<PAGE>
Pursuant to Rule 424(b)(3)
Registration No. 33-60403
PROSPECTUS
11,096,157 SHARES
COMFORCE CORPORATION
COMMON STOCK
COMFORCE Corporation, a Delaware corporation (the "Company" or
"COMFORCE") is a provider of staffing, consulting and outsourcing
solutions that address the high technology needs of businesses.
All of the 11,096,157 shares of common stock ("Common Stock") of the
COMFORCE Corporation (the "Company" or "COMFORCE") offered hereby are being
offered for sale, from time to time by or for the account of certain
existing security holders of the Company ("Selling Stockholders"). See
"Selling Stockholders." The Common Stock is listed on the American Stock
Exchange. The Selling Stockholders have indicated that they propose from
time to time to offer their shares, if any, for sale in regular way
brokerage transactions on the American Stock Exchange or in privately
negotiated transactions; and that sales on or through the facilities of the
American Stock Exchange will be effected at such prices as may be
obtainable and are satisfactory to the respective Selling Stockholders.
Michael Ferrentino, President and a Director of the Company, Christopher P.
Franco, an Executive Vice President and Secretary of the Company, James L.
Paterek, a principal consultant to the Company, and Kevin W. Kiernan, a
Vice President of COMFORCE Telecom, collectively are registering 3,888,084
shares hereby.
In certain cases the Selling Stockholders, brokers executing sales
orders on their behalf and dealers purchasing shares from the Selling
Stockholders for resale, may be deemed to be "underwriters," as that term
is defined in Section 2(11) of the Securities Act of 1933, as amended (the
"Securities Act"), and any commissions received by them and any profit on
the resale of Common Stock purchased by them may be deemed underwriting
commissions or discounts under the Securities Act.
The Company will not receive any proceeds from sales of shares to
which this Prospectus relates. However, insofar as the holders of warrants
to purchase shares of the Common Stock are expected to exercise their
warrants in order to sell the underlying shares (which are registered
hereby), the Company will receive the amount of the exercise prices of any
warrants so exercised. The Company cannot predict when or if it will
receive proceeds from the exercise of warrants, or the amount of any such
proceeds.
SEE "RISK FACTORS" ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
On February 18, 1997, the closing price of the Common Stock on the
American Stock Exchange was $ 8.9375 per share. The Company will bear
certain of the expenses of this offering, estimated to be $485,000.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is February 18, 1997.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and the
consolidated financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this
Prospectus concerning the Company's operations is presented on an unaudited
pro forma basis as if the following transactions (the "Recent
Transactions") had been completed as of January 1, 1994: (i) the
transactions (including the acquisition financing transactions) described
under "Acquisition History" in this Prospectus Summary including those that
have occurred since September 30, 1996 and the proposed RHO Company
Incorporated acquisition and acquisition financing, (ii) the amendment of
the Company's Certificate of Incorporation in October 1996 to increase the
number of authorized shares of Common Stock and Preferred Stock as
described under "Description of the Company's Securities," and (iii) the
automatic conversion in October 1996 of the Company's Series E Preferred
Stock into 887,100 shares of Common Stock as described under "Description
of the Company's Securities." References in this Prospectus to the
"Company" mean COMFORCE Corporation, its predecessors and its and their
subsidiaries, unless the context otherwise requires.
THE COMPANY
COMFORCE Corporation is a provider of technical staffing,
consulting and outsourcing solutions focused on the high technology needs
of businesses. The Company provides services to over 725 customers through
its highly-skilled labor force that includes computer programmers,
engineers, technicians, scientists and researchers. The Company's customers
include telecommunication equipment manufacturers, telecommunication
service providers (wireline and wireless), computer software and hardware
manufacturers, aerospace and avionics firms, utilities and national
research laboratories such as Los Alamos National Laboratory, Sandia
National Laboratory and Lawrence Livermore National Laboratory. The
Company maintains its headquarters in Lake Success, NY and has 31 branch
offices in 15 states across the United States to enable it to meet the
needs of national as well as local customers. The Company employs
approximately 3,700 persons with a ratio of billable to non-billable
employees of 18.9 to 1 (as compared to a reported overall industry-wide
ratio of 14.2 to 1 for comparably-sized staffing companies), and maintains
a proprietary database of over 110,000 prospective employees with expertise
in the technical disciplines served by the Company.
The Company serves customers in three principal sectors --
telecommunications, information technology ("IT") and technical services --
which represent 14%, 24% and 62%, respectively, of pro forma sales for the
nine months ended September 30, 1996. In the telecommunications sector,
the Company provides staffing for wireline and wireless communications
systems development, satellite and earth station deployment, network
management and plant modernization. In the information technology sector,
the Company provides staffing for specific projects requiring highly
specialized skills such as applications programming and development,
client/server development, systems software architecture and design,
systems engineering and systems integration. In the technical services
sector, the Company provides staffing for national laboratory research in
such areas as environmental safety, alternative energy source development
and laser technology, and provides highly-skilled labor meeting diverse
commercial needs in the avionics and aerospace, architectural, automotive,
energy and power, pharmaceutical, marine and petrochemical fields.
The Company's objective is to be the leading provider of technical
staffing, consulting and outsourcing solutions for the high technology
needs of businesses. The Company will seek to achieve its objective by
pursuing the following strategy:
Focus on High Technology Markets. In the telecommunications, IT and
technical service sectors which the Company serves, dynamic technology
needs of businesses can effectively be met through the use of staffing,
consulting and outsourcing services. The Company is focused on servicing
the high technology markets because management believes that providing
staffing in the high technology sectors offers greater growth opportunities
2
<PAGE>
over providing staffing in the lower-skilled labor sectors, including a
higher growth in demand for services, lower turnover rates, generally
higher profit margins and more stable customer and employee relationships
Pursue Acquisitions as Key Element of Growth. A key element of the
Company's expansion strategy is to continue acquiring staffing companies
with profitable track records and recognized local or regional presence.
Management believes that such acquisitions will enable the Company to more
rapidly achieve significant economies of scale and maintain greater
financial resources which will allow it to secure larger contracts and
enhance its leverage for negotiating contracts.
Expand Geographic Presence. The Company will seek to increase revenues and
enhance earnings stability by continuing to expand geographically in the
United States and internationally. Management believes that further
increasing the Company's geographic diversity will better enable it to
increase its customer base, weather regional economic and business cycles
and provide an advantage when pursuing contracts with national accounts,
particularly for customers with a national or international presence and a
wide variety of staffing needs.
Develop Innovative Staffing Solutions. Management continually seeks to
develop new staffing solutions that provide its customers with maximum
value and flexibility. By offering innovative and flexible service
packages to customers, management believes that it will be better able to
attract new customers as well as increase sales to existing customers.
Capitalize on Operational Efficiencies. The Company considers its
management information systems responsible for administrative, accounting
and other "back office" operations to be 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 improve operating efficiencies.
The Company was incorporated in Illinois in 1954 and became a Delaware
corporation through its merger with a Delaware subsidiary in 1969. It
maintains its headquarters at 2001 Marcus Avenue, Lake Success, New York
11042. The Company's telephone number is (516) 328-7300 and its address on
the World Wide Web is www.comforce.com.
ACQUISITION HISTORY
In October 1995, the Company acquired all of the capital stock of
Spectrum Global Services, Inc. (formerly d/b/a YIELD Global and
subsequently renamed COMFORCE Telecom, Inc.) ("COMFORCE Telecom"), which
was engaged in the telecommunications technical staffing business.
COMFORCE Telecom had been formed in 1987 by Michael Ferrentino, currently
the President of the Company, and James L. Paterek, currently a principal
consultant to the Company. In September 1995, the Company discontinued its
then existing jewelry business. As shown in the table below, the Company
acquired five additional technical staffing businesses in 1996 and has
entered into a definitive agreement to acquire RHO Company Incorporated
("RHO"). Since September 30, 1996, the recent acquisitions have been
funded principally from proceeds received by the Company from its sale of
3,250 shares of Series F Preferred Stock and 460,000 shares of Common Stock
and related payment rights and its issuance of 111,111 shares of Common
Stock upon the exercise of a warrant. See "Description of the Company's
Securities." The agreement to acquire RHO requires that the transaction be
closed by February 28, 1997. The Company will seek to raise net proceeds of
$15.0 million through debt financing to provide the balance of the funds
needed to consummate the RHO acquisition. The Company is seeking to raise
between $11.4 million to $17.0 million through the private placement of
debt instruments bearing interest at 8% per annum. Such private placement
of debt will require additional redemption premiums ranging from 2.5% to
15% based upon, among other factors, the timing of the redemptions, which
premimums are not reflected in the unaudited pro forma data presented. See
"Risk Factors -- Future Capital Needs; Uncertainty of Financing; Potential
Dilution" and "Business--Acquisitions" and "Discontinued Operations."
3
<PAGE>
<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
Communications FL
Services, Inc.
("Williams")
RRA, Inc., Project 1964 May 1996 $52.0 8 Tempe, AZ Technical Services
Staffing Support Team,
Inc. and DataTech
Technical Services, Inc.
(collectively, "RRA")
Force Five, Inc. 1993 August 1996 $ 7.1 4 Dallas, TX Information Technology
("Force Five")
AZATAR Computer 1980 November $ 7.1 2 Rochester, Information Technology
Systems, Inc. 1996 NY
("AZATAR")
Continental Field 1965 November $ 9.9 2 Elmsford, NY Telecommunications
Service Corporation and 1996
Progressive Telecom,
Inc. (collectively,
"Continental")
RHO 1971 Proposed to be $83.6 9 Redmond, Technical Services and
February 1997 WA Information Technology
</TABLE>
4
<PAGE>
THE OFFERING
The Company is required under certain agreements it has entered into
with stockholders and warrantholders to register the shares of Common Stock
held by such persons or issuable upon the exercise of warrants or
conversion of convertible Preferred Stock held by them.
Existing securityholders of the Company are offering 11,096,157 shares
of Common Stock held by them or issuable to them. The Selling Stockholders
may be deemed to be underwriters within the meaning of Section 2(11) of the
Securities Act of 1933 and, as a result, such Selling Stockholders may be
subject to the liability provisions of Section 11 thereunder in connection
with any sales of shares of Common Stock pursuant to the registration
statement of which this prospectus is a part.
Common Stock Offered by the Selling Stockholders....... 11,096,157 shares
Common Stock Outstanding............................... 12,761,934 shares
Common Stock Issuable Under Warrants................... 1,445,608 shares
Common Stock Issuable Under Options.................... 2,005,850 shares
Common Stock Issuable Upon Conversion of
Convertible Preferred Stock........................... 879,695 shares (1)
Total Common Stock..................................... 17,093,087 shares (2)
American Stock Exchange Symbol..................................... CFS
_________________________________
(1) Includes (i) 583,500 shares of Common Stock issuable upon conversion of
the outstanding shares of the Company's Series D Preferred Stock based
on a conversion price of $12.00 per share and (ii) 296,195 shares
of Common Stock issuable upon conversion of the outstanding shares of
the Company's Series F Preferred Stock based on a conversion price of
83% of the closing price of the Common Stock on December 31, 1996,
$14.25 per share. The number of shares of Common Stock issuable upon
conversion of the Series F Preferred Stock is based on a specified
percentage of the average closing bid price of the Common Stock for the
five trading days preceding conversion. The closing price on December
31, 1996 approximates this average closing bid price. The number of
shares of Common Stock issuable upon conversion of shares of Series F
Preferred Stock will increase if the closing bid price of the Common
Stock decreases and, conversely, will decrease if the closing bid price
of the Common Stock increases. See "Description of the Company's
Securities -- Preferred Stock."
(2) Excludes shares of Common Stock which may become issuable (i) as
contingent consideration in connection with the AZATAR and RHO
acquisitions, or (ii) at the Company's option (in lieu of making a cash
payment) under payment rights on the Common Stock described under
"Description of the Company's Securities -- Warrants and Payment
Rights." See "Business -- Acquisitions." In addition, dividends on the
Company's Series D and F Preferred Stock are payable in cash or Common
Stock at the Company's option and any accrued and unpaid amounts are
added to the respective conversion values of those shares. See
"Description of the Company's Securities -- Preferred Stock."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Common
Stock offered hereby by the Selling Stockholders. However, if the holders
of warrants to purchase shares of Common Stock exercise their warrants in
order to sell the underlying shares (which are registered hereby), the
Company will receive the amount of the exercise prices of any warrants so
exercised. The Company cannot predict when or if it will receive proceeds
from the exercise of warrants, or the amount of any such proceeds. The
Company intends to use the proceeds, if any, received from the exercise of
warrants for working capital purposes. See "Plan of Distribution."
SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA
The following information reflects (i) the treatment of the operation
of the Company's jewelry business prior to September 1995 as a discontinued
operation and (ii) the acquisition of COMFORCE Telecom in 1995, the other
five acquisitions completed in 1996, and the proposed acquisition of RHO as
if such acquisitions had occurred on January 1, 1994 (other than unaudited
pro forma balance sheet data at September 30, 1996, which has been prepared
as if all such acquisitions were consummated as of such date). The
unaudited pro forma balance sheet data also reflects the sale in December
1996 of 350,000 shares of the Company's Common Stock and related payment
rights, the proceeds of which were not required in connection with any
acquisition, and net proceeds of $15.0 million related to contemplated debt
financing to be used for the acquisition of RHO. The Company is seeking to
raise between $11.4 million to $17.0 million through the private placement
of debt instruments bearing interest at 8% per annum. Such private
placement of debt will require additional redemption premiums ranging from
2.5% to 15% based upon, among other factors, the timing of the redemptions,
which premiums are not reflected in the unaudited pro forma data presented.
For more detailed information as to the pro forma data, see "Selected
Unaudited Pro Forma Financial and Operating Data," and for historical data
as to the Company, see "Discontinued Operations -- Selected Historical
Financial Information."
