COMFORCE CORPORATION
Supplement dated November 12, 1997 to
Prospectus dated February 18, 1997,
as supplemented October 30, 1997, August 29, 1997, August 14, 1997,
July 10, 1997, May 29, 1997, April 2, 1997 and March 6, 1997
Set forth in this Supplement is certain information included in the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997 of COMFORCE
Corporation ("COMFORCE" or the "Company"), including (i) Management's Discussion
and Analysis of Financial Condition and Results of Operation (page 3), and (ii)
financial statements for the Company as listed on page 8. Capitalized terms not
defined herein shall have the meanings set forth in the Prospectus, as
supplemented to date.
<PAGE>
[Intentionally left blank]
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion set forth below supplements the information found in the
unaudited consolidated financial statements and related notes. The matters
discussed below and elsewhere in this Supplement contain forward looking
statements that involve risks and uncertainties, many of which may be beyond the
Company's control. See "-- Forward Looking Statements" for a discussion of
certain of such risks and uncertainties.
Overview
Set forth below is a discussion and analysis of financial condition and
results of operations of the Company. The Company believes that its future
operating results may not be directly comparable to historical operating results
of the Company if its proposed acquisition of Uniforce Services, Inc.
("Uniforce") is consummated (see Note 3 to the Unaudited Condensed Consolidated
Financial Statements).
In addition, since October 1995, the Company has completed seven
acquisitions. Each of these prior acquisitions has 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 historical financial statements from the
date of acquisition. Certain of these prior acquisitions provide for contingent
payments by the Company as a part of the purchase consideration based upon the
operating results of the acquired businesses for specified future periods. The
prior acquisitions have been financed by the Company principally through its
issuance of debt and equity securities and borrowings under bank credit
facilities. As a result, the Company's historical results of operations include
bridge financing costs and preferred stock dividends which may not be incurred
in future periods.
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 information technology sectors. 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 employees of the Company. 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.
Staffing and consulting companies, including the Company, typically pay their
billable employees weekly for their services before receiving payment from their
customers, often resulting in significant outstanding receivables. To the extent
the Company increases revenues through acquisitions and/or internal growth,
these receivables will grow and there will be greater requirements for borrowing
availability under its credit facilities to fund current operations.
In addition, the principal assets of staffing and consulting companies are
typically their relationships with their employees and their customers, rather
than tangible assets. Consequently, amortization of intangibles, principally
goodwill, has increased as a result of the Company's seven acquisitions since
October 1995 and can be expected to further increase if the Company continues to
grow through acquisitions.
Results of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Revenues of $54.5 million for the three months ended September 30, 1997
were $34.1 million, or nearly 168% higher than revenues for the three months
ended September 30, 1996. The increase in 1997 revenues is attributable
principally to the Company's completion of five acquisitions since the end of
the first quarter of 1996.
3
<PAGE>
Cost of revenues for the three months ended September 30, 1997 was 87.1% of
revenues or a 0.2% increase compared to cost of revenues of 86.9% for the three
months ended September 30, 1996.
Selling, general and administrative expenses as a percentage of revenue was
8.3% for the three months ended September 30, 1997, compared to 8.4% for the
three months ended September 30, 1996.
Operating income for the three months ended September 30, 1997 was $2.1
million, compared to operating income of $835,000 for the three months ended
September 30, 1996. This increase was principally attributable to the Company's
completion of five acquisitions since the end of the first quarter of 1996.
The Company's interest expense for the three months ended September 30,
1997 is attributable principally to interest charged under the Company's $40
million credit facility (the "Existing Credit Facility") with Fleet National
Bank, as lender and agent ("Fleet"), and U.S. Bank, Washington, as lender ("U.S.
Bank") (collectively, "Lenders").
The income tax provision for the three months ended September 30, 1997 was
for $391,000 on pretax income of $956,000, compared to taxes of $342,000 on
pretax income of $797,000 for the three months ended September 30, 1996. The
difference between the federal statutory income tax rate and the Company's
effective tax rate relates primarily to state income taxes and the
nondeductibility of certain intangible assets.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Revenues of $146 million for the nine months ended September 30, 1997 were
$112.5 million, or nearly 336% higher than revenues for the nine months ended
September 30, 1996. The increase in 1997 revenues is attributable principally to
the Company's completion of five acquisitions since the end of the first quarter
of 1996.
Cost of revenues for the nine months ended September 30, 1997 was 87.2% of
revenues compared to cost of revenues of 85.6% for the nine months ended
September 30, 1996. The 1997 cost of revenues increase of 1.6% is a result of
COMFORCE's expansion into more mature technical staffing sectors, which
historically generate gross margins substantially lower than telecommunications
and information technology sectors, principally due to the nature of the related
contracts and competition in this sector.
Selling, general and administrative expenses as a percentage of revenue was
8.1% for the nine months ended September 30, 1997, compared to 8.6% for the nine
months ended September 30, 1996. The decrease is principally attributable to the
acquisitions completed during 1996 and 1997 which contributed increased revenues
with lower incremental selling, general and administrative costs.
Operating income for the nine months ended September 30, 1997 was $5.7
million, compared to operating income of $1.6 million for the nine months ended
September 30, 1996. This increase was principally attributable to the Company's
completion of five acquisitions since the end of the first quarter of 1996.
