note agreement. This amount is being amortized using the effective interest
method over the life of the note payable.
Debt maturities on these notes are as follows:
1997 $ 396
1998 3,478
1999 409
2000 436
2001 466
Thereafter 4,479
------
$9,664
======
5. LEASE COMMITMENTS:
The Company leases office and storage space and equipment under noncancelable
operating leases. Future minimum rentals are as follows:
Year ending December 31,
------------------------
1997 $ 608
1998 547
1999 389
2000 337
2001 99
------
$1,980
======
Rental expense under operating leases totaled $316, $457 and $659 for the years
ended December 31, 1994, 1995 and 1996, respectively.
6. COMMITMENTS:
The Company has covenant not-to-compete agreements with the former stockholders
of an acquired/merged company. Payments under the agreements are the greater of:
(a) $50 per year for five years; or (b) 8% of the gross margin (defined as gross
billings minus temporary employee wages) generated by the merged company's
clients.
The minimum future payment under these covenant not-to-compete agreements is $50
for the year ending December 31, 1997.
The Company expensed $236, $167 and $118 under these agreements for the years
ended December 31, 1994, 1995 and 1996, respectively.
F-44
<PAGE>
7. EMPLOYEE BENEFIT PLAN:
The Company has a qualified 401(k) profit sharing plan covering eligible
employees. The plan provides for contributions by the Company without regard to
current or accumulated earnings at the discretion of the Board of Directors. The
Company did not make any matching contributions to the plan for the years ended
December 31, 1994 and 1995. Matching contributions totaling $44 were made during
the year ended December 31, 1996.
8. MAJOR CUSTOMERS:
During the year ended December 31, 1996, the Company had two customers with
sales greater than 10% of the Company's revenues. Contracts with one customer in
the software industry accounted for approximately $22,600, $29,000 and $26,100,
of the Company's sales for the years ended December 31, 1994, 1995 and 1996,
respectively. As of December 31, 1995 and 1996, this customer's accounts
receivable balance was $1,540 and $680, respectively. Contracts with one
customer in the aerospace industry accounted for approximately $12,800 of the
Company's sales for the year ended December 31, 1996. As of December 31, 1996,
this customer's accounts receivable balance was $1,484. Contracts with these two
customers can be terminated at any time with 30 days' notice.
9. PRIOR PERIOD ADJUSTMENT:
During 1995, the Company began accruing for vacations earned but unpaid to its
permanent employees and the portion of bonuses earned but unpaid to its contract
employees. The effect of this correction on the prior year financial statements
was as follows:
Net income, year ended December 31, 1994, as
previously reported $ 364
Less: Adjustment for correction of error (52)
-------
Net income, year ended December 31, 1994, as restated $ 312
=======
Retained deficit, as previously reported for
December 31, 1993 $(9,221)
Less: Adjustment for correction of error (313)
-------
Retained deficit, as restated for December 31, 1993 $(9,534)
=======
10. CONTINGENCIES:
The Company is the defendant in litigation with a previous insurer regarding a
settlement paid by the insurer which the insurer alleges should be indemnified
by the Company in the amount of approximately $1.6 million. The Company is
vigorously defending the lawsuit and management, in consultation with legal
counsel, believes it is more likely than not that the Company will prevail. In
November 1996, the Court granted a motion for summary judgment to dismiss the
case in favor of the Company. The plaintiff may still appeal the decision.
F-45
<PAGE>
11. PURCHASE AGREEMENT:
The stockholders of the Company have signed a definitive purchase agreement
whereby the Company will repurchase their shares concurrent with issuing shares
to COMFORCE Corporation. COMFORCE would then own all of the outstanding shares
of the Company. As part of this agreement, COMFORCE has advanced, on behalf of
the Company, $567 to a shareholder as a prepayment for the purchase of his
shares, which represent 1/3 of the outstanding shares of the Company. This
amount represents treasury stock subscribed and is shown as a reduction of
shareholders' equity. COMFORCE has also placed $500 in an earnest money escrow
account. In the event the stock purchase agreement fails to close as a result of
a breach of or material representative by the Company, the Company would be
required to return the entire $1,067 to COMFORCE, which was advanced as common
stock subscribed.
F-46