5
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA Nine Months Ended September 30 Year Ended December 31
STATEMENT OF OPERATIONS DATA: 1996 1995 1995 1994
----------- ---------- --------- ---------
(In thousands, except per share and operating data)
<S> <C> <C> <C> <C>
Revenues $138,282 $129,639 $175,202 $142,447
Cost of revenues 121,136 113,980 153,493 126,930
-------- -------- -------- --------
Gross profit 17,146 15,659 21,709 15,517
Operating expenses:
Selling, general and administrative 12,282 10,133 14,461 12,124
Depreciation and amortization 1,214 1,195 1,618 1,593
Non-recurring items:
Stock compensation -- 3,000 3,425 --
Management fees to former parent
company -- 1,140 1,140 803
-------- -------- -------- --------
Income (loss) from operations 3,650 191 1,065 997
Other (income) expense 91 (121) (176) (128)
Interest expense 1,604 1,435 2,730 3,463
-------- -------- -------- --------
1,695 1,314 2,554 3,335
-------- -------- -------- --------
Income (loss) before income taxes 1,955 (1,123) (1,489) (2,338)
Provision (credit) for income taxes 978 834 833 --
-------- -------- -------- --------
Net income (loss) 977 (1,957) (2,322) (2,338)
Dividends on preferred stock (323) (148) (197) (197)
Dividends on Common Stock
equivalents 26 -- -- --
-------- -------- -------- --------
Income available for Common
Stock $ 680 $ (2,105) $ (2,529) $ (2,535)
======== ======== ======== ========
Income (loss) per share $0.05 $(0.22) $(0.26) $(0.26)
======== ======== ======== ========
Weighted average shares
outstanding 14,067 9,741 9,876 9,615
======== ======== ======== ========
PRO FORMA OPERATING
DATA AT PERIOD END:
Number of branches 31 22 24 22
Total employees 3,642 3,690 3,528 3,322
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
------------------
Pro Forma
---------
As Adjusted
-----------
<S> <C>
UNAUDITED PRO FORMA
BALANCE SHEET DATA:
Working capital................................................................. 7,238
Total assets.................................................................... 61,986
Total short term debt........................................................... 8,914
Total long term debt............................................................ 15,000
Shareholders' equity............................................................ 31,094
</TABLE>
6
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should
consider carefully the factors set forth below, as well as other
information contained in this Prospectus, before making a decision to
purchase the Common Stock offered hereby. This Prospectus contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ
materially from those projected or suggested in any forward-looking
statement. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below as well as those
discussed elsewhere in this Prospectus.
DILUTION AND DEPRESSION OF MARKET PRICE OF COMMON STOCK
During November 1996, the daily average number of shares of Common
Stock traded on the American Stock Exchange was approximately 20,000
shares. If such trading levels continue, it may be difficult for Selling
Stockholders to effect sales of their shares on the American Stock Exchange
and the placement of a substantially larger number of sell orders could
materially and adversely impact the market price of the Common Stock.
As of December 31, 1996, there were 17,093,087 shares of Common Stock
issued and outstanding or issuable upon the exercise of options or warrants
or the conversion of convertible Preferred Stock. Of such shares, 1,770,000
were believed to be in the public float. Assuming that all shares
registered hereby (including shares issuable upon the exercise of warrants
and the conversion into Common Stock of convertible Preferred Stock) will
be sold into the market, an additional 11,096,157 previously restricted
shares will enter the public float. In addition, the exercise of warrants
and the conversion into Common Stock of convertible Preferred Stock at
prices below the market price will result in substantial dilution to
existing stockholders.
An additional 1,770,000 shares of Common Stock are freely tradeable
under federal securities laws but are not in the public float due to
contractual restrictions on resale of from six to 12 months. The 2,540,000
remaining shares are "restricted securities" as that term is defined under
Rule 144. Restricted securities may not be resold unless they are
registered under the Securities Act of 1933 or are sold pursuant to an
applicable exemption from such registration, such as is contained in Rule
144. Under Rule 144, restricted shares are subject to restrictions on
resale for three years (two years upon satisfaction of certain conditions).
Of such restricted securities, 2,010,000 shares are issuable upon the
exercise of stock options under the Company's Long-Term Stock Investment
Plan. The Company may elect to register such shares at any time, in which
such shares would become freely tradeable (subject, in certain
circumstances, to volume restrictions on trading by affiliates). Of the
remaining 530,000 shares, 290,000 shares are expected to become freely
tradeable under Rule 144 from three to 12 months after the date of this
Prospectus, and 240,000 shares are expected to become freely tradeable
under Rule 144 more than 12 months after the date of this Prospectus.
Although the Company is unable to predict the effect that sales of
Common Stock may have on the then prevailing market price of the shares of
the Common Stock, such sales may have a negative effect on such market
price. See "Dilution and Depression of Market Price of Common Stock."
ABSENCE OF COMBINED OPERATING HISTORY; POTENTIAL INABILITY TO INTEGRATE
ACQUIRED BUSINESSES
The Company's technical staffing business has been developed
principally through the acquisition of established technical staffing
businesses, all of which have been acquired since October 1995. Prior to
their acquisition by the Company, each of these acquired companies operated
as a separate independent entity. The unaudited pro forma financial and
operating data of the Company set forth in this Prospectus includes the
combined operating results of these recently acquired businesses during
periods when they were not under common control or management and as such
may not be indicative of the Company's future financial or operating
results. There can be no assurance that the Company's management group
will be able to adequately manage the combined entity and effectively
implement the Company's strategy or effectively integrate the businesses
acquired. If the Company is unable to integrate the management personnel
needed to manage the acquired businesses, if such personnel are unable to
achieve anticipated performance levels or if the Company is unable to
implement effective controls, the Company's business, financial condition
and results of operations could be adversely affected. Future operating
results will depend upon many factors, 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 margins in the face of pricing pressures. See
"Business--Acquisitions."
7
<PAGE>
FUTURE CAPITAL NEEDS; UNCERTAINTY OF FINANCING; POTENTIAL DILUTION
The Company expects to seek to raise funds through public or private
debt or equity financing to fund its strategy of growth through
acquisition, geographic expansion and market development, including
contemplated debt financing to raise net proceeds of $15.0 million needed
to consummate the acquisition of RHO. The Company can give no assurance
that (i) additional financing will be available or, if available, that it
will be available on terms acceptable to the Company, or that (ii) its
existing capital resources, the amounts available for borrowing under its
lines of credit with its lenders or its cash flow from operations, will
either individually or collectively be sufficient to fund future
acquisitions or satisfy its working capital requirements. There also can
be no assurance that the Company or any of the acquired businesses will
generate positive cash flow.
If additional funds are raised by issuing equity securities, the
Company's stockholders may experience dilution. Further, such equity
securities may have rights, preferences, or privileges senior to those of
the Common Stock. To the extent the Company finances its activities by
issuing debt securities, the Company may become subject to certain
financial and other covenants which may restrict its ability to pursue its
strategy of growth through acquisition. There can be no assurance that
adequate equity or debt will be available as needed or on terms acceptable
to the Company. A lack of available funds may require the Company to delay,
scale back or eliminate all or some of its market development and
acquisition projects and could have a material adverse effect on the
Company's business, financial condition and results of operations. The pro
forma financial presentation in this Prospectus assumes that the Company
will be successful in raising net proceeds of $15.0 million through debt
financing to provide the balance of the funds needed to consummate the RHO
acquisition. No assurance can, however, be given that the Company will be
successful in raising such funds. The inability of the Company to raise
such funds could have a material adverse effect on the Company's business.
RELIANCE ON BORROWINGS TO FINANCE OPERATIONS
The Company's primary sources of funds to meet working capital needs
are from operations and borrowings under a $10.0 million credit facility
(the "Chase Credit Facility") with The Chase Manhattan Bank ("Chase").
Although the Company believes that funds provided by operations and
available borrowings under the Chase Credit Facility will be sufficient to
meet its present level of business activity, such facility is not expected
to be adequate to fund the Company's operations following the
RHO acquisition. Consequently, the Company is currently in discussions
with lenders to obtain a new revolving credit facility providing for
borrowings of at least $25.0 million to replace the Chase Credit Facility
to be used to fund operations and capital expenditures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
RELIANCE ON ACQUISITIONS FOR COMPANY GROWTH AND RISKS ASSOCIATED WITH
ACQUISITIONS
The ability of the Company to achieve growth through acquisition will
depend on a number of factors, including the availability of attractive
acquisition opportunities, the availability of funds needed to complete
acquisitions, the availability of working capital needed to fund the
operations of acquired businesses and the effect of existing and emerging
competition on operations. See "-- Future Capital Needs; Uncertainty of
Financing; Potential Dilution." The Company has recently consummated
several acquisitions. These acquisitions may not achieve levels of revenue,
profitability or productivity comparable to those of the Company's existing
operations or may not otherwise perform as expected. Acquisitions also
involve special risks, including risks associated with unanticipated
liabilities and contingencies, diversion of management attention and
possible adverse effects on earnings resulting from increased goodwill
amortization, increased interest costs, the issuance of additional
securities and difficulties related to the integration of the acquired
business. The Company is actively seeking additional acquisition
opportunities, although the Company has no agreements, understandings or
plans regarding any material acquisitions (other than RHO) at this time.
There can be no assurance that the Company will be able to successfully
identify additional suitable acquisition candidates, complete additional
acquisitions or integrate acquired businesses into its operations. See
"Business--Growth Strategy."
LIMITED EXPERIENCE IN MANAGING RAPID GROWTH
The Company's officers have had limited experience in managing
companies as large and as rapidly growing as the Company. The Company's
strategy of continuing its growth and expansion will place additional
demands upon the Company's current management and will require additional
information systems and management, operational and other financial
resources. Not all factors affecting the Company's growth are within the
control of the Company. The Company's ability to manage growth successfully
will require the Company to continue to enhance its operational,
management, financial and information systems and controls. No assurance
can be given that the Company will be able to manage its expanding
operations and, if the Company's management is unable to manage growth
effectively, the Company's business, financial condition and results of
operations could be materially adversely affected.
8
<PAGE>
RISKS RELATED TO THE LOSS OF KEY CUSTOMERS
As is common in the staffing industry, the Company's engagements to
provide services to its customers are generally non-exclusive, of a short-
term nature and subject to termination by the customer with little or no
notice. For the first nine months of fiscal year 1996, sales to the
Company's ten largest customers accounted for approximately 50% of the
Company's pro forma revenues, with sales to Microsoft Corporation
accounting for approximately 14% of the Company's pro forma revenues. The
loss of or a material reduction in the revenues from any of the Company's
significant customers could have an adverse effect on the Company's
business, results of operations and financial condition. See "Business--
Customers."
EFFECT OF FLUCTUATIONS IN THE GENERAL ECONOMY
Demand for staffing services is significantly affected by the general
level of economic activity in the country. Companies use staffing services
to manage personnel costs and changes in staffing needs due to business
fluctuations. When economic activity increases, employees from staffing
companies are often added before full-time employees are hired. As
economic activity slows, many companies reduce their usage of employees
from staffing companies before undertaking layoffs of their regular
employees. In addition, the Company may experience more competitive
pricing pressure during such periods of economic downturn. Therefore, any
significant economic downturn could have a material adverse effect on the
Company's business.
LIABILITIES FOR CUSTOMER AND EMPLOYEE ACTIONS
Staffing service providers are in the business of employing people and
placing them in the workplace of other businesses. An attendant risk of
such activity includes possible claims by customers of employee misconduct
or negligence, including claims of discrimination and harassment,
employment of illegal aliens and other similar claims. The Company has
policies and guidelines in place to reduce its exposure to these risks.
However, a failure to follow these policies and guidelines may result in
negative publicity and the payment by the Company of money damages or
fines. Although the Company historically has not had any significant
problems in this area, there can be no assurance that the Company will not
experience such problems in the future. The Company is also exposed to
liability with respect to actions taken by its employees while on
assignment, such as damages caused by employee errors, misuse of customer
proprietary information or theft of customer property. Although the
Company maintains insurance, due to the nature of the Company's
assignments, in particular its access to customer information systems and
confidential information, and the potential liability with respect thereto,
there can be no assurance that insurance coverage will continue to be
available or that it will be adequate to cover any such liability. See
"Business--Legal Proceedings" for a discussion of the insurance coverage
maintained by the Company.
INCREASES IN UNEMPLOYMENT INSURANCE PREMIUMS AND WORKERS' COMPENSATION
RATES
The Company is required to pay unemployment insurance premiums and
workers' compensation benefits for its billable employees. Unemployment
insurance premiums are set annually by the states in which employees
perform services and could increase as a result of, among other things,
increased levels of unemployment and the lengthening of periods for which
unemployment benefits are available. Workers' compensation costs have
increased as various states in which the Company conducts operations have
raised levels of compensation and liberalized allowable claims. The
Company may incur costs related to workers' compensation claims at rates
higher than anticipated due to higher than anticipated losses from known
claims or an increase in the number or the severity of new claims. In
addition, the Company's costs could increase as the result of any future
health care reforms. Certain federal and state legislative proposals have
included provisions extending health insurance benefits to billable
employees who do not presently receive such benefits. There can be no
assurance that the Company will be able to increase the fees charged to its
customers in a sufficient amount to cover increased costs related to
workers' compensation and unemployment insurance. Further, there can be no
assurance that the Company will be able to obtain or renew workers'
compensation insurance coverage in amounts and types desired at reasonable
premium rates.
POTENTIAL IMPAIRMENT OF INTANGIBLE ASSETS
As of September 30, 1996, approximately $14 million, or 53%, on a
historical basis and approximately $37 million, or 59%, on a pro forma
basis, 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 are being
amortized over a five to forty year period, resulting in a pro forma annual
charge of $1.1 million. Various factors could impact the Company's ability
to generate the earnings necessary to support this amortization schedule,
9
<PAGE>
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON AVAILABILITY OF QUALIFIED STAFFING PERSONNEL
The Company depends on its ability to attract, train and retain
personnel who possess the skills and experience necessary to meet the
staffing requirements of its customers. Competition for individuals with
proven skills in certain areas, particularly information technology and
telecommunications, is intense. The Company competes for such individuals
with other providers of technical staffing services, systems integrators,
providers of outsourcing services, computer systems consultants, customers
and personnel agencies. The Company must continually evaluate, train and
upgrade its base of available personnel to keep pace with changing
customers' needs and emerging technologies. There can be no assurance that
qualified personnel will continue to be available to the Company in
sufficient numbers and on economic terms acceptable to the Company. In
addition, although the Company's employment agreements contain non-compete
covenants, there can be no assurance that the Company can effectively
enforce such agreements against its former employees. See "Business --
Recruiting of Billable Employees."