The Company's interest expense for the nine months ended September 30, 1997
is attributable principally to the amortization of bridge finance costs payable
on the $25.2 million principal amount of Subordinated Convertible Debentures
("Old Debentures") issued by the Company in February and March 1997, the
proceeds of which were used to partially fund the acquisition of RHO Company
Incorporated ("Rhotech") and for working capital purposes. The Old Debentures
were refinanced in June 1997.
The income tax reflects a credit for the nine months ended September 30,
1997 for $646,000 on a loss before income taxes of $2 million, compared to taxes
of $610,000 on pretax income of $1.5 million for the nine months ended September
30, 1996. Such credit assumes that the Company will have taxable income in
future periods. The difference between the federal statutory income tax rate and
the Company's effective tax rate relates primarily to state income taxes and the
nondeductibility of certain intangible assets.
4
<PAGE>
Financial Condition, Liquidity and Capital Resources
During the first nine months of 1997, the Company's primary sources of
funds to meet working capital needs were from operations, funds made available
through the Company's $25.2 million offering of the Old Debentures in February
and March 1997 and borrowings under a short-term credit facility with U.S. Bank
entered into in February 1997 which provided for up to $7.5 million in
availability. A portion of the net proceeds from the offering of the Old
Debentures was also used to fund the Company's acquisition of Rhotech in
February 1997.
On June 25, 1997, the Company completed the $40 million Existing Credit
Facility. The Existing Credit Facility consists of a revolving credit facility
of up to $20 million and a $20 million term loan. The Company utilized all of
the proceeds of the term loan and a portion of the availability under the
revolving credit facility to redeem the Old Debentures. Additional funds
available under the revolving credit facility were used to retire the existing
$7.5 million revolving credit facility with U.S. Bank. The Company intends to
use available funds under the revolving credit facility for working capital and
general corporate purposes, including for acquisitions, subject to satisfaction
of the conditions set forth in the Existing Credit Facility. Borrowings under
the revolving credit facility are subject to various financial covenants and
other conditions.
The revolving credit facility and the term loan bear interest at a rate
equal to 0.75% and 1.75%, respectively, in excess of Fleet's prime rate as
announced from time to time. The Company's obligations under the Existing Credit
Facility are secured by substantially all of its assets. Subject to Fleet's
right to issue a call notice requiring repayment of the term loan at any time on
or after July 10, 1998, the term loan is payable in quarterly installments as
follows: $750,000 on July 1, 1998 and at the end of each calendar quarter
thereafter through and including December 31, 1999, $1,475,000 at the end of
each calendar quarter beginning March 31, 2000 and ending March 31, 2002, and a
final balloon payment equal to the sum of unpaid principal plus accrued interest
on June 30, 2002. The Company presently expects to repay the Existing Credit
Facility with the proceeds from the New Financings (as defined and described in
Note 3 to the Condensed Consolidated Financial Statements for the quarter ended
September 30, 1997 included in this Supplement), although no assurance can be
given that the New Financings will be completed. See "--Forward Looking
Statements."
The Company has historically paid its billable employees weekly for their
services before receiving payment from its customers. Additionally, certain
statutory payroll and related taxes, as well as other fringe benefits, are
generally paid by the Company before the Company receives payment from its
customers. Consequently, a significant portion of the Company's cost of revenues
is normally paid by the Company prior to receiving payment from its customers.
Increases in the Company's revenues, resulting from expansion of existing
offices or establishment of new offices, will require additional cash resources
necessary to support such growth. Following the Uniforce acquisition, the debt
service costs associated with the borrowing under the New Financings will
significantly increase liquidity requirements. Management of the Company
believes that, based on pro forma results of operations and anticipated growth,
including growth through acquisitions, cash flow from operations and funds
anticipated to be available under the New Credit Facility (as defined and
described in Note 3 to the Condensed Consolidated Financial Statements for the
quarter ended September 30, 1997 included in this Supplement) will be sufficient
to service the Company's indebtedness, to fund growth at anticipated levels and
to meet anticipated working capital requirements for the foreseeable future.
However, various factors could prevent the Company from realizing these
objectives.
The Company is obligated under various acquisition agreements to make
earn-out payments to the sellers of acquired companies, subject to the acquired
companies' meeting certain contractual requirements. For calendar year 1997,
sellers are entitled to earn-out payments of $521,000, all of which have been
paid. The maximum amount of the remaining potential earn-out payments is $5
million in cash and $4.5 million in stock payable in the three-year period from
1998 to 2000. The Company cannot currently estimate whether it will be obligated
to pay the maximum amount; however, the Company anticipates that the cash
generated by the operations of the acquired companies will provide all or a
substantial part of the capital required to fund the cash portion of the
earn-out payments.
Cash and cash equivalents decreased $938,000 during the nine months ended
September 30, 1997. Cash
5
<PAGE>
flows of $2,756,000 used in operating activities and cash flows of $15,232,000
used by investing activities were in excess of cash flows provided by financing
activities of $17,050,000. Cash flows used by operating activities were
principally attributable to the need to fund growth in accounts receivable and
their carrying costs. Cash flows used in investing activities are principally
related to the purchase of Rhotech. Cash flows from financing activities were
principally attributable to net proceeds available to the Company in connection
with its sale of the Old Debentures (which were redeemed on June 25, 1997), net
borrowings under the credit facility with U.S. Bank (which was repaid on June
25, 1997) and net borrowings under the Existing Credit Facility. The Old
Debentures were redeemed and the net borrowings under the credit facility with
U.S. Bank were repaid with proceeds from the Existing Credit Facility (as
described in Note 4 to the Company's Condensed Consolidated Financial Statements
for the quarter ended September 30, 1997 included in this Supplement).
As of September 30, 1997, approximately $39.0 million, or 51% of the
Company's total assets were intangible 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 40 year
period, resulting in an annual charge of approximately $4.0 million. Various
factors could impact the Company's ability to generate the earnings necessary to
support this amortization schedule. 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.
The Company estimates that the total amount of funds required to effect the
Uniforce acquisition will be approximately $93.6 million. In addition, the
Company estimates that the total amount of funds required to refinance certain
existing indebtedness of the Company and Uniforce, provide for working capital
and pay fees and expenses incurred in connection with the Uniforce acquisition
will be approximately $80.6 million. The Company expects to fund these costs
from the proceeds of the New Financings and available cash from operations. See
Note 3 to the Condensed Consolidated Financial Statements for the quarter ended
September 30, 1997 included in this Supplement. No assurance can be given that
the New Financings will be completed. See "--Forward Looking Statements."
Seasonality
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 information technology 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.
Other Matters
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. 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.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 becomes effective in fiscal 1999. Management
has not yet evaluated the effects of this change on the Company's financial
statements.
6
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), which changes the way public companies report
information about segments. SFAS 131, which is based on the management approach
to segment reporting, includes requirements to report selected segment
information quarterly and entity-wide disclosures about products and services,
major customers, and the material countries in which the entity holds and
reports revenues. SFAS 131 becomes effective in fiscal 1999. Management has not
yet evaluated the effect of this change on the Company's financial statements.
Forward Looking Statements
Certain statements contained herein and in the notes to the Company's
Condensed Consolidated Financial Statements for the quarter ended September 30,
1997 included in this Supplement suggest that the Company expects to acquire
Uniforce and consummate the New Financings. Such statements, and similar
statements as to the likely effect of such transactions and the Company's
objectives and management's beliefs with respect thereto are forward looking
statements. The Company may not be successful in acquiring Uniforce or in
consummating the New Financings, and/or the effect of such transactions on the
Company's actual results could otherwise differ materially from those projected
or suggested in any forward looking statement. Factors that could cause or
contribute to the foregoing include, but are not limited to, the following
important factors:
The Company will need to obtain additional financial resources to fund its
strategy of growth through acquisition, geographic expansion and market
development, including consummation of the Uniforce acquisition. The
consummation of the Uniforce acquisition and the financing therefor are subject
to numerous conditions customary to such transaction, including, in the case of
the Uniforce acquisition, the Company's ability to obtain adequate financing.
The Company is currently in discussions with financing sources and currently
anticipates that it will be able to obtain such financing and thereafter to
consummate the Uniforce acquisition. No assurances can be given, however, that
such financing will be able to be arranged or that such acquisition will be
consummated.
7
<PAGE>
COMFORCE Corporation
Index to Financial Statements
Page Number
in this Supplement
Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 9
Condensed Consolidated Statements of Operations
for the three months and nine months ended
September 30, 1997 and September 30, 1996 11
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended September 30, 1997 12
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997
and September 30, 1996 13
Notes to Condensed Consolidated Financial Statements 14
8
<PAGE>
COMFORCE Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
September 30, December 31,
1997 1996
------- -------
(unaudited)
ASSETS
Current assets:
Cash and equivalents $ 2,670 $ 3,608
Restricted cash 360 --
Accounts receivable, net of allowance of doubtful
accounts of $501 in 1997 and $213 in 1996 26,547 12,042
Prepaid expenses 1,050 243
Deferred income tax 2,028 278
Deferred financing fees 1,628 --
Income tax receivable 590 --
Other 243 373
------- -------
Total current assets 35,116 16,544
------- -------
Property, plant and equipment 1,937 890
Less: accumulated depreciation and amortization 488 146
------- -------
1,449 744
------- -------
Other assets:
Excess of cost over net assets acquired, net of
accumulated amortization of $1,425 in 1997 and
$526 in 1996 38,722 24,756
Other 452 1,322
------- -------
39,174 26,078
------- -------
Total Assets $75,739 $43,366
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
9
<PAGE>
COMFORCE Corporation and Subsidiaries
Condensed Consolidated Balance Sheets, Continued
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1997 1996
-------- --------
LIABILITIES (unaudited)
<S> <C> <C>
Current liabilities:
Borrowings under revolving line of credit $ 16,488 $ 3,850
Accounts payable 956 1,398
Accrued expenses 5,232 1,961
Payroll tax liabilities 3,337 969
Income taxes -- 354
-------- --------
Total current liabilities 26,013 8,532
-------- --------
Deferred income tax 90 90
Long-term debt 20,000 --
Other liabilities 690 --
-------- --------
Total liabilities 46,793 8,622
-------- --------
Commitments and contingencies
STOCKHOLDERS EQUITY
6% Series D convertible preferred stock, $.01 par value;
15,000 shares authorized, 7,002 shares issued and
outstanding in 1996. Liquidation value of $1,000 per
share ($7,002,000) -- 1
5% Series F convertible preferred stock, $.01 par value;
10,000 shares authorized, 500 shares issued and outstanding
in 1997 and 3,250 shares issued and outstanding in 1996. Liquidation value of
$1,000 per share ($500,000 in 1997) 1 1
Common stock, $.01 par value; 100,000,000 shares authorized, 13,744,039 shares
issued and outstanding in 1997 and 12,701,934 shares issued and outstanding
in 1996 137 127