HIGHLY COMPETITIVE MARKET; LIMITED BARRIERS TO ENTRY
The staffing services industry is highly competitive and has low
barriers to entry. Heightened competition for customers as well as for
technical personnel could adversely impact the Company's margins.
Heightened competition for customers could result in the Company being
unable to maintain its current fee scales without being able to reduce the
personnel costs of its billable employees. Shortages of qualified
technical personnel, which currently exist in some technical specialties
and could occur in the future, may result in the Company being unable to
fulfill its customers' needs. Moreover, customers could employ technical
staff directly (rather than using the Company's services) to ensure the
availability of such personnel. Many of the Company's competitors have
greater marketing, financial and personnel resources than the Company does
and could provide increased competition to the Company. The Company
expects that the level of competition will remain high in the future, which
could have a material adverse effect on the Company. Additionally, in
certain markets the Company has experienced significant pricing pressure
from some of its competitors. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on its management. The Company's
success depends upon the availability and performance of its President,
Michael Ferrentino, its Executive Vice President, Christopher P. Franco and
its principal consultant, James L. Paterek. The loss of services of any of
these key persons could have a material adverse effect upon the Company.
The Company has entered into employment agreements with Messrs. Ferrentino
and Franco, both expiring in December 1997. The Company has entered into a
three year consulting agreement with Tarek Corporation ("Tarek"), a
corporation wholly owned by Mr. Paterek, whereby Tarek agreed to engage Mr.
Paterek to perform services for the Company. The Company does not maintain
key man life insurance on any of these individuals. See "Management."
CONTROL BY INSIDERS
Current management of the Company currently controls approximately one
third of the Company's outstanding shares of Common Stock. As a result,
such persons are expected to have the ability to significantly influence
all issues submitted to the Company's stockholders including with respect
to its management and the selection of its Board of Directors. Such
concentration of ownership could limit the price that certain investors
might be willing to pay in the future for shares of Common Stock and could
have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control of the
Company. See "Principal and Selling Stockholders."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
Bylaws authorize the issuance of "blank check" Preferred Stock and the
establishment of advance notice requirements for director nominations and
actions to be taken at stockholder meetings. These provisions could
discourage or impede a tender offer, proxy contest or other similar
transaction involving control of the Company, including transactions in
which the stockholders might
10
<PAGE>
otherwise receive a premium for their shares over then current market
prices and other transactions that they may deem to be in their best
interests. In particular the issuance of Preferred Stock could have an
adverse effect on holders of Common Stock by delaying or preventing a
change in control of the Company, making removal of the present management
of the Company more difficult or resulting in restrictions upon the payment
of dividends and other distributions to the holders of Common Stock. For
example, the Company could issue shares of Preferred Stock with
extraordinary voting rights or liquidation preferences to make it more
difficult for a hostile acquiror to gain control of the Company. In
addition to the anti-takeover effect of the issuance of preferred stock,
holders of preferred stock have a preferred position over holders of common
stock on liquidation, the right to a fixed or minimum dividend before any
dividend is paid (or accrued) on common stock, and the right to approve
certain extraordinary corporate matters. See "Description of the Company's
Securities."
NO CASH DIVIDENDS
The Company anticipates that for the foreseeable future its earnings
will be retained for the operation and expansion of its business and that
it will not pay cash dividends on its Common Stock. In addition, the
Company's revolving credit facility prohibits the payment of cash dividends
on the Common Stock without the lender's consent. See "Dividend Policy."
POTENTIAL ENVIRONMENTAL LIABILITY
The Company, through a predecessor company that was engaged in
manufacturing activities, has been named as one of 80 defendants in a case
alleging that the defendants disposed of hazardous substances at a site in
Gary, Indiana. Although the Company is entitled to be indemnified for any
environmental liabilities in connection with disposal of hazardous
substances at this site, no assurance can be given that the Company will be
effectively indemnified or will not otherwise ultimately sustain liability
for disposing of hazardous substances. See "Discontinued Operations--
Environmental Liability."
POSSIBLE VOLATILITY OF STOCK PRICE
From time to time, there has been and may continue to be significant
volatility in the market price for the Company's Common Stock. Quarterly
operating results of the Company or of other staffing companies, changes in
general conditions in the economy, the financial markets or the staffing
industry, natural disasters or other developments could cause the market
price of the Company's Common Stock to fluctuate substantially. In
addition, in recent years the stock market has experienced extreme price
and volume fluctuations. This volatility has had a significant effect on
the market prices of securities issued by many companies for reasons
unrelated to their operating performance. See "Price Range of the
Company's Common Stock."
11
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA
The following information reflects (i) the treatment of the operation
of the Company's jewelry business prior to September 1995 as a discontinued
operation and (ii) the acquisition of COMFORCE Telecom in 1995, the other
five acquisitions completed in 1996, and the proposed acquisition of RHO as
if such acquisitions had occurred on January 1, 1994 (other than the
unaudited pro forma balance sheet data at September 30, 1996, which has
been prepared as if all such acquisitions were consummated as of such
date).
Prior to its acquisition by the Company, each of these acquired
businesses operated as a separate independent entity. Since the unaudited
pro forma financial data of the Company set forth below and elsewhere in
this Prospectus shows the combined financial condition and operating
results of these recently acquired businesses during periods when they were
not under common control or management, the data presented may not be
indicative of the results which would have actually been obtained had such
acquisitions been completed on the dates indicated, or of the Company's
future financial or operating results.
The unaudited pro forma information presented below is a summary of
the full unaudited pro forma financial statements presented under "Index to
Financial Statements." This unaudited pro forma financial information has
been derived from the financial information for the various acquired
businesses which is also presented under "Index to Financial Statements."
The unaudited pro forma financial statements should be read in conjunction
with the full unaudited pro forma financial statements and historical
financial statements of the Company and the various acquired businesses,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information and statements included
elsewhere in this Prospectus.
Unaudited Pro Forma Balance Sheet Data
(in thousands, except per share data)
September 30,1996
-----------------
Pro Forma
---------
As Adjusted (1)
---------------
Working capital............................ $ 7,238
Total assets............................... 61,986
Total short term debt...................... 8,914
Total long term debt....................... 15,000
Shareholders' equity....................... 31,094
See notes to selected unaudited pro forma financial and operating data.
12
<PAGE>
Unaudited Pro Forma Statement of Operations
for the Nine Month Period Ended September 30, 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
PRO FORMA
COMFORCE ACQUISITIONS RHO ADJUSTMENTS
CORPORATION (2) COMPLETED (2) (2) (3) PRO FORMA
--------------- -------------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues $33,514 $41,212 $63,556 $138,282
Cost of revenues 28,690 35,790 56,656 121,136
--------------- -------------- ------- ----------
Gross profit 4,824 5,422 6,900 17,146
Operating expenses
Selling, general and
administrative 2,891 4,070 5,321 12,282
Depreciation and amortization
343 87 226 558 1,214
--------------- -------------- ------- ------------ ----------
Income (loss) from operations 1,590 1,265 1,353 (558) 3,650
Other (income) expense
Other (29) (77) 197 91
Interest expense 102 75 984 443 1,604
--------------- -------------- ------- ------------ ----------
73 (2) 1,181 443 1,695
--------------- -------------- ------- ------------ ----------
Income (loss) before income taxes 1,517 1,267 172 (1,001) 1,955
Provision (credit) for income taxes 610 244 - 124 978
--------------- -------------- ------- ------------ ----------
Net income (loss) 907 $ 1,023 $ 172 $(1,125) 977
============== ======= ============
Less dividends on preferred stock (193) (323)
(7)
Add dividends on Common Stock
equivalents (7) 18 26
=============== ==========
Income available for Common
Stock $ 732 $ 680
=============== ==========
$0.05
Income (loss) per share $0.06
=============== ==========
Weighted average shares
outstanding (6) 12,661 14,067
=============== ==========
</TABLE>
See notes to selected unaudited pro forma financial and operating data.
13
<PAGE>
Unaudited Pro Forma Statement of Operations
for the Nine Month Period Ended September 30, 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
PRO FORMA
COMFORCE ACQUISITIONS RHO ADJUSTMENTS
CORPORATION (2) COMPLETED (2) (2) (3) PRO FORMA
--------------- ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $66,806 $62,833 $129,639
Cost of revenues 57,499 56,481 113,980
Gross profit 9,307 6,352 15,659
Operating expenses
Selling, general and administrative 265 5,403 4,465 10,133
Depreciation and amortization - 292 178 725 1,195
Non-recurring items:
Stock compensation (4) 3,000 -- -- -- 3,000
Management fees to former
parent company (5) - 1,140 -- -- 1,140
--------------- ------------ --------- ----------- -----------
Income (loss) from operations (3,265) 2,472 1,709 (725) 191
Other (income) expense
Other (121) (121)
Interest expense 410 204 1,249 (428) 1,435
--------------- ------------ --------- ----------- -----------
410 83 1,249 (428) 1,314
--------------- ------------ --------- ----------- -----------
Income (loss) before income taxes (3,675) 2,389 460 (297) (1,123)
Provision (credit) for income taxes -- 517 - 317 834
--------------- ------------ --------- ----------- -----------
Net income (loss) (3,675) $ 1,872 $ 460 $ (614) (1,957)
============ ========= ===========
Dividends on preferred stock (7) -- (148)
--------------- -----------
Income available for common stock $(3,675) $ (2,105)
=============== ===========
Income (loss) per share $(1.11) $(0.22)
=============== ===========
Weighted average shares outstanding (6) 3,321 9,741
=============== ===========
</TABLE>
See notes to selected unaudited pro forma financial and operating data.
14
<PAGE>
Unaudited Pro Forma Statement of Operations
for the Year Ended December 31, 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
PRO FORMA
COMFORCE ACQUISITIONS ADJUSTMENTS
CORPORATION (2) COMPLETED (2) RHO (2) (3) PRO FORMA
--------------- ------------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 2,387 $89,184 $83,631 $175,202
Cost of revenues 1,818 76,697 74,978 153,493
--------------- ------------- -------- ----------
Gross profit 569 12,487 8,653 21,709
Operating expenses
Selling, general and
administrative 765 7,413 6,283 14,461
Depreciation and amortization
58 344 227 989 1,618
Non-recurring items:
Stock compensation (4) 3,425 -- -- -- 3,425
Management fees to former
parent company (5) -- 1,140 -- -- 1,140
--------------- ------------- -------- ----------- ----------
Income (loss) from operations (3,679) 3,590 2,143 (989) 1,065
Other (income) expense
Other 33 (209) -- -- (176)
Interest expense 585 323 1,643 179 2,730
--------------- ------------- -------- ----------- ----------
618 114 1,643 179 2,554
--------------- ------------- -------- ----------- ----------
Income (loss) before income taxes (4,297) 3,476 500 (1,168) (1,489)
Provision (credit) for income taxes 35 852 - (54) 833
--------------- ------------- -------- ----------- ----------
Net income (loss) (4,332) $ 2,624 $ 500 $(1,114) (2,322)
============= ======== ===========
Dividends on preferred stock (7) -- (197)
--------------- ----------
Income available for Common Stock $(4,332) $ (2,529)
=============== ==========
Income (loss) per share $(0.95) $(0.26)
=============== ==========
Weighted average shares 4,596 9,876
outstanding (6)
=============== ==========
</TABLE>
See notes to selected unaudited pro forma financial and operating data.
15
<PAGE>
Unaudited Pro Forma Statement of Operations
for the Year Ended December 31, 1994
(in thousands, except per share data)
<TABLE>
<CAPTION>
PRO FORMA
COMFORCE ACQUISITIONS ADJUSTMENTS
CORPORATION (2) COMPLETED (2) RHO (2) (3) PRO FORMA
--------------- ------------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $66,277 $76,170 $142,447
Cost of revenues 57,773 69,157 126,930
------------ ------- ---------
Gross profit 8,504 7,013 15,517
Operating expenses
Selling, general and administrative
966 6,092 5,066 12,124
Depreciation and amortization
426 200 967 1,593
Non-recurring items:
Management fees to former
parent company (5) 803 -- -- 803
--------------- ------------ ------- ----------- ---------
Income (loss) from operations (966) 1,183 1,747 (967) 997
Other (income) expense
Other (128) (128)
Interest expense 1,316 252 1,435 460 3,463
--------------- ------------ ------- ----------- ---------
1,316 124 1,435 460 3,335
--------------- ------------ ------- ----------- ---------
Income (loss) before income taxes (2,282) 1,059 312 (1,427) (2,338)
Provision (credit) for income taxes -- 383 - (383) --
--------------- ------------ ------- ----------- ---------
Net income (loss) (2,282) $ 676 $ 312 $(1,044) (2,338)
============ ======= ===========
Dividends on preferred stock (7) -- (197)
Dividends on Common Stock equivalents --
--------------- ---------
Income available for common stock $(2,282) $ (2,535)
=============== =========
$(0.72)
Income (loss) per share $(0.26)
=============== =========
Weighted average shares outstanding (6) 3,195 9,615
=============== =========
</TABLE>
See notes to selected unaudited pro forma financial and operating data.
16
<PAGE>
Notes to Selected Unaudited
Financial and Operating Data
(1) The pro forma adjustments to the unaudited balance sheet data reflect
the Company's contemplated debt financing which is anticipated to
provide net proceeds of $15 million, $14.8 million of which is to be
applied to acquire RHO, with the remaining cash available for working
capital. The Company is seeking to raise between $11.4 million to $17.0
million through the private placement of debt instruments bearing
interest at 8% per annum. Such private placement of debt will require
additional redemption premiums ranging from 2.5% to 15% based upon,
among other factors, the timing of the redemptions, which premiums are
not reflected in the unaudited pro forma data presented. In addition,
the pro forma balance sheet adjustments eliminate assets not acquired
of $5 million and liabilities not assumed of $11.2 million as part of
the related acquisitions. The unaudited pro forma balance sheet data
also reflects the sale in December 1996 of 350,000 shares of the
Company's Common Stock and certain related payment rights, the proceeds
of which were not required in connection with any acquisition.