Additional paid-in capital 30,485 34,253
Retained earnings (deficit) since January 1, 1996 (1,677) 362
-------- --------
Total stockholders' equity 28,946 34,744
-------- --------
Total liabilities and stockholders' equity $ 75,739 $ 43,366
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
10
<PAGE>
COMFORCE Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 54,509 $ 20,356 $ 145,986 $ 33,514
--------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 47,476 17,688 127,227 28,690
Selling, general and administrative 4,503 1,718 11,842 2,891
Depreciation and amortization 439 115 1,241 343
--------- --------- --------- ---------
52,418 19,521 140,310 31,924
--------- --------- --------- ---------
Operating income 2,091 835 5,676 1,590
--------- --------- --------- ---------
Other income -- 13 344 29
Interest expense:
Bridge financing costs -- -- (5,822) --
Other interest, net of interest income (1,135) (51) (2,151) (102)
--------- --------- --------- ---------
(1,135) (38) (7,629) (73)
--------- --------- --------- ---------
Income (loss) before income taxes 956 797 (1,953) 1,517
Provision (credit) for income taxes 391 342 (646) 610
--------- --------- --------- ---------
Net income (loss) 565 455 (1,307) 907
Dividends on preferred stock 6 123 732 193
--------- --------- --------- ---------
Income (loss) available to common stockholders $ 559 $ 332 $ (2,039) $ 714
========= ========= ========= =========
Earnings (loss) per share $ 0.04 $ 0.03 $ (0.15) $ 0.06
========= ========= ========= =========
Weighted average number of shares of common
stock and common stock equivalents outstanding 15,116 13,303 13,256 12,661
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
11
<PAGE>
COMFORCE Corporation and Subsidiaries
Condensed Consolidated Statement of Changes
In Stockholders' Equity
(unaudited in thousands, except per share data)
<TABLE>
<CAPTION>
Series D Series F
Common Stock Preferred Stock Preferred Stock
------------ --------------- ---------------
Shares Dollars Shares Dollars Shares Dollars
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 12,701,934 $ 127 7,002 $ 1 3,250 $ 1
Exercise of stock options 124,000 1 -- -- -- --
Exercise of stock warrants 65,000 1 -- -- -- --
Redemption of Series F
preferred stock -- -- -- -- (2,750) --
Conversion of Series D
preferred stock 583,500 6 (7,002) (1) -- --
Issuance of common stock as
inducement to effect
Series D conversion 87,750 1 -- -- -- --
SEC Registration fees -- -- -- -- -- --
Issuance of warrants in
connection with debt
placement -- -- -- -- -- --
Issuance of common stock in
connection with payment
right 385,591 4 -- -- -- --
Issuance of common stock as
consideration for interest
owed on debt 118,145 1 -- -- -- --
Redemption of common
stock (321,867) (4) -- -- -- --
Redemption of partial shares
of common stock (14) -- -- -- -- --
Net loss -- -- -- -- -- --
Dividends:
Series D preferred stock -- -- -- -- -- --
Series F preferred stock -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance as of September 30,
1997 13,744,039 $ 137 0 $ 0 500 $ 1
-========== =========== =========== =========== =========== ===========
<CAPTION>
Retained
Earnings
(Deficit)
Additional Since Total
Paid-in January 1, Stockholders'
Capital 1996 Equity
------- ---- ------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 34,253 $ 362 $ 34,744
Exercise of stock options 141 -- 142
Exercise of stock warrants 170 -- 171
Redemption of Series F
preferred stock (3,162) -- (3,162)
Conversion of Series D
preferred stock (5) -- --
Issuance of common stock as
inducement to effect
Series D conversion 492 (493) --
SEC Registration fees (619) -- (619)
Issuance of warrants in
connection with debt
placement 1,004 -- 1,004
Issuance of common stock in
connection with payment
right (4) -- --
Issuance of common stock as
consideration for interest
owed on debt 632 -- 633
Redemption of common
stock (2,417) -- (2,421)
Redemption of partial shares
of common stock -- -- --
Net loss -- (1,307) (1,307)
Dividends:
Series D preferred stock -- (195) (195)
Series F preferred stock -- (44) (44)
----------- ----------- -----------
Balance as of September 30,
1997 $ 30,485 $ (1,677) $ 28,946
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
12
<PAGE>
COMFORCE Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flow
(unaudited in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Net cash flows used by operating activities $ (2,755) $ (4,321)
-------- --------
Cash flows from investing activities:
Acquisition payments, net of cash acquired (14,355) (9,442)
Officer loans 30 (367)
Restricted cash (360) (50)
Additions to property, plant and equipment (548) (183)
-------- --------
Net cash flows (used by) from investing activities (15,233) (10,042)
-------- --------
Cash flows from financing activities:
Payment of note payable -- (500)
Proceeds from revolving lines of credit 52,835 4,150
Repayment on revolving lines of credit (45,481) (900)
Proceeds from short-term debt 20,628 --
Payment of short-term debt (27,930) --
Proceeds from long-term debt 20,000 --
Repurchase of common stock (2,421) --
Proceeds from issuance of Preferred Stock -- 11,052
Proceeds from exercise of stock options 142 23
Proceeds from exercise of warrants 171 1,046
Payment of registration costs (619) (100)
Dividends paid (275) (105)
-------- --------
Net cash flows from financing activities 17,050 14,666
-------- --------
Increase (decrease) in cash and cash equivalents (938) 303
Cash and equivalents, beginning of period 3,608 649
-------- --------
Cash and equivalents, end of period $ 2,670 $ 952
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 1,044 $ 103
Income taxes paid 227 119
Supplemental schedule of noncash investing and
financing activities:
Quasi-reorganization -- (93,847)
Common stock issued to settle liabilities 633 276
Issuance of short-term debt to redeem Series F
preferred stock 3,162 --
Dividends accrued but not yet paid 102 88
Net change in ARTRA receivables and liabilities -- (2,968)
Warrants issued in connection with the sale of convertible 1,004 --
debentures
Warrants issued in connection with short-term loan 100 --
Warrants issued in connection with credit facility 170 --
Common stock issued for purchase of Force Five, Inc. -- 500
Repayment of officer loans (see note 9) 352 --
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
13
<PAGE>
COMFORCE Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
COMFORCE Corporation ("COMFORCE" or the "Company") currently operates in one
industry segment as a provider of telecommunications and computer technical
staffing and consulting services worldwide.