(2) The unaudited pro forma statements of operations include the statements
of operations for the companies noted below for the periods prior to
their acquisition by the Company. The unaudited pro forma statement of
operations for the period ended September 30, 1996 presents the
financial statements of the Company, AZATAR, Continental and RHO for
their respective 1996 nine month periods and the results of operations
for companies acquired during the nine month period ended September 30,
1996 as follows: Williams (January 1 through March 3, 1996), RRA
(January 1 through May 10, 1996) and Force Five (January 1 through July
31, 1996). The unaudited pro forma financial statements for the year
ended December 31, 1995 include the annual 1995 results of operations
of each entity, except for COMFORCE Telecom which reflects results of
operations for the period January 1 through September 30, 1995, prior
to its acquisition on October 16, 1995. The financial statements for
all companies for the nine month period ended September 30, 1995 and
year ended December 31, 1994 present the nine and 12 month results of
operations of the respective companies. All periods presented exclude
the revenues and expenses related to the jewelry business of COMFORCE
which was discontinued in September 1995. The unaudited pro forma
results of operations are presented as if these companies were acquired
on January 1, 1994 and do not purport to be an indication of the
results of operation had these acquisitions been made as of that date
or of results which may occur in the future.
(3) Pro forma adjustments include the following:
<TABLE>
<CAPTION>
Nine months ended Year Ended
September 30, December 31,
------------------ -----------------
1996 1995 1995 1994
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Additional amortization of intangibles $ (558) (725) $ (989) (967)
(Increase) decrease in interest expense (443) 428 (179) (460)
(Increase) decrease in provision
for income taxes (124) (317) 54 383
--------- ------ ------ ------
Total pro forma adjustments
$ (1,125) $ (614) $(1,114) $(1,044)
========= ====== ====== ======
</TABLE>
(4) 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 staffing business.
(5) Represent a non-recurring management fee paid by COMFORCE Telecom to
its former parent company prior to its acquisition by the Company.
(6) Pro forma weighted average shares of Common Stock outstanding includes
(i) the historical weighted average shares outstanding for each period
presented, (ii) shares of Preferred Stock convertible into Common Stock
issued in connection with the acquisitions of AZATAR and Continental,
and (iii) 316,000 shares of Common Stock which, based upon the December
31, 1996 market price of $14.25 per share, will be issuable as
contingent consideration in connection with the AZATAR and RHO
acquisitions.
<PAGE>
The effects of options, warrants and contingent shares are not included
in the calculation in periods where their effects would be anti-
dilutive.
(7) The pro forma dividends on Preferred Stock include dividends on Series
E and F Preferred Stock for all periods presented. Dividends on Series
D Preferred Stock are included for the 1996 period during which they
were outstanding and are not included in prior periods as the proceeds
from the sale of such shares were utilized for 1996 working capital
requirements. Certain discounts upon conversion of Series F Preferred
Stock aggregating approximately $665,000 will be recorded as an
additional dividend attributable to holders of Preferred Stock in the
fourth quarter of 1996.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company, and elsewhere
in this Prospectus, contain forward-looking statements that involve risks
and uncertainties, many of which may be beyond the Company's control. The
actual results that the Company achieves may differ materially from any
forward-looking statements due to such risks and uncertainties. In
particular, because the unaudited pro forma data of the Company set forth
below and elsewhere in this Prospectus shows combined operating results of
recently acquired technical staffing businesses during periods when they
were not under common control or management, the unaudited pro forma data
presented may not be indicative of the Company's future financial or
operating results. Prospective investors should carefully consider the
information under "Risk Factors" beginning on page 7 for a discussion of
the risks and uncertainties that could cause actual results to differ
materially from those described in such forward-looking statements.
OVERVIEW
The October 1995 acquisition of COMFORCE Telecom marked the Company's
entry into the technical staffing business, followed by the acquisition of
five additional technical staffing businesses in 1996 and the pending
acquisition of a seventh business expected to close in February 1997. See
"--Acquisition History" and "Business--Acquisitions." Prior to its
acquisition by the Company, each of these acquired businesses operated as a
separate independent entity. All acquisitions made by the Company have
been accounted for on a purchase basis and the results of operations of
each of the businesses acquired have been included in the Company's
consolidated financial statements from the date of acquisition
The Company's results of operations and financial condition reflect its
rapid growth through acquisitions. Amortization of intangibles, principally
goodwill, has also increased as a result of acquisitions. The Company has
made and continues to make investments in connection with the purchase and
integration of its acquired businesses in order to realize long-term
improvements in profitability; however, the costs of integration may have
an adverse effect on short-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 -- Reliance on
Acquisitions for Company Growth and Risks Associated with Acquisitions."
The Company serves customers in three principal sectors --
telecommunications, information technology and technical services -- which
represent 14%, 24% and 62%, respectively, of pro forma sales for the nine
months ended September 30, 1996. 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,
19
<PAGE>
Medicare and Social Security taxes and general payroll expenses. The
Company offers health, dental, disability and life insurance to its
billable employees. See "Risk Factors--Increases in Unemployment Insurance
Premiums and Workers' Compensation Rates."
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
Historical financial information for the Company is presented under
"Index to Financial Statements" and, on a selected basis, under "Selected
Historical Financial Information." However, this historical information
relates principally to operations discontinued September 30, 1995 and
includes limited results of the Company's technical staffing operations
(all of which, except for COMFORCE Telecom, were acquired during 1996).
Consequently, a discussion and comparison of the Company's historical
results of operations is not meaningful. Accordingly, the Company has
presented below a discussion and comparison of unaudited pro forma results
of operations of the Company for the years ended December 31, 1995 and
December 31, 1994 and for the nine months ended September 30, 1996 and
September 30, 1995. However, since the unaudited pro forma financial data
of the Company set forth below and elsewhere in this Prospectus shows the
combined operating results of the recently acquired businesses during
periods when they were not under common control or management, the
unaudited pro forma data presented may not be indicative of the Company's
future financial or operating results.
The following table sets forth, for the periods indicated, the percentage
relationship to unaudited pro forma revenues of selected items in the
Company's unaudited pro forma statement of operations:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
1996 1995 1995 1994
------------- --------- ------ -------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 87.6 87.9 87.6 89.1
----- ----- ----- -----
Gross profit 12.4 12.1 12.4 10.9
Operating expenses:
Selling, general and administrative 8.8 7.8 8.2 8.5
Depreciation and amortization 0.9 0.9 0.9 1.1
Non-recurring items:
Stock compensation - 2.4 2.0 -
Management fees to former parent
company - 0.9 0.7 0.6
----- ----- ----- -----
Total operating expenses 9.7 12.0 11.8 10.2
----- ----- ----- -----
Operating income (loss) 2.7 0.1 0.6 0.7
Other income (expense), net (0.1) 0.1 0.1 0.1
Interest expense (1.2) (1.1) (1.6) (2.4)
----- ----- ----- -----
Income (loss) before income taxes 1.4 (0.9) (0.9) (1.6)
Provision for income taxes 0.7 0.6 0.5 -
----- ----- ----- -----
Net income (loss) 0.7% (1.5)% (1.4)% (1.6)%
===== ===== ===== =====
</TABLE>
20
<PAGE>
Pro Forma Nine Months ended September 30, 1996 and Pro Forma Nine Months
ended September 30, 1995
Pro forma revenues of $138.3 million for the nine months ended
September 30, 1996 were $8.6 million, or 6.7%, higher than pro forma
revenues for the nine months ended September 30, 1995. The increase in
1996 pro forma revenues was principally attributable to growth in the
Company's IT and technical services sectors. This growth was partially
offset by the Company's decision to eliminate certain non-technical
services contracts during the 1996 period.
Pro forma cost of revenues for the nine months ended September 30,
1996 was 87.6% of pro forma revenues compared to pro forma cost of revenues
of 87.9% for the nine months ended September 30, 1995. Although the pro
forma cost of revenues increased by $7.1 million in the 1996 period as
compared to the 1995 period due to increased revenues during the 1996
period, on a percentage basis, the 1996 pro forma cost of revenues
decreased by 0.3% as a result of a more favorable sales mix in the 1996
period.
Pro forma selling, general and administrative expenses for the nine
months ended September 30, 1996 increased $2.1 million, or 20%, over the
pro forma selling, general and administrative expenses for the nine months
ended September 30, 1995. The increase in selling, general and
administrative expenses as a percent of pro forma revenues from 7.8% in
1995 to 8.8% in 1996 resulted from increased investment in infrastructure
and marketing costs (including greater branch personnel and facility
expenses incurred to open new offices) as well as the decision to eliminate
certain non-technical services contracts discussed above.
Pro forma operating results for the nine months ended September 30,
1995 were negatively impacted by two non-recurring charges totaling $4.1
million. These included stock compensation expense of $3.0 million and
management fees of $1.1 million paid by COMFORCE Telecom to its former
parent company prior to its acquisition by the Company.
Pro forma operating income for the nine months ended September 30,
1996 was $3.7 million compared to pro forma income of $191,000 for 1995.
The improvement of $3.5 million was principally attributable to the
discontinuance in the 1996 period of the non-recurring charges of $4.1
million recorded in 1995. The 1996 pro forma operating income was also
impacted by slightly increased margins on additional revenues offset by
increased branch and corporate operating costs.
The pro forma income tax provision for the nine months ended September
30, 1996 was $978,000 (on pro forma income before income taxes of $2
million) compared with $834,000 (on pro forma loss before income taxes
of $1.1 million) for the nine months ended September 30, 1995. The
significantly higher tax provision as a percentage of pro forma income
before income taxes (loss before income taxes for the 1995 period) was
principally due to the non-tax deductible component of stock compensation
expense in 1995. The pro forma income tax provision for both the 1995 and
1996 nine month periods includes the effects of state income taxes and the
portion of intangible amortization not deductible for federal income tax
purposes.
Pro Forma Year ended December 31, 1995 and Pro Forma Year ended December
31, 1994
Pro forma revenues of $175.2 million for the year ended December 31,
1995 were $32.8 million, or 23.0%, higher than pro forma revenues for year
ended December 31, 1994. The increase in 1995 pro forma revenues is
attributable to growth in all sectors serviced by the Company --
telecommunications, information technology and technical services.
Pro forma cost of revenues for the year ended December 31, 1995 was
87.6% of pro forma revenues compared to pro forma cost of revenues of 89.1%
for the year ended December 31, 1994. Although the pro forma cost of
revenues increased by $26.6 million for year ended December 31, 1995 as
compared to the year ended December
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31, 1994 due to increased revenues during 1995, on a percentage basis, the
1995 pro forma cost of revenues decreased by 1.5% 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 $2.3 million, or 19%, over the pro forma
selling, general and administrative expenses for the year ended December
31, 1994. This increase was principally related to greater branch expenses
referred to above related to the significant volume increase during the
1995 period. Selling, general and administrative expenses decreased from
8.5% of pro forma revenues in 1994 to 8.2% of pro forma revenues in 1995,
principally due to certain components of selling, general and
administrative expenses which do not increase in direct relation to
revenues.
Pro forma operating results for the year ended December 31, 1994 were
negatively impacted by a non-recurring charge of $803,000 related to
management fees paid by COMFORCE Telecom to its former parent company prior
to its acquisition by the Company. Pro forma operating results for the
year ended December 31, 1995 included a charge of $1.1 million for
management fees paid by COMFORCE Telecom to its former parent company prior
to its acquisition by the Company as well as a $3.4 million charge related
to non-recurring stock compensation expense. The net impact of these non-
recurring charges on the 1995 pro forma results was $4.5 million as
compared to $803,000 for 1994.
Pro forma operating income for the year ended December 31, 1995 was
$1.1 million compared to pro forma operating income of $1.0 million for the
year ended December 31, 1994. The increase in operating income of $200,000
was principally attributable to increased gross profit, net of additional
operating expenses, of $4.3 million in the 1995 period offset by increased
management fees and stock compensation charges of $3.8 million recorded in
1995 as compared to 1994.
The pro forma income tax provision for the year ended December 31,
1995 was $833,000 (on pro forma loss before income taxes of $1.5
million). No tax provision was required for 1994 (on pro forma loss before
income taxes of $2.3 million) for the year ended December 31, 1994. The
significantly higher tax provision as a percentage of pro forma loss
before income taxes was principally due to the non-tax deductible component
of stock compensation expense in 1995. The pro forma income tax provision
for both 1995 and 1994 includes the effects of state income taxes and the
portion of intangible amortization not deductible for federal income tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds to meet working capital needs
are from operations and borrowings under a $10.0 million Chase Credit
Facility. 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. On July 22, 1996, the Company and certain of its
subsidiaries entered into the Chase Credit Facility to provide working
capital for the Company's operations. See Note 8 to the consolidated
financial statements of the Company for the nine months ended September 30,
1996. Although the Company believes that funds provided by operations and
available borrowings under the Chase Credit Facility will be sufficient to
meet its present level of business activity, such facility is not expected
to be adequate to meet the Company's working capital needs following the
RHO acquisition. Consequently, the Company is currently in discussions
with lenders to obtain a new revolving credit facility providing for
borrowings of at least $25.0 million to replace the Chase Credit Facility
to be used for working capital and capital expenditures. The Company
believes that funds provided by operations and available borrowings under a
$25.0 million credit facility will be sufficient to meet its anticipated
level of business activity following the acquisition of RHO funded by a
debt placement to raise net proceeds of $15 million. No assurance can,
however, be given that the Company will be successful in raising such
funds. The inability of the Company to raise such funds could have a
material adverse effect on the Company's business.
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The Company has also borrowed under the Chase Credit Facility and
issued preferred stock to fund acquisitions. In addition to the Series D
and E Preferred Stock, discussed below, the Company sold 3,250 shares of
Series F Preferred Stock for $3.25 million and 460,000 shares of its Common
Stock and certain related payment rights for $3.5 million, principally to
fund a portion of the consideration in connection with the AZATAR,
Continental and RHO transactions. The Company sold an additional 350,000
shares of its Common Stock and certain related payment rights for $3.5
million, principally for general corporate and working capital purposes.
See "Description of the Company's Securities."
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 (in cash and stock) is $717,000
payable in 1997 and $9.5 million payable in the three-year period from 1998
to 2000. The Company cannot currently estimate whether it will be
obligated to pay the maximum amount; however, the Company anticipates that
the cash generated by the operations of the acquired companies will provide
all or a substantial part of the capital required to fund the cash portion
of the earn-out payments.
Cash and cash equivalents increased $303,000 during the nine months
ended September 30, 1996. Cash flows of $14,666,000 provided by financing
activities exceeded cash flows of $4,321,000 used in operating activities
and cash flows of $10,042,000 used by investing activities. Cash flows
used by operating activities were principally attributable to the temporary
need to fund Williams, RRA and Force Five accounts receivable and their
carrying costs due to the purchase of Williams in March 1996, RRA in May
1996 and Force Five in August 1996 (effective July 31, 1996). Cash flows
used in investing activities are principally related to the purchase of
Williams, RRA and Force Five for a total of $9,442,000, including directly
related costs, as well as loans made to certain officers of the Company
pursuant to their employment contracts in the amount of $367,000 and the
purchase of fixed assets in the amount of $183,000. Cash flows from
financing activities were attributable to net borrowings under the
revolving line of credit of $3,250,000, the exercise of warrants in the
amount of $1,046,000, and the issuance of Series E Preferred Stock and
Series D Preferred Stock in the amount of $4,636,000 and $6,416,000,
respectively, offset by dividend payments of $105,000, repayments on notes
of $500,000 and other miscellaneous payments of $77,000.
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 incrementatal 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 first nine months of 1996, the Company eliminated its
working capital deficiency and, at September 30, 1996, had excess working
capital of $4,553,000. The increase in working capital is principally
attributable to the Company's increase in accounts receivable due to the
acquisitions of Williams, RRA and Force Five, and the reduction in the
liabilities assumed by ARTRA GROUP Incorporated ("ARTRA").
OTHER MATTERS
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages,
but does not require, companies to recognize compensation expense for
grants of stock, stock options and other equity instruments to employees
based on new fair value accounting rules. Although expense recognition for
employee stock-based compensation is not mandatory, the pronouncement
requires companies that choose not to adopt the new fair value accounting
to disclose the pro forma net income and earnings per share under the new
method. This new accounting principle is effective for the Company's
fiscal year ending December 31, 1996. The Company believes that adoption
will not have a material impact on its financial statements and the Company
will comply with the related disclosure requirements.
See "Discontinued Operations" for a discussion of the Company's
discontinued operations.
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BUSINESS
COMFORCE Corporation is a provider of technical staffing,
consulting and outsourcing solutions focused on the high technology needs
of businesses. The Company provides services to over 725 customers through
its highly-skilled labor force that includes computer programmers,
engineers, technicians, scientists and researchers. The Company's customers
include telecommunication equipment manufacturers, telecommunication
service providers (wireline and wireless), computer software and hardware
manufacturers, aerospace and avionics firms, utilities and national
research laboratories such as Los Alamos National Laboratory, Sandia
National Laboratory and Lawrence Livermore National Laboratory. The
Company maintains its headquarters in Lake Success, NY and has 31 branch
offices in 15 states across the United States to enable it to meet the
needs of national as well as local customers. The Company employs
approximately 3,700 persons with a ratio of billable to non-billable
employees of 18.9 to 1 (as compared to a reported overall industry-wide
ratio of 14.2 to 1 for comparably-sized staffing companies), and maintains
a proprietary database of over 110,000 prospective employees with expertise
in the technical disciplines served by the Company.
The Company serves customers in three principal sectors --
telecommunications, information technology and technical services -- which
represent 14%, 24% and 62%, respectively, of pro forma sales for the nine
months ended September 30, 1996. 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.
MARKET OPPORTUNITIES
The Growing Market for Staffing, Consulting and Outsourcing Services.
The staffing services industry, once used predominately as a short-term
solution for peak production periods and to temporarily replace workers
absent due to illness, vacation, or abrupt termination, has evolved into a
permanent and significant component of the staffing plans of many
corporations. Corporate restructuring, downsizing, increased government
regulations governing employee relations, advances in technology, and the
desire by many companies to shift employee costs from a fixed to a variable
expense have resulted in the use of a wide range of staffing alternatives
by businesses. In addition, the reluctance of corporations to risk
liability upon the discharge of employees has led to an increase in
companies using staffing services as a means of evaluating the
qualifications of personnel before hiring them on a full-time basis. In
addition, entrants into the labor force increasingly look to such
assignments as a way to build experience, make contacts, and get valuable
exposure to a variety of work settings, and as a vehicle to gain full-time
employment.
Organizations have also begun using flexible staffing to reduce
administrative overhead by strategically outsourcing operations that are
not part of their core business functions, such as recruiting, training and
benefits administration. By utilizing employees from personnel providers,
businesses are able to avoid the management and administrative costs
incurred when full-time personnel are employed. An ancillary benefit of
staffing services, particularly for smaller businesses, is the shifting of
certain employment costs and risks (e.g., workers' compensation and
unemployment insurance) to the personnel provider, which can spread the
costs and risks over a larger pool of employees.
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Opportunities for Consolidation in a Fragmented Industry. The Company
believes that the staffing industry is highly fragmented and is currently
experiencing a trend toward consolidation primarily due to the increasing
demand by large companies for centralized staffing services and the
difficulties faced by many smaller staffing companies in today's staffing
services market. The growth of national and regional accounts resulting
from the centralization of staffing decisions by national and regional
companies has increased the importance of staffing companies being able to
offer a wide range of services over a broad geographic area. In addition,
many smaller staffing companies are experiencing increased difficulties due
to factors such as significant working capital requirements, limited
management resources and an increasingly competitive environment.
Telecommunications Sector and the Growth of PCS. As businesses
globalize and advance technologically, the demand for telecommunications-
related services has increased. The Company believes that the recent
enactment of the Telecommunications Act of 1996, which deregulates
substantial portions of the telecommunications industry, has been the
impetus for the recent and expected future growth in the industry.
The growth of the telecommunications industry is being fueled by the
rising demand for wireless telecommunications services which have increased
dramatically since their commercial introduction in 1984. This demand is
largely attributable to the widespread availability and increasing
affordability of mobile telephone, paging and other emerging wireless
telecommunications services. Technological advances and a regulatory
environment more favorable to competition have also served to stimulate
market growth. Currently, wireless penetration is estimated to be
approximately 16% of the telephone market and, according to Paul Kagan
Associates, Inc., is expected to exceed 47% by 2006.
The Company believes that the demand for wireless telecommunications
will continue to grow dramatically and that personal communications service
("PCS") will capture a significant share of the wireless market. PCS is a
wireless digital system which translates telephone calls into computer
language before transmitting. Spurred by federal deregulation and the
recent auction of $18 billion of PCS licenses in early 1996, regional and
national PCS companies are making substantial investments to bring their
PCS networks into operation as quickly as possible. The Company believes
the installation of these networks, which is labor-intensive and requires
specialized technical personnel, will significantly increase the demand for
staffing and outsourcing services.
Information Technology Sector and the Year 2000 Challenge. The demand
for qualified personnel is increasing significantly in computer-related
disciplines such as technical project support, software development and
documentation, systems and database management, and desktop publishing. As
a result, information technology services is one of the most rapidly
growing sectors of the staffing services industry.
Management believes that the demand for IT services will continue to
grow, principally as a result of accelerating technological advances
requiring highly specialized expertise and the need for enterprise-wide
integration of computer systems. The continuing transition, particularly
by large corporations, from legacy systems to computer networks using
client/server architecture is a key factor contributing to the demand for
technical staffing services. Rapid technological change makes it
increasingly difficult and expensive for businesses to employ full-time
technicians with the leading edge expertise needed to maintain and upgrade
advanced and complex computer systems. Companies are increasingly relying
on outsourcing and staffing services to maintain and upgrade their systems
and to train full-time employees in the use and support of their systems.
The Company believes that the substantial increase in the use of
sophisticated information technologies has coincided with economic factors
that have led to reductions in corporate work forces and a return by
businesses to a focus on their core competencies. Faced with the challenge
of implementing and operating more complex information systems with
substantially smaller corporate staffs, businesses are increasingly using
specialty staffing services companies to augment their information
technology operations. At the same time, an increasing number of technical
professionals are choosing to operate as consultants, motivated by a desire
for more flexible work schedules and an opportunity to work with emerging
and challenging technologies in a variety of industries and work
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environments. Such consultants generally are able to maintain compensation
levels comparable to or higher than those of similarly skilled, full-time
employees. These factors have caused IT services to be one of the fastest
growing segments of the specialty staffing services industry.
With the approach of the Year 2000, management believes that over the
next several years opportunities in the IT sector will increase as a result
of the need to correct the Year 2000 problem. Virtually from the origins
of the computer, dates have been programmed into computer applications as
six-digit fields, with the last two digits representing the year. In many
cases these fields are encrypted in basic or fundamental applications,
often in obscure or obsolete computer languages. As a result, after
December 31, 1999, many computer applications will lose the ability to
distinguish dates and will cease to function or give erroneous results
unless reprogrammed. Industry sources estimate that corporations and
government agencies will spend from $200 to $600 billion to assess and
correct this problem. Estimates indicate that up to 90% of these projected
costs will be incurred for professional services, with the balance incurred
for software tools. In 1995 only an estimated $50 million was spent
rectifying the problem. However, the Year 2000 challenge is receiving
increasing attention. Many companies and organizations requiring Year 2000
conversions do not have the internal personnel, resources or expertise that
will be required to address the problem and instead will rely on the
staffing industry to supply personnel, including programmers with skills in
multiple computer languages or obscure languages that have not been used in
many years.
Technical Services. The technical services sector, the traditional
market for staffing companies such as the Company, is a more mature sector
than the more rapidly emerging telecommunications and IT sectors. However,
the Company believes that this sector has experienced significant growth in
recent years due principally to the factors that have contributed to the
growth in the staffing services industry generally, including the
increasing prevalence of corporate restructurings and downsizings,
increased government regulations governing employee relations and the
desire by many companies to shift employee costs from a fixed to a variable
expense.
STRATEGY
The Company's objective is to be the leading provider of technical
staffing, consulting and outsourcing solutions for the high technology
needs of businesses. The Company will seek to achieve its objective by
pursuing the following strategy:
Focus on High Technology Markets. In the telecommunications, IT and
technical service sectors which the Company serves, dynamic technology
needs of businesses can effectively be met through the use of staffing,
consulting and outsourcing services. These services permit a company to
access personnel with experience in the most current technologies. The
Company intends to focus on servicing high technology markets because
management believes that providing staffing in the high technology sectors
offers greater growth opportunities over providing staffing in the lower-
skilled labor sectors, including a higher growth in demand for services,
lower turnover rates, generally higher profit margins and more stable
customer and employee relationships. In the rapidly emerging high
technology fields such as PCS network development and information
technology, the Company's employees continually develop new marketable
skills by working on projects that make use of the most advanced
technology. As a result, these skills developed by the Company's staffing
personnel while on an assignment continually expand the Company's ability
to service more diverse and emerging technologies.
Pursue Acquisitions as Key Element of Growth. A key element of the
Company's expansion strategy is to continue acquiring staffing companies
with profitable track records and recognized local or regional presence in
order to expand the Company's geographic service base, diversify its
capabilities in the high technology sectors, strengthen its existing
expertise and expand its proprietary database of highly skilled technical
talent. Management believes that such acquisitions will enable the Company
to more rapidly achieve significant economies of scale and maintain greater
financial resources which will allow it to secure larger contracts and
enhance its leverage for negotiating contracts. Management believes that
its decentralized management philosophy and operating strategies will make
it an attractive acquiror to the owners of regional and local staffing
businesses.
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Expand Geographic Presence. The Company will seek to increase
revenues and enhance earnings stability by continuing to expand
geographically in the United States and internationally. The Company
services its customers through a network of 31 branch offices located in 15
states across the United States and its corporate headquarters located in
Lake Success, New York. Management believes that further increasing its
geographic diversity will better enable it to increase its customer base,
weather regional economic and business cycles and provide an advantage when
pursuing contracts with national accounts, particularly for customers with
a national or international presence and a wide variety of staffing needs.
Develop Innovative Staffing Solutions. Management continually seeks
to develop new staffing solutions that provide its customers with maximum
value and flexibility. By offering innovative and flexible service
packages to customers, management believes it will be better able to
attract new customers as well as increase sales to existing customers. Two
examples of innovative staffing solutions are the Company's
RightSourcing/(SM)/ and COMFORCE Homework/(SM)/ programs. Through its new
RightSourcing/(SM)/ program, the Company evaluates the performance level of
a particular department, function or project and recommends ways to
increase cost-effectiveness and workforce efficiency through specific
staffing strategies. The COMFORCE Homework/(SM)/ program, which is
currently under development, will allow the Company's highly-skilled
professionals to "telecommute," thus eliminating geographic barriers to
meeting its customers' needs. The Company currently provides this service
to customers on a limited basis.
Capitalize on Operational Efficiencies. In the technical staffing
industry, administrative, accounting and other "back office" operations are
often provided on a centralized basis. The Company believes that its
management information systems responsible for these functions are capable
of supporting additional levels of business in the future at low
incremental costs. The Company believes that the administrative functions
of acquired businesses can be integrated into those of the Company without
proportionally increasing overhead expenses, resulting in increased
profitability, improved operating efficiencies and an increase in the
Company's ratio of billable-to-non-billable employees from the current
ratio of 18.9 to 1, which is approximately 33% greater than the overall
industry-wide ratio of 14.2 to 1 for comparably-sized staffing companies,
as published in the NTSA 1996 Industry Profile and Company Norms Survey.
ACQUISITIONS
A key component of the Company's strategy is to continue to acquire
established, profitable businesses in new markets that provide the Company
with opportunities to expand its geographic service base and diversify and
strengthen its service mix. In addition, the Company plans to acquire
complementary companies located in both current and new markets which can
be integrated into its existing businesses. Management believes that
acquired businesses can be integrated into the Company at low incremental
costs, enabling it to spread fixed costs over an increasingly larger
revenue base.
The Company evaluates acquisition opportunities based on such factors
as market location, market share, services complementary to the Company's
existing service offerings, efficiencies of operating systems, strength of
management and cultural fit of management with the Company's decentralized,
entrepreneurial environment. The Company generally attempts to retain the
management of acquired companies. In cases in which the seller remains
with the Company as part of the management team, the Company seeks where
possible to pay a portion of the purchase price in stock to provide further
incentives to management through ownership in the Company. Following an
acquisition, the Company generally markets the services of the acquired
company under the "COMFORCE" name, but may retain the former marketing
identities of its acquired companies during a transition period if prudent
for marketing purposes.
Since October 1995, the Company has acquired six staffing services
companies and has entered into a definitive agreement to purchase the
capital stock of a seventh company expected to close in February 1997.