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.
As discussed in Note 3, on February 28, 1997, the Company purchased all of the
stock of RHO Company Incorporated ("Rhotech"). Rhotech is in the business of
providing contract employees to other businesses.
These condensed consolidated financial statements are presented in accordance
with the requirements applicable to Form 10-Q and consequently do not include
all the disclosures required in audited financial statements. Accordingly, the
Company's audited financial statements for the fiscal year ended December 31,
1996, included in the Supplement to the Prospectus dated April 2, 1997, should
be read in conjunction with the accompanying consolidated financial statements.
The condensed consolidated balance sheet as of December 31, 1996 was derived
from the audited consolidated financial statements included in such supplement.
Reported interim results of operations are based in part on estimates which may
be subject to year-end adjustments. In addition, these quarterly results of
operations are not necessarily indicative of those expected for the year.
2. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
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.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 becomes effective in fiscal 1999. Management
has not yet evaluated the effects of this change on the Company's financial
statements.
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), which changes the way public companies report
information about segments. SFAS 131, which is based on the management approach
to segment reporting, includes requirements to report selected segment
information quarterly and entity-wide disclosures about products and services,
major customers, and the material countries in which the entity holds and
reports revenues. SFAS 131 becomes effective in fiscal 1999. Management has not
yet evaluated the effect of this change on the Company's financial statements.
14
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
3. CERTAIN ACQUISITIONS AND PROPOSED ACQUISITIONS
Rhotech Acquisition
On February 28, 1997, the Company purchased all of the stock of Rhotech for
$14.8 million in cash, plus a contingent payout to be paid over three years on
future earnings of Rhotech payable in stock in an aggregate amount not to exceed
$3.3 million. The maximum number of shares issuable under the contingent payout
is 386,249 shares. The acquisition of Rhotech was accounted for under the
purchase method and, accordingly, Rhotech's operations are included in the
Company's statement of operations from the date of acquisition. The cash portion
of the purchase price paid at closing was principally funded through the
Company's offering of Subordinated Convertible Debentures. (See Note 4.) Rhotech
provides specialists primarily in the technical services and information
technology sectors. In connection with the closing of the Rhotech acquisition
and in recognition of the efforts of James L. Paterek, Chairman of the Company,
Christopher P. Franco, Chief Executive Officer of the Company, and Michael
Ferrentino, President of the Company, including providing their personal
guarantees on certain loans to the Company through the pledging of their shares
of Company stock, the Company paid each of these officers $75,000.
Proposed Uniforce Acquisition and Related Financing
On August 13, 1997, the Company, Uniforce Services, Inc. ("Uniforce") and
COMFORCE Columbus, Inc., a wholly-owned subsidiary of the Company (the
"Subsidiary"), executed an Agreement and Plan of Merger (the "Merger Agreement")
which provides for the acquisition of Uniforce by the Company. Pursuant to the
Merger Agreement, on October 27, 1997, the Company caused the Subsidiary to
commence a tender offer (the "Offer") to acquire all of the outstanding Uniforce
common stock (the "Uniforce Shares") for a per share price of $28 in cash and
0.5217 shares of the Company's Common Stock (collectively the "Per Share
Amount"), or an aggregate purchase price of approximately $93.6 million in cash
and approximately 1.6 million shares of the Company's Common Stock. The Merger
Agreement also provides, subject to various conditions some of which are
described below, for a merger (the "Merger") pursuant to which all holders of
Uniforce Shares who have not tendered their stock to the Subsidiary will receive
the Per Share Amount, and Uniforce will become a wholly-owned subsidiary of
COMFORCE Operating, Inc., a newly-formed, wholly-owned subsidiary of the Company
("COI").
Pursuant to the Merger Agreement, the Company's obligation to accept for payment
and pay for shares of Uniforce Shares pursuant to the Offer is subject to the
condition that at least two-thirds of the then outstanding Uniforce Shares are
tendered or otherwise held by the Company, and to certain other conditions. In
addition, the Merger is subject to various conditions set forth in the Merger
Agreement, and may also be terminated by either party in circumstances specified
in the Merger Agreement.