Each of these companies is described briefly below.
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.COMFORCE Telecom, Inc.: On October 17, 1995, the Company acquired
all of the capital stock of COMFORCE Telecom. COMFORCE Telecom provides
staffing on a contract basis to customers in the telecommunications sector.
The price paid by the Company for the COMFORCE Telecom stock and related
acquisition costs was approximately $6.4 million, payable in $5.6 million
cash and 500,000 shares of the Company's Common Stock. The Company added
four branch offices with the acquisition of COMFORCE Telecom.
.Williams Communication Services, Inc.: In March 1996, the Company
acquired substantially all of the assets of Williams, a regional provider
of technical staffing services to the telecommunications sector. The
purchase price for the assets of Williams was $2 million in cash, plus a
four year contingent payout based on future earnings of Williams payable in
cash. The amount of the contingent payout cannot exceed $2 million, for a
total purchase price not to exceed $4 million. The Company acquired one
branch office with the acquisition of Williams.
.RRA, Inc., Project Staffing Support Team, Inc. and DataTech Technical
Services, Inc.: In May 1996, the Company acquired all of the stock of
Project Staffing Support Team, Inc. and substantially all the assets of
RRA, Inc. and DataTech Technical Services, Inc. for a purchase price of
$5.1 million, payable in cash, plus a three year contingent payout based on
future earnings of RRA payable in cash. The amount of the contingent
payout cannot exceed $650,000, for a total purchase price not to exceed
$5.75 million. RRA provides specialists for supplemental staffing
assignments as well as outsourcing and vendor-on-premises programs,
primarily in the technical services sector. The Company added nine
branch offices with the acquisition of RRA.
.Force Five, Inc.: In August 1996, the Company purchased all of the
stock of Force Five for a purchase price of $2 million, payable in $1.5
million cash and 27,398 shares of the Company's Common Stock, plus a three
year contingent payout based on future earnings of Force Five payable in
cash. The amount of the contingent payout cannot exceed $2 million, for a
total purchase price not to exceed $4 million. Force Five provides
information technology consulting services to leading companies nationwide.
The acquisition of Force Five added one branch office to the Company.
.AZATAR Computer Systems, Inc.: In November 1996, the Company
acquired all of the stock of AZATAR, a provider of IT services, for a
purchase price of $5.15 million, payable in $1.03 million cash and 243,211
shares of the Company's Common Stock, plus a three year contingent payout
based on future earnings of AZATAR payable in stock. The maximum amount of
the contingent payout in any year cannot exceed $400,000, which, if earned
in full, would bring the total purchase price to $6.35 million. The number
of shares to be issued as contingent payouts is based upon the average
closing sales price of the Common Stock for the 10 business days
immediately preceding December 31st of each earnout year. The Company
added two branch offices with the acquisition of AZATAR.
.Continental Field Services Corporation and Progressive Telecom, Inc.:
In November 1996, the Company acquired substantially all of the assets of
Continental and its affiliate, Progressive Telecom, Inc., providers of
technical staffing services to the telecommunications sector, for a
purchase price of $5 million, payable in $4.4 million cash and 36,800
shares of the Company's Common Stock, plus a three year contingent payout
based on future earnings of Continental payable in cash in an aggregate
amount not to exceed $1.02 million, for a total purchase price not to
exceed $6.02 million. The Company added two branch offices with this
acquisition.
.RHO Company Incorporated: In November 1996, the Company entered into
a definitive agreement to purchase all of the stock of RHO for $14.8
million payable in cash, plus a contingent payout to be paid over two or
three years based on future earnings of RHO payable in stock in an
aggregate amount not to exceed $3.3 million. The maximum amount of the
contingent payout in any year cannot exceed $1.67 million, which, if earned
in full, would bring the total purchase price to $18.1 million. The total
number of shares issuable as contingent payouts is equal to the quotient of
$3.3 million and the average value of the Common Stock for the 20
consecutive business days ending three business days prior to the closing
of the RHO acquisition. The closing for RHO is to occur in February 1997.
RHO provides specialists for its customers primarily in the technical
services and IT sectors. The acquisition of RHO will add nine branch
offices.
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The Company believes that there exist a substantial number of
potentially attractive acquisition opportunities in the staffing services
industry. The Company from time to time enters into discussions and non-
binding letters of intent which may lead to potential acquisitions but no
assurances can be given that future acquisitions will be consummated. The
Company has no current agreements or letters of intent with respect to any
acquisition other than the acquisition of RHO.
SERVICES
The Company provides a wide range of technical staffing, consulting
and outsourcing services. The Company's extensive proprietary database and
national presence enable it to draw from a wealth of resources to link
highly-trained telecommunications and computer professionals with
businesses that need highly skilled labor. The Company's services are
designed to give its customers maximum flexibility and maximum choice. The
Company's professionals are available on a short-term or long-term basis.
The Company's services permit businesses to increase the volume of their
work without increasing fixed overhead and permanent personnel costs.
The Company's employees provide services ranging from basic equipment
installation to sophisticated engineering skills to customers in the
telecommunications sector, typically in support of telecommunications
network expansion or modernization programs. To customers in the IT
sector, the Company's employees provide computer programming services that
include updating or modifying existing programs as well as developing new
programs and integrating new programs with existing systems. The Company's
employees offer both manufacturing and engineering support to customers in
the technical services sector on research and development and product
design projects that relate to, inter alia, energy research and aerospace
design.
The Company offers its customers four staffing alternatives: Project
Support, Vendor-on-Premises, RightSourcing/(SM)/ and Needs Analysis. The
staffing alternatives serve different customer needs, depending on the
nature and length of the assignment and the degree of management
responsibility the customer wishes to delegate. In addition, the Company is
currently developing a new telecommuting service, COMFORCE Homework/(SM)/,
to offer its customers even greater flexibility.
Project Support. Through its Project Support program, the Company
contracts with its customers to provide staffing for specific projects
requiring highly specialized skills such as applications programming and
development, client/server development, systems software architecture and
design, systems engineering and systems integration. Generally, project
staffing involves the commitment of a team of employees who remain at the
site until a project is completed. However, the Company helps its
customers complete their development projects by providing both short-term
and long-term staffing. The Company has the resources and experience to
plan and manage a project from conception through completion, as well as
the ability to enter a project midstream, assess its status, develop a plan
and successfully complete the project.
Vendor-on-Premises. Through its Vendor-on-Premises program, the
Company coordinates personnel services by establishing an on-site office to
assist in the procurement and management of the customer's workforce. The
program facilitates customer use of staffing personnel and allows the
customer to outsource a portion of its personnel responsibility. The
Company designs and implements customized programs that can include
services such as specialized testing, drug screening, selection and
monitoring of secondary staffing vendors, enforcement of the customer's
quality standards, and orientation of the workforce. The program can also
provide permanent, full-time placement services through traditional staff
selection and recruiting services.
RightSourcing/(SM)/. Through the RightSourcing/(SM)/ program, the
Company evaluates the performance level of a particular department,
function, or project and recommends ways to increase cost-effectiveness and
workforce efficiency through specific staffing strategies. The Company then
tailors a program to meet specific staffing needs and established
performance standards. Through the use of RightSourcing/(SM)/ software, the
customer can access information and data regarding the cost, management and
productivity of its contract and permanent personnel. The
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RightSourcing/(SM)/ program provides the customer with the option to
transfer its workers from its payroll to the Company's payroll.
Needs Analysis. Through its Needs Analysis service, the Company
evaluates the specific objectives and requirements of a project or function
and identifies needed staff positions and responsibilities. This is
accomplished by the development of a work breakdown structure and other
needs analysis techniques that define tasks, outputs, and
interdependencies, establish task durations and milestones, and identify
elements critical to the successful implementation of the function or
completion of the project. The resulting staffing plan defines an
organizational structure, identifies specific staff positions, numbers,
responsibilities, and qualifications, defines the start and end date of
each position, and indicates the employment category for each position
(permanent full-time, temporary short-term, or contract). The staffing
requirements can then be matched to the Company's proprietary database of
more than 110,000 prospective employees.
New Telecommuting Initiative. The Company's COMFORCE Homework/(SM)/
program is designed to allow highly-skilled professionals to telecommute
from their homes, eliminating geographic barriers in order to provide the
most qualified staff for specific customer requirements. The program is
also designed to provide increased flexibility by allowing part-time staff
to assist more than one customer over any given time period and by reducing
overhead costs to the customer. The Company's staffing, consulting and
outsourcing services are particularly well suited for telecommuting due to
the highly skilled nature of its employee base.
CUSTOMERS
The Company's customers are typically Fortune 500 companies and other
large organizations. During 1996, the Company provided technical staffing,
consulting and outsourcing solutions to over 725 customers including
telecommunication equipment manufacturers, telecommunication service
providers (wireline and wireless), computer software and hardware
manufacturers, aerospace and avionics firms, utilities and national
laboratories engaged in such areas as environmental safety research and
development of alternative energy sources and laser technology. The
Company believes that its large customer base provides it with attractive
opportunities for further marketing and cross-selling of its technical
staffing solutions capabilities. In addition, the requirements of these
organizations often provide opportunities for major projects that extend
for multiple years or generate additional assignments. Generally, the
Company's contracts with its customers provide that the Company will have
the first opportunity to supply the personnel required by that customer.
Other staffing companies not under contract with the customer are typically
offered the opportunity to supply personnel only if the Company is unable
to meet the customer's requirements.
For the first nine months of 1996, sales to the Company's ten largest
customers accounted for approximately 50% of the Company's pro forma
revenues, with sales to Microsoft Corporation accounting for approximately
14% of the Company's pro forma revenues. Sales to no other customer
accounted for more than 10% of the Company's pro forma revenues.
The Company provides staffing for cellular and wireless technology
communications system development, satellite and earth station deployment
and network management services to customers engaged in the
telecommunications industries. Sales to customers in the
telecommunications sector accounted for 14% of the Company's pro forma
revenues for the nine months ended September 30, 1996. Among the customers
in this sector are ALCATEL, AT&T Wireless Services, Inc., Lucent
Technologies, Inc., Northern Telecom, Inc. (NORTEL), Fujitsu Network
Transmission Systems, Inc., Bell Atlantic Corporation and Motorola, Inc.
Typically, customers from the telecommunications sector obtain the services
of the Company on a purchase order basis and are invoiced weekly.
Sales to the Company's customers in the information technology sector
represented 24% of the Company's pro forma revenues for the first nine
months of fiscal 1996. The major customers in this sector are Microsoft
Corporation, Western Digital Corporation, NEC Technologies, Inc., Oracle
Corporation, First Union Bank, Xerox Corporation, Eastman Kodak Company and
Electronic Data Systems Corporation. The Company expects that
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revenues contributed by the IT sector will continue to increase as a
percentage of its total revenues. IT customers generally obtain the
services of the Company on a contract and purchase order basis and are
typically invoiced weekly or bi-weekly.
The customers in the technical services sector are principally quasi-
public organizations, aerospace, electronics and petrochemical companies
and public utilities. Sales to technical services customers generated 62%
of the Company's pro forma revenues for the first nine months of 1996. The
major customers in this sector include The Boeing Company, Cable Systems
International, Gulfstream Aerospace Corporation, Honeywell, Inc.,
Westinghouse Electric Corporation, McDonnell Douglas Corporation and
National Department of Energy Research Laboratories including Los Alamos
National Laboratory, Sandia National Laboratory, Lawrence Livermore
National Laboratory and Battelle Northwest Laboratory. Typically,
customers in the technical services sector obtain the services of the
Company on a long-term contract basis and are invoiced weekly.
SALES AND MARKETING
The Company services its customers through a network of 31 branch
offices located in 15 states across the United States and its corporate
headquarters located in Lake Success, New York. The Company's sales and
marketing strategy is focused on expanding its business with existing
customers through cross-selling and establishing relationships with new
customers. The strategy focuses on national accounts that are primarily
serviced on a local level through its branch locations.
These accounts, as well as local accounts serviced by the Company, are
targeted by account managers at the branch offices, permitting the Company
to capitalize on the local expertise and established relationships of its
branch office employees. Such accounts are solicited through personal
sales presentations, telephone marketing, direct mail solicitation,
referrals from customers, and advertising in a variety of local and
national media including the Yellow Pages, magazines, newspapers, trade
publications and through the Company's home page on the World Wide Web. The
Company also sponsors public relations activities designed to enhance
public recognition of the Company and its services. Local employees are
encouraged to be active in civic organizations and industry trade groups to
facilitate the development of new customer relationships.
The Company's international and national sales and marketing effort is
and will continue to be coordinated by management at the corporate level,
enabling the Company to develop a consistent, focused strategy to pursue
national and international account opportunities. This strategy allows the
Company to capitalize on the desire of national and international customers
to work with a limited number of preferred vendors for their staffing
requirements. As larger customers consolidate their purchasing of staffing
services, management believes that the Company's ability to provide a full
range of services to national accounts will be a competitive advantage.
In certain markets, the Company intends to cross-sell professional
services. The Company has established long-term relationships with many of
its customers. Most of these customers are currently serviced by the
Company in a single sector in which they operate. The Company believes
that the access and goodwill from these existing customer relationships
provide it with significant advantages in marketing services to these
customers in other sectors.
In order to maximize its marketing effectiveness, the Company provides
motivational training to empower its employees and instill a proactive,
solution-based approach to problem solving. In addition, the Company
offers additional compensation, in the form of cash and stock options, to
certain of its employees as incentive to maximize their sales efforts.
RECRUITING OF BILLABLE EMPLOYEES
The Company's success is dependent upon its ability to effectively and
efficiently match skilled technical personnel with specific customer
assignments. As a result of continuous recruiting efforts, the Company has
established an extensive national resume database of over 110,000
prospective employees with expertise in the
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technical disciplines served by the Company. The Company continuously
updates its proprietary database to reflect changes in technical personnel
skill levels and availability. Upon receipt of assignment specifications,
the Company searches the database to identify suitable technical personnel.
Once technical skills are matched to the specifications, the Company
considers other selection criteria such as interpersonal skills,
availability and geographic preferences to ensure there is a proper fit
between personnel and the assignment being staffed. The Company's resume
database, which may be accessed by appropriate personnel throughout the
Company, can be searched by a number of different criteria, including
specific skills or qualifications.
To identify qualified personnel for inclusion in its proprietary
database, the Company solicits referrals from its existing personnel and
customers and places advertisements in local newspapers, trade magazines
and on the Company's home page on the World Wide Web. As competition for
the limited number of qualified technical personnel with certain "niche"
skills intensifies, the Company intends to enhance its recruiting practices
to attract technical personnel in areas of high demand.
The Company believes it has a competitive advantage in attracting and
retaining technical personnel as it provides assignments that make use of
advanced technology and offer the employees the opportunity to obtain
additional experience that can enhance their skills and overall
marketability. In addition, in certain instances the Company provides its
billable employees the opportunity to participate in a stock option
purchase plan of the Company. The Company believes this plan distinguishes
the Company from most of its competitors.
The Company also offers flexible schedules, better-than-competitive
wages and, depending on the contract or assignment, paid holidays,
vacation, and certain benefit plan opportunities to attract and retain
qualified technical personnel. In addition, the Company offers its
billable employees a wide range of choices for custom designing a benefit
package specific to each employee's needs and an opportunity for immediate
participation in the Company's 401(k) savings plan. The Company also
offers health insurance benefits to its billable employees at their cost
through a national trade association to which the Company belongs.
PAYROLL/BILLING/ACCOUNTING
The Company believes that its management information ("MIS") systems
are instrumental to the success of its operations and are technologically
advanced. Its invoice customization and electronic billing features enable
the Company to expedite its billing and collection functions and to meet
payroll in a more timely and efficient manner. The Company's MIS systems
also retain coded information regarding employment candidates'
qualifications and skills, providing the Company with a competitive
advantage in matching such skills and qualifications with customer needs.
The Company seeks to increase its profitability by adding offices and
employees without proportionately increasing overhead expenses. The
Company believes that its MIS systems are well suited to facilitate that
goal in that the administrative functions of the acquired businesses can be
integrated into those of the Company at low incremental costs, allowing the
Company to spread its fixed costs over a larger revenue base.
COMPETITION
The specialty staffing services industry is very competitive and
fragmented. There are relatively limited barriers to entry and new
competitors frequently enter the market. The Company's competitors vary
depending on geographic region and the nature of the service(s) being
provided. The Company faces substantial competition from both larger firms
possessing substantially greater financial, technical and marketing
resources than the Company and smaller, regional firms with a strong
presence in their respective local markets. Large national firms that
offer specialty staffing services include AccuStaff Incorporated,
Corestaff, Inc., Butler International, Inc., CDI Corporation and TAD
Technical Services. Local firms are typically operator-owned, and each
market generally has one or more significant competitors. The Company
believes that as it grows and expands geographically, it may compete with
additional national, regional and local service providers.
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Management believes that the availability and quality of candidates,
the effective monitoring of job performance, scope of geographic service
and the price of service are the principal elements of competition. The
availability of quality technical staffing personnel is an especially
important facet of competition. In order to attract staffing candidates,
the Company places emphasis upon its ability to provide permanent placement
opportunities, competitive compensation, quality and varied assignments,
and scheduling flexibility. The Company believes its ability to compete
also depends in part on a number of competitive factors outside its
control, including the ability of its competitors to hire, retain and
motivate skilled technical and management personnel and the extent of its
competitors' responsiveness to customer needs. Additionally, in certain
markets the Company has experienced significant pricing pressure from some
of its competitors. Although the Company believes it competes favorably
with respect to these factors, it expects competition to increase, and
there can be no assurance that the Company will remain competitive.
EMPLOYEES
The Company employs approximately 184 full-time staff employees and
has approximately 3,485 billable employees on assignment resulting in a
ratio of billable to non-billable employees of 18.9 to 1. (At September
30, 1996 the comparable figures were 185 full-time staff employees, 3,457
billable employees and a ratio of billable to non-billable employees of
18.7 to 1.) In addition to employees on assignment, the Company maintains
a proprietary database of over 110,000 prospective employees with expertise
in the technical disciplines served by the Company. Billable employees are
employed by the Company on an as-needed basis dependent on customer demand
and are paid only for time they actually work. Non-billable administrative
personnel provide management, sales and marketing and other services in
support of the Company's staffing services.
For its non-billable employees, the Company offers a package of
benefits which it believes to be competitive, including vacation and
holiday pay and a 401(k) plan. All employees are covered by workers'
compensation and general liability insurance. The Company is responsible
for and pays the employer's share of Social Security taxes (FICA), federal
and state unemployment taxes, workers' compensation insurance and other
costs for all employees. The Company also offers its billable employees the
benefits described under "--Recruiting of Billable Employees."
INTELLECTUAL PROPERTY
The Company has applications pending with the Patent and Trademark
Office for federal registration of the service marks "COMFORCE" and
RightSourcing for job placement services for staffing personnel and
permanent employees and telecommunications and computer consultation
services and the service mark COMFORCE Homework for intent to use for job
placement services for placing personnel from traditional work environments
into a home environment.
REGULATIONS
Staffing services firms are generally subject to one or more of the
following types of government regulation: (i) registration of the
employer/employees; (ii) licensing, record keeping and recording
requirements; and (iii) substantive limitations on its operations.
Staffing services are the legal employers of their workers. Therefore, the
Company is governed by laws regulating the employer/employee relationship,
such as tax withholding or reporting, social security or retirement,
antidiscrimination and workers' compensation.
PROPERTIES
The Company owns no real estate. It leases its corporate headquarters
as well as its branch offices. The leases generally run for terms of one
to five years. The Company believes that its facilities are adequate for
its present and reasonably anticipated future business requirements, except
to the extent of future acquisitions of existing businesses. In the case of
such acquisitions, the Company expects to assume the leases of businesses
acquired or, to the extent possible, consolidate such operations with
existing offices. The Company does not anticipate difficulty locating
additional facilities, if needed.
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LEGAL PROCEEDINGS
In January 1997, Austin A. Iodice, formerly the Company's Chief
Executive Officer, President and Vice Chairman, and Anthony Giglio, who
formerly performed the functions of the Company's Chief Operating Officer,
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 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. Messers. Giglio and
Iodice maintain that they were agents and not employees of the Company and
the options continue to be exercisable. The Company intends to vigorously
defend these suits.
The Company is also involved in a proceeding described below under
"Discontinued Operations--Environmental Matters."
The Company is a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are
believed by management to be material to the business, results of
operations or financial condition of the Company. The Company maintains
general liability insurance, property insurance, automobile insurance,
employee benefit liability insurance, owner's and contractor's protective
insurance and exporter's foreign operations insurance with coverage of $1
million on a per claim basis and $2 million aggregate (with $3 million
umbrella coverage). The Company insures against workers' compensation in
amounts required under applicable state law and in the amount of $500,000
in the case of foreign workers. The Company also maintains fidelity
insurance in the amount of $25,000 per claim and directors' and officers'
liability insurance in the amount of $2 million. The Company is presently
soliciting quotations to obtain errors and omissions coverage.
DIVIDEND POLICY
The Company anticipates that it will not pay cash dividends on the
Common Stock for the foreseeable future and that it will retain its
earnings to finance future growth. The declaration and payment of dividends
by the Company are subject to the discretion of its Board of Directors and
compliance with applicable law. Any determination as to the payment of
dividends in the future will depend upon, among other things, general
business conditions, the effect of such payment on the Company's financial
condition and other factors the Company's Board of Directors may in the
future consider relevant. Under the Chase Credit Facility, the Company is
prohibited from paying cash dividends on its Common Stock and its Preferred
Stock except to the extent required to pay dividends on the Company's
Series D Senior Convertible Preferred Stock that was issued and outstanding
as of the date of the Chase Credit Facility. No dividends have been
declared or paid on the Common Stock during 1995 or 1996.
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PRICE RANGE OF THE COMPANY'S COMMON STOCK
The Company's Common Stock, $.01 par value, is traded on the American
Stock Exchange. The high and low sales prices for the Company's Common
Stock, as reported by the American Stock Exchange in the Monthly Market
Statistics during the past two years and for the interim quarters in 1996,
were as follows:
HIGH LOW
---- ---
Prior to Acquisition of COMFORCE Telecom:
FISCAL YEAR 1994
First Quarter.................................. $6 $5
Second Quarter................................. 7-1/8 3-1/8
Third Quarter.................................. 8-1/8 5-1/4
Fourth Quarter ............................... 6-3/8 1-7/8
FISCAL YEAR 1995
First Quarter.................................. 3-7/8 1-15/16
Second Quarter................................. 3-1/2 2
Third Quarter 4-3/4 1-9/16
Fourth Quarter (through October 16, 1995)...... 4-3/8 3-1/4
Following Acquisition of COMFORCE Telecom:
Fourth Quarter (commencing October 17, 1995).. 9-1/4 3-1/4
FISCAL YEAR 1996
First Quarter.................................. 10-3/8 6
Second Quarter................................. 34-1/8 9-3/8
Third Quarter.................................. 28-1/2 15-1/2
Fourth Quarter ................................ 18-3/8 11-1/2
The last reported sale price of the Common Stock on the American
Stock Exchange on February 18, 1997 was $8.9375. As of February 18, 1997,
there were 5,500 holders of record of the Company's Common Stock.
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DESCRIPTION OF THE COMPANY'S SECURITIES
GENERAL
The authorized capital stock of the Company consists of
100,000,000 shares of Common Stock having a par value of $.01 per share and
10,000,000 shares of Preferred Stock, par value $0.01 per share, which may
be issued in one or more series with such rights and preferences as
determined by the Board of Directors. As of December 31, 1996, the Company
had issued and outstanding capital stock consisting of 12,701,934 shares of
Common Stock, 7,002 shares of Series D Preferred Stock and 3,250 shares of
Series F Preferred Stock. In addition, as of the date of this Prospectus,
there were options and warrants to purchase an additional 3,252,566 shares
of Common Stock issued and outstanding.
The following summary description of the Company's capital stock
does not purport to be complete and is qualified in its entirety by this
reference to the Company's Certificate of Incorporation and Bylaws, copies
of which have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
COMMON STOCK
The holders of the Common Stock are entitled to one vote per
share of record on all matters to be voted upon by stockholders. At a
meeting of stockholders at which a quorum is present, a majority of the
votes cast decides all questions, unless the matter is one upon which a
different vote is required by express provision of law or the Company's
Certificate of Incorporation or Bylaws. Cumulative voting is not permitted
with respect to the election of directors.
The holders of Common Stock have no preemptive rights and have no
rights to convert their Common Stock into any other securities. Subject to
the rights of holders of Preferred Stock, if any shares of Preferred Stock
are then outstanding, in the event of a liquidation, dissolution or winding
up of the Company, holders of Common Stock are entitled to participate
equally, share for share, in all assets remaining after payment of
liabilities.
The holders of Common Stock are entitled to receive ratably such
dividends as the Board of Directors may declare out of funds legally
available therefor, when and if so declared. The payment by the Company of
dividends, if any, rests within the discretion of its Board of Directors
and will depend upon the Company's results of operations, financial
condition and capital expenditure plans, as well as other factors
considered relevant by the Board of Directors. See "Dividend Policy."
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Board
of Directors to issue shares of Preferred Stock in one or more series and
to establish such relative voting, dividend, redemption, liquidation,
conversion and other powers, preferences, rights, qualifications,
limitations and restrictions as the Board of Directors may determine
without further approval of the Stockholders of the Company.
On May 6, 1996, the Board authorized the issuance of up to 15,000
shares of Preferred Stock, par value $0.01 per share, designated the Series
D Senior Convertible Preferred Stock ("Series D Preferred Stock"). The
holder of each share of Series D Preferred Stock will have the right to
convert such share into 83.33 shares of Common Stock at $12 per share at
any time. If at any time after the first anniversary of the date of first
issuance of the Series D Stock, the Common Stock of the Company has a
closing sale price of at least $20 per share for a period of twenty
consecutive trading days, the Company may convert all shares of the Series
D Preferred Stock then outstanding into shares of Common Stock at $12 per
share, without prior notice to the Stockholder. All shares of Series D
outstanding on the fifth anniversary of the date of first issuance of the
Series D Stock will automatically be converted into shares of Common Stock
based on the conversion price of $12 per share. Holders of shares of
Series D Preferred Stock are entitled to cumulative dividends of 6% per
annum, payable quarterly in cash on the first day
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of February, May, August and November in each year. For the purposes of
conversion, to the extent that the Company does not pay any accrued and
unpaid dividends within fifteen days of the conversion with respect to
those shares, such amount shall be added to the conversion value for those
shares. Except as otherwise provided by law, the holders of Series D
Preferred Stock will not be entitled to vote. As of December 31, 1996,
there were 7,002 shares of Series D Preferred Stock outstanding.
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 77% 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.
Except for the Series D Preferred Stock and the Series F
Preferred Stock, there are no other series or classes of Preferred Stock
with currently outstanding shares. All the shares of all other series or
classes of Preferred Stock previously authorized by the Company's Board
have been repurchased by the Company, canceled or converted to Common Stock
and are not subject to reissue.
The issuance of any additional series of Preferred Stock, and the
relative powers, preferences, rights, qualifications, limitations and
restrictions of such series, if and when established, will depend upon,
among other things, the future capital needs of the Company, the then-
existing market conditions and other factors that, in the judgment of the
Board of Directors, might warrant the issuance of Preferred Stock. The
issuance of additional series of Preferred Stock by the Board of Directors
could, among other things, adversely affect the voting power of the holders
of Common Stock and, under certain circumstances, make it more difficult
for a person or group to gain control of the Company. At the date of this
Prospectus, there are no plans, agreements or understandings relative to
the issuance of any shares of Preferred Stock.
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WARRANTS AND PAYMENT RIGHTS
As of the date of this Prospectus, there were warrants to
purchase an aggregate of 1,246,716 shares of Common Stock issued and
outstanding at exercise prices ranging from $2.00 to $24.00 per share. All
warrants expire by June 1, 2001.
In connection with the recent private placement of shares of its
Common Stock, the Company granted certain payment rights. In December 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 five trading days prior to a specified payment
date (not later than May 1, 1997).
In addition, in December 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 five
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 May 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.
DELAWARE LAW
Certain provisions of the General Corporation Law of the State of
Delaware, summarized in the following paragraphs, may be considered to have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.