The Company estimates that the total amount of funds required by the Subsidiary
to purchase all of the Uniforce Shares issued and outstanding and Uniforce
Shares issuable upon exercise of the outstanding Uniforce stock options pursuant
to the Offer and the Merger will be approximately $93.6 million. In addition,
the Company estimates that the total amount of funds required to refinance
certain existing indebtedness of the Company and Uniforce, provide for working
capital and pay fees and expenses incurred in connection with the Offer and the
Merger will be approximately $80.6 million.
The Company and COI expect to obtain debt financing in the aggregate amount of
$210 million (which includes a $75 million revolving credit facility as
discussed below), of which approximately $93.6 million will be applied to
purchase the Uniforce Shares in the Offer and effect the Merger and $80.6
million will be used to pay related fees and expenses and refinance certain
existing indebtedness of Uniforce and the Company. The Offer and the Merger are
both conditioned upon the receipt of this financing by the Company.
15
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
In August 1997, the Company engaged NatWest Capital Markets Limited ("NatWest")
to act as its exclusive financial advisor and initial purchaser or lead
placement agent in connection with certain debt offerings to fund the Uniforce
acquisition, such offerings to be conducted on a best efforts basis. No
assurance can be given that NatWest will be successful in consummating such
offerings.
In addition, in November 1997, the Company received a commitment letter from
Heller Financial, Inc. ("Heller") for a $75 million revolving credit facility
(the "New Credit Facility") to refinance the existing credit facilities of the
Company and Uniforce. This financing is subject to various conditions, and no
assurance can be given the New Credit Facility will be made available to the
Company or, if so, on terms which are acceptable to the Company.
In accordance with the foregoing, the Company expects to finance the Uniforce
acquisition and to refinance the existing credit facilities of the Company and
Uniforce through (i) the issuance of $110 million in principal amount of Senior
Notes due 2007 to be issued by COI, a wholly-owned subsidiary of the Company,
(ii) the issuance of 25,000 Units representing $25 million in principal amount
of Senior Secured PIK Debentures due 2009 with Warrants to purchase the
Company's Common Stock to be issued by the Company, (iii) an initial draw under
the New Credit Facility to be entered into by COI and Heller, together with
existing cash balances, aggregating $39.2 million (the New Credit Facility,
together with the issuance of the Senior Notes and the Units, the "New
Financings").
4. DEBT
At September 30, 1997, current and long-term debt (in thousands) consists of:
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1997 1996
---- ----
<S> <C> <C>
Current debt
Revolving line of credit, due in July 1998, with interest
payable monthly at the bank's prime rate plus .75%. At
September 30, 1997, the bank's prime rate was 8.5%. $16,488 $3,850
Long-term debt
Term loan with interest payable at the bank's prime rate
plus 1.75%. At September 30, 1997, the bank's prime rate $20,000
was 8.5%.
</TABLE>
From February 27 to March 21, 1997 (each date of sale a "Closing Date"), the
Company sold $25.2 million of its Subordinated Convertible Debentures ("Old
Debentures") to certain institutional investors for cash or in exchange for
shares of the Company's Series F Preferred Stock. In the case of the shares
exchanged, the Company effected the repurchase of 2,750 of the 3,250 outstanding
shares of its Series F Preferred Stock by issuing Old 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"), which premium had been
included as an accretive dividend in December 1996. The Old Debentures bore
interest at the rate of 8% per annum, and were to bear interest at the rate of
10% per annum commencing 180 days after each Closing Date. Interest on the Old
Debentures was payable quarterly in cash or in common stock of the Company, at
the Company's option. Warrants to purchase 302,400 shares of the Company's
common stock at prices ranging from $6.85 to $7.65 per share were issued in
connection with this financing, which were valued at $734,000. In connection
with this financing, the Company incurred costs of approximately $5.8 million
which were expensed during the first half of 1997.
On June 25, 1997, the Company completed a $40 million credit facility (the
"Existing Credit Facility") with Fleet
16
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
National Bank, as lender and agent ("Fleet"), and U.S. Bank, Washington, as
lender ("U.S. Bank") (collectively, "Lenders"). The Existing Credit Facility
consists of a revolving credit facility of up to $20 million and a $20 million
term loan.
The Company utilized all of the proceeds of the term loan and a portion of the
availability under the revolving credit facility to redeem the Company's $25.2
million in outstanding principal amount of Old Debentures issued principally to
fund the Company's acquisition of Rhotech in February 1997. Additional funds
available under the revolving credit facility were used to retire the existing
$7.5 million revolving credit facility of Rhotech with U.S. Bank. The Company
intends to use available funds under the revolving credit facility for working
capital and general corporate purposes, including for acquisitions, subject to
the satisfaction of the conditions therefore set forth in the Existing Credit
Facility. Borrowings under the revolving credit facility are subject to various
financial covenants and other conditions. At September 30, 1997, the Company was
in compliance with all covenants and conditions of the Existing Credit Facility.
The revolving credit facility and the term loan bear interest at a rate equal to
0.75% and 1.75%, respectively, in excess of Fleet's prime rate as announced from
time to time. The Company's obligations under the Existing Credit Facility are
secured by substantially all of its assets. In addition, James L. Paterek, the
Chairman of the Company, Christopher P. Franco, the Chief Executive Officer of
the Company, and Michael Ferrentino, the President of the Company, each pledged
500,000 shares of the Company's common stock held by them and all of the options
to purchase common stock held by them as additional collateral for the Company's
obligations under the Existing Credit Facility. The scheduled maturity date of
the revolving credit facility is July 10, 1998. Subject to Fleet's right to
issue a call notice requiring repayment of the term loan at any time on or after
July 10, 1998, the term loan is payable in quarterly installments as follows:
$750,000 on July 1, 1998 and at the end of each calendar quarter thereafter
through and including December 31, 1999; $1,475,000 at the end of each calendar
quarter beginning March 31, 2000 and ending March 31, 2002, and a final balloon
payment equal to the sum of unpaid principal plus accrued interest on June 30,
2002. The Company intends to restructure its financing with the New Financings
discussed in Note 3.
The Company incurred fees and expenses of approximately $1.7 million in
connection with obtaining the Existing Credit Facility, which will be amortized
over the term of the Existing Credit Facility, including amounts awarded to
Messrs. Paterek, Franco and Ferrentino for pledging their shares to further
collateralize the Company's obligations under the Existing Credit Facility (see
Note 9). In addition, the Company agreed to issue to Fleet warrants to purchase
(i) 100,000 shares of common stock at an exercise price of $7.30 per share
($1.50 per share in excess of the average closing price of the common stock for
the five business days ended June 24, 1997), exercisable until June 25, 2000 and
(ii) upon the occurrence of certain specified conditions, 100,000 shares of
common stock at an exercise price of $0.75 per share in excess of the average
closing price of the common stock for the five business days ending prior to the
date of the occurrence of the specified conditions, exercisable commencing on
such date and for a period of three years thereafter (see Note 5).
5. EQUITY
During the first nine months of 1997, options to purchase 124,000 shares of
common stock at a price of $1.125 per share were exercised.
During the first nine months of 1997, the Company issued warrants with a value
of $734,000 to purchase 302,400 shares of common stock at prices ranging from
$6.85 to $7.65 in connection with issuance of the Old Debentures and warrants
with a value of $170,000 to purchase 100,000 shares of common stock at a price
of $7.30 per share in connection with a long-term credit facility.
During the first nine months of 1997, the Company issued 100,000 warrants with a
value of $100,000 in connection with
17
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
a short-term loan made to the Company.
During the first nine months of 1997, warrants to purchase 65,000 shares of
common stock were exercised at prices ranging from $2.00 to $3.375 per share.
During the first nine months of 1997, the Company effected the repurchase of
2,750 of the 3,250 outstanding shares of its Series F Preferred Stock with a
value of $3,162,000 through the issuance of its Old Debentures. (See Note 4.)
During the first nine months of 1997, 7,002 shares of Series D Preferred Stock
were converted into 671,250 shares of common stock under the conversion terms.
Such common shares included 87,750 shares with a market value of $493,000 given
to induce certain conversions. These additional shares have been accounted for
as a preferred stock dividend in the second quarter of 1997.
In June 1997, 118,145 shares of common stock were issued in consideration for
interest of $633,000 owed on the Old Debenture financing.
In December 1996, the Company sold 460,000 shares of its common stock, together
with a related payment right requiring the Company to make a payment to the
investors in either cash or common stock, at the Company's option, equal to the
amount by which $10.00 per share exceeded the average closing bid price for the
five trading days prior to April 1, 1997. In addition, in December 1996, the
Company sold 350,000 shares of its common stock, together with a related payment
right requiring the Company to make a payment to the investors in either cash or
common stock, at the Company's option, equal to the amount by which $12.05 per
share exceeded the average closing bid price for the five trading days prior to
April 1, 1997. On April 1, 1997, the Company satisfied these payment rights by
issuing 385,591 shares of its common stock.
In February 1997, in connection with its sale of its Old Debentures to the
investors who purchased 460,000 shares of the Company's common stock in December
1996, described above, the Company granted to such investors put options under
which the Company agreed to repurchase 115,000 of the shares on each of April
28, 1997, May 28, 1997, June 27, 1997 and July 27, 1997 made in satisfaction of
the payment right described above, subject to termination of such put options
upon earlier repayment of the Old Debentures. In the case of cash payments under
the payment right, this adjustment is effected through a reduction of the put
option price by the amount of the cash payment. In the case of payments in stock
under the payment right, this adjustment is effected through an increase in the
aggregate number of shares subject to the put option, without adjustment of the
aggregate put option price. On April 28 and May 28, 1997, the investors elected
to exercise the put option. As a result of the Company's satisfaction of the
payment right through its issuance of shares of common stock, the number of
shares the Company was required to repurchase was increased by 80,782 shares.
Consequently, the Company repurchased 310,782 shares of its common stock for
$2,300,000. The put options for June 27, 1997 and July 27, 1997 terminated by
their terms by reason of the Company's repayment of the Old Debentures on June
25, 1997.
6. EARNINGS PER SHARE
Earnings per common share is computed by dividing net earnings available for
common stockholders 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 and are
excluded from this calculation. The dividends of $688,000 accrued or paid on the
Series D Preferred Stock for the nine months ended September 30, 1997, and the
dividends of $6,000 and $44,000 respectively accrued or paid on the Series F
Preferred Stock for the three and nine months ended September 30, 1997, have
been deducted for computing
18
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
earnings available to common stockholders. For the nine month period ended
September 30, 1997, common stock equivalents have not been included in this
calculation as their effect is antidilutive. For the three and nine month
periods ended September 30, 1997 and the three and nine month periods ended
September 30, 1996, 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>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings (loss) available for common
stockholders $ 559 $ 332 $ (2,039) $ 714
-------- -------- -------- --------
Weighted average number of shares
outstanding for the period 13,731 11,285 13,256 9,548
Dilutive effect of common stock equivalents 1,385 2,018 -- 3,113
-------- -------- -------- --------
15,116 13,303 13,256 12,661
======== ======== ======== ========
Primary earnings (loss) per share $ .04 $ 0.03 $ (0.15) $ 0.06
======== ======== ======== ========
</TABLE>
7. INCOME TAXES
In the three month and nine month periods ended September 30, 1997, the
difference between the federal statutory income tax rate and the Company's
effective tax rate relates primarily to state income taxes and the
nondeductibility of certain intangible assets amortization.
8. LITIGATION
In January 1997, Austin A. Iodice, who served as the Company's Chief Executive
Officer, President and Vice Chairman while the Company was engaged in the
jewelry business, and Anthony Giglio, who performed the functions of the
Company's Chief Operating Officer while the Company was engaged in the jewelry
business, filed separate suits against the Company in the Connecticut Superior
Court alleging that the Company had breached the terms of management agreements
entered into with them by failing to honor options to purchase Common Stock
awarded to them in connection with the management of the jewelry business under
the terms of such management agreements and the Company's Long-Term Stock
Investment Plan. The suits allege that the plaintiffs are entitled to an
unspecified amount of damages. The Company believes that the option to purchase
370,419 shares granted to Mr. Iodice (through Nitsua, Ltd., a corporation
wholly-owned by him) and the option to purchase 185,210 shares granted to Mr.
Giglio, each having an exercise price of $1.125 per share, expired in 1996,
three months after Messrs. Giglio and Iodice ceased to be employed by the
Company. Messrs. Giglio and Iodice maintain that they were agents and not
employees of the Company and that the options continue to be exercisable. In
March 1997, the Company filed motions to dismiss each of these suits, and the
court scheduled hearings on these motions for December 1997. The Company intends
to vigorously defend these suits.
In a case filed in U.S. District Court, Central District of California, against
Rhotech and Technical Staff Associates, Inc. ("TSA"), which was acquired by
Rhotech in 1992, TSA's former insurance carrier has alleged that TSA and Rhotech
are obligated to repay to it approximately $1.6 million that it was required to
pay in connection with an injury and death that occurred in November 1992 to a
temporary employee of TSA. The action has been referred to
19
<PAGE>
Rhotech's insurance carrier, which is defending it with a reservation of rights.
Rhotech has been granted summary judgment with respect to all claims made in the
action, which judgment is the subject of an appeal by the plaintiff. Management
believes that the case is without substantial merit and intends to vigorously
defend it.
In December 1994, the Company was notified by the Federal Environmental
Protection Agency that it was a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("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 manufacturing operations. 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. In October 1997, ARTRA entered into a
settlement agreement with the plaintiffs to settle the case for a cash payment
of $50,000. Under the terms of this settlement agreement, the Company was
dismissed as a defendant in the case and released and discharged from liability
in connection with this matter.
The Company is a party to routine contract and employment-related litigation
matters in the ordinary course of its business. No such pending matters,
individually or in the aggregate, if adversely determined, are believed by
management to be material to the business, results of operations or financial
condition of the Company. The Company maintains general liability insurance,
property insurance, automobile insurance, employee benefit liability insurance,
owner's and contractor's protective insurance and exporter's foreign operations
insurance with coverage of $1 million on a per claim basis and $2 million
aggregate (with $3 million umbrella coverage). The Company insures against
workers' compensation in amounts required under applicable state law and in the
amount of $500,000 in the case of foreign workers. The Company also maintains
fidelity insurance in the amount of $25,000 per claim and directors' and
officers' liability insurance in the amount of $5 million. The Company is
presently soliciting quotations to obtain errors and omissions coverage.
9. RELATED PARTY TRANSACTION
The Company paid L.H. Frishkoff & Company, a certified public accounting firm at
which Richard Barber, a Director of the Company, is a partner, approximately
$196,907 in fees during 1997 for tax-related advisory services.
As a condition to the funding of the Existing Credit Facility (see Note 4), the
Lenders required James L. Paterek, the Company's Chairman, Christopher P.
Franco, the Company's Chief Executive Officer, and Michael Ferrentino, the
Company's President, to each pledge as additional collateral to secure the
Company's obligations under the Existing Credit Facility 500,000 shares of the
Company's common stock owned by them and all of the options to purchase common
stock held by them (281,250 shares in the case of Messrs. Paterek and Ferrentino
and 112,500 shares in the case of Mr. Franco), which shares had a current market
value in excess of $12 million at the approximate time of the transaction. The
board of directors of the Company engaged an independent valuation firm to value
these pledges by the principals.
In recognition of both the substantial benefit afforded to the Company by the
pledges and the cost to the principals of making the pledges, the board of
directors authorized the issuance of an aggregate consideration of approximately
$650,000 to these principals, which amount was utilized to repay outstanding
loans of such officers due to the Company and related payroll withholding taxes.
The board of directors has deemed such consideration reasonable based on the
valuation of the pledges as determined by the appraisal performed by the
independent valuation firm. The aggregate amount of this consideration,
approximately $650,000, is included as a part of the fees and expenses incurred
in connection with the Existing Credit Facility (as described in Note 4).
20