Section 203 of the General Corporation Law of the State of
Delaware prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which such person became
an interested stockholder unless (i) prior to such date, the Board of
Directors approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; or (ii)
upon becoming an interested stockholder the stockholder then owned at least
85% of the voting stock, as defined in Section 203; or (iii) subsequent to
such date, the business combination is approved by both the Board of
Directors and by at least 66-2/3 of the corporation's outstanding voting
stock, excluding shares owned by the interested stockholder. For these
purposes, the term "business combination" includes mergers, asset sales and
other similar transactions with an "interested stockholder." An "interested
stockholder" is a person who, together with affiliates and associates, owns
(or, within the prior three years, did own) 15% or more of the
corporation's voting stock. Although Section 203 permits a corporation to
elect not to be governed by its provisions, the Company to date has not
made this election.
Section 203 excludes from the definition of "interested
stockholder" any stockholder of the Company that owned over 15% of the
Company's stock on December 23, 1987, so long as such holder continues to
own over 15% of the Company. Accordingly, ARTRA is not subject to the
restrictions of Section 203.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Chase
Mellon Shareholder Services.
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MANAGEMENT
Set forth below is information concerning each director, director
designee and executive officer of the Company.
Name Age Position
Michael Ferrentino 34 President and Director
Christopher P. Franco 37 Executive Vice President and
Secretary
Dr. Glen Miller 59 Director
Keith Goldberg 33 Director
Richard Barber 36 Director
Paul J. Grillo 44 Vice President - Finance and
Chief
Financial Officer
Andrew Reiben 32 Chief Accounting Officer and
Corporate Controller
James L. Paterek 35 Principal Consultant
MICHAEL FERRENTINO has served as the President and a Director of
the Company since December 1995. Mr. Ferrentino was a founder of COMFORCE
Telecom, and he served as COMFORCE Telecom's Executive Vice President from
1987 to 1995. From 1984 through 1987, he was employed by Dun & Bradstreet.
CHRISTOPHER P. FRANCO has served as the Executive Vice President
and Secretary of the Company since December 1995. From November 1993 to
September 1995, Mr. Franco served as Vice President and General Counsel of
Spectrum Information Technologies, Inc. (wireless transmissions,
telecommunications and franchiser of computer stores). From 1985 to 1993,
Mr. Franco practiced law, principally in the field of corporate securities,
with the law firms of Fulbright & Jaworski (Houston), Cummings & Lockwood
(Hartford) and Kelley Drye & Warren (New York).
DR. GLEN MILLER has served as a Director since December 1995. He
is a Vice President of Cybertel Network Systems, a telecommunications
service company. From 1990 to 1994, Dr. Miller was responsible for
strategic planning for the Harris Corporation. From 1984 to 1990, he was
responsible for the direction and arrangement of business activities in
various markets nationwide for GTE Telecom, a telecommunications company.
Dr. Miller is a retired Colonel, U.S. Air Force.
KEITH GOLDBERG has served as a Director since December 1995. He
is a partner at J. Walter Thompson Advertising. Previously, he worked for
BBDO Advertising as an Associate Creative Director from 1994 to 1995. From
1989 through 1994, he served as a Vice President at Young & Rubicam. Mr.
Goldberg is the recipient of several advertising industry awards.
RICHARD BARBER has served as a Director since December 1995. He
is a partner at L.H. Friskoff & Company, a certified public accounting
firm. Mr. Barber is a member of the American Institute of Certified Public
Accountants, the New York State Society of Certified Public Accountants and
served as a committee member of the New York State Real Estate Accounting
Committee.
39
<PAGE>
PAUL J. GRILLO has served as Vice President - Finance and Chief
Financial Officer of the Company since July 1996. From July 1991 to July
1996, Mr. Grillo provided business planning and acquisition advisory
services to a number of industries including telecommunications, contract
services, manufacturing, publishing and real estate management. From April
1980 to June 1991, Mr. Grillo served as Senior Vice President - Finance,
Treasurer and Chief Financial Officer of Butler Service Group, Inc., an
international contract technical staffing services company. Mr. Grillo is a
certified public accountant.
ANDREW REIBEN has served as Chief Accounting Officer and
Corporate Controller of the Company since February 1996. From June 1993 to
February 1996, Mr. Reiben served as Controller of Daystar Robinson, a C.H.
Robinson company (New York). From September 1987 to June 1993, Mr. Reiben
was a Senior Accountant with the accounting firm of Coopers & Lybrand LLP
(New York). Mr. Reiben is a certified public accountant.
JAMES L. PATEREK has served as Principal Consultant to the
Company since December 1995. Mr. Paterek was a founder of COMFORCE
Telecom, and he served as COMFORCE Telecom's President from 1987 to 1995.
Directors are elected annually and hold office until the next
annual meeting of the stockholders or until a successor shall have been
duly elected and qualified. Executive officers are appointed by the Board
of Directors and serve at the pleasure of the Board. There are no family
relationships among the executive officers and/or directors, nor are there
any arrangements or understandings between any officer and another person
pursuant to which he was appointed to office except as may be hereinafter
described.
COMMITTEES
The Board of Directors has three standing committees -- the Audit
Committee, the Compensation Committee and the Stock Option Committee. The
Audit Committee has responsibility for reviewing matters with respect to
the accounting, auditing and financial reporting practices and procedures
of the Company. Dr. Miller and Mr. Barber are members of this Committee.
The Compensation Committee has responsibility for reviewing executive
salaries, administering the bonus and incentive compensation of the
Company, approving the salaries and other benefits of the executive
officers of the Company and administering the Company's Long-Term
Investment Plan. Mr. Ferrentino, Mr. Goldberg and Dr. Miller are members
of the Compensation Committee. The Stock Option Committee has
responsibility for administering the Company's Long-Term Investment Plan.
Mr. Goldberg and Dr. Miller are members of the Stock Option Committee.
DIRECTORS' COMPENSATION
As of January 1, 1996, non-employee directors receive fees of
$1,000 per quarter. In addition, pursuant to a plan adopted at the annual
meeting of stockholders held on October 28, 1996, each non-employee
director serving as a director on that date received, and annually
thereafter on the date any such non-employee director is elected or re-
elected by the stockholders will receive, options to purchase 10,000 shares
of the Company's Common Stock, unless the plan is subsequently amended as
permitted therein.
EXECUTIVE OFFICER COMPENSATION
The following table shows all compensation paid by the Company
and its subsidiaries for the fiscal years ended December 31, 1996, 1995,
and 1994, to each person who has served as the chief executive officer of
the Company at any time since the beginning of the last completed fiscal
year and to the Company's most highly compensated executive officers who
served as executive officers during the last fiscal year whose income
exceeded $100,000 (the "Named Executive Officers). No other executive
officers of the Company received compensation in excess of $100,000 in
1996.
40
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND POSITION YEAR ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------- ---- ------------------- ----------------------
SALARY BONUS AWARDS
------
($) ($) OPTIONS/SAR'S (#)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael Ferrentino, 1996 150,000 281,250/2/
Chief Operating 1995 79,703 739,264/(1)/ -
Officer and Treasurer 1994 - - -
Christopher P. Franco 1996 150,000 - 112,500/2/
Executive Vice 1995 28,846 739,264/(1)/
President and Secretary 1994 - - -
</TABLE>
- ---------------------------------------------
(1) This amount represents the value of shares of Common Stock of the
Company issued to Messrs. Ferrentino and Franco for agreeing to direct
the Company's entry into the technical staffing business. Management
valued the Company based on its discussions with market makers and
other advisors, taking into account (i) that the business then
conducted by the Company, which was discontinued during the third
quarter of 1995, had a negligible value, and (ii) the value of the
Company was principally related to the potential effect that a purchase
of COMFORCE Telecom, if successfully concluded, would have on the
market value of the Company's Common Stock. Management believes this
value is a fair and appropriate value based upon the Company's
financial condition as of the date the Company became obligated to
issue these shares. See "Certain Transactions."
(2) The options shown are currently exercisable options to purchase the
Company's Common Stock at an exercise price of $6.75 per share. These
options were granted pursuant to a letter agreement dated June 29, 1995
and subsequently amended as of October 6, 1995. These options terminate
on January 10, 2006.
Options Awards. The following table sets forth information concerning
options to purchase the Company's Common Stock granted to Named Executives
in 1996. No stock appreciation rights were awarded to any of the Named
Executives in 1996
OPTION/SAR GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM/2/
- ----------------------------------------------------------------------------------------- --------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
NAME OPTION/SARS EMPLOYEES OR BASE PRICE EXPIRATION
GRANTED(#)/1/ IN FISCAL YEAR ($/SH) DATE 5% ($) 10%($)
- ----------------------------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael Ferrentino 281,250 22.6% $6.75 1/10/06 1,193,916 3,025,620
Christopher P. Franco 112,500 9.0% $6.75 1/10/06 477,563 1,210,275
</TABLE>
- ----------
(1) The options shown are currently exercisable options granted to
purchase the Company's Common Stock at an exercise price of $6.75 per
share. These options were granted pursuant to a letter agreement dated
June 29, 1995 and subsequently amended as of October 6, 1995. These
options terminate on January 10, 2006.
(2) The potential realizable value shown is calculated based upon
appreciation of the Common Stock issuable under options, calculated
over the full term of the options assuming 5% and 10% annual
appreciation in the value of the Company's Common Stock from the date
of grant, net of the exercise price of the options.
OPTION VALUES. The following table sets forth information concerning
the aggregate number and values of options held by Named Executives
Officers as of December 31, 1996. None of the Named Executives Officers
hold stock appreciation rights and none of the Named Executives Officers
exercised any options in 1996.
41
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE/1/ UNEXERCISABLE
- ---------------------------------------------------------------------------
Michael Ferrentino 281,250/0 $2,109,375/0
Christopher P. Franco 112,500/0 $ 843,750/0
- ----------
(1) This information is presented as of December 31, 1996. See Note 1 to the
"Option/SAR Grants in Fiscal Year 1996" table and the notes to the "Summary
Compensation Table" above for a description of the terms of the options
listed in this table.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements in December 1995 with
Michael Ferrentino, the President of the Company, and Christopher P.
Franco, the Executive Vice President and the Secretary of the Company.
Each agreement is for a term of two years and is terminable by the Company
only for "just cause." "Just cause" includes the employee's consistent
failure to follow written policies or directions, wrongful conduct which
has or is expected to have a material adverse effect on the Company,
material violations of the employment agreement and disruption of a
harmonious work environment, except that, following a change in control of
the Company, the term "just cause" is generally limited in application to
criminal acts. Under these agreements, each of Messrs. Ferrentino and
Franco is entitled to annual compensation of $150,000 plus such bonuses as
are awarded by the Board, and each is entitled to participate in the
Company's normal benefit programs. If the Company terminates either
agreement, the employee shall be entitled to receive full compensation and
to continue to participate in the Company's benefit programs for the
greater of one year or the balance of the term of the agreement, payable in
full at the time of termination. Each agreement contains customary
confidentiality, non-disclosure and employee non-solicitation provisions.
See also "Certain Transactions" for a description of the consulting
agreement and management agreement entered into by the Company with a
company controlled by James L. Paterek.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The 1996 compensation of Michael Ferrentino, the President of the
Company, and Christopher P. Franco, the Executive Vice President and
Secretary of the Company, was fixed pursuant to employment agreements
negotiated with a former Vice President of the Company.
42
<PAGE>
Although the Company had a Committee on Compensation, this Committee did
not meet in 1996. There are no interlocking relationships, as defined in
the regulations of the Securities and Exchange Commission, involving any of
these individuals.
CERTAIN TRANSACTIONS
On June 29, 1995, the Company entered into a letter agreement with
Michael Ferrentino, the President of the Company, Christopher P. Franco,
the Executive Vice President and Secretary of the Company, and James L.
Paterek, a beneficial owner of more than 10% of the Company's Common Stock,
subsequently amended as of October 6, 1995 (as amended, the "Letter
Agreement"), pursuant to which Messrs. Ferrentino, Franco and Paterek
agreed to direct the Company's entry into the technical staffing business.
As consideration for agreeing to guide the Company's entry into the
technical staffing business, the Company agreed, inter alia, to (i) issue
to Messrs. Ferrentino, Franco and Paterek and one other individual who
agreed to serve as a Vice President of COMFORCE Telecom, Kevin W. Kiernan
(collectively, the "Designated Individuals"), such number of shares of
Common Stock then equal to 35% of the Company's then issued and outstanding
Common Stock together with additional shares issued and warrants or options
to purchase additional shares granted between October 6, 1995 and December
1, 1995; (ii) sell or otherwise dispose of all or substantially all of the
Company's interest in the businesses it then operated; (iii) nominate four
individuals selected by the Designated Individuals to serve on the
Company's Board of Directors; and (iv) reserve for issuance to the
Designated Individuals and other employees of the Company options or
warrants to purchase 10% of the Company's then issued and outstanding
Common Stock together with additional shares issued and warrants or options
to purchase additional shares granted between October 6, 1995 and December
1, 1995.
In the aggregate, 3,888,084 shares of the Company's Common Stock were
issued to the Designated Individuals in October 1995 and December 1996 in
full satisfaction of the Company's obligations to issue its shares under
the terms of the Letter Agreement, all as follows:
No. of Shares
-------------
Michael Ferrentino 999,794
Christopher P. Franco 999,794
James L. Paterek 1,666,322
Kevin W. Kiernan 222,174
---------
Total 3,888,084
These shares have the same rights and privileges as all other shares of
the Company's Common Stock.
The Company made loans in 1995 and 1996 of $367,000 in the aggregate to
the Designated Individuals to cover their tax liabilities resulting from
these transactions. The obligations are evidenced by notes which bear
interest at the rate of 6% per annum and mature on September 30, 1997.
See "Management--Employment Agreements" for a description of the
employment agreements entered into between the Company and each of Messrs.
Ferrentino and Franco.
In October 1995, the Company entered into a consulting agreement with
Tarek Corporation ("Tarek"), which is a corporation wholly-owned by Mr.
Paterek. Mr. Paterek, age 35, was a founder of COMFORCE Global and served
as its President from 1985 to September 1995. Tarek has agreed to engage
Mr. Paterek to perform the services required under the agreement,
principally to advise the Company as to fundamental stategies and policies
relating to its operations, as to acquisitions and the integration of
acquired businesses and as to growth strategies generally. Under the terms
of the agreement, Tarek has agreed to devote at least 50 hours per month
performing services for the Company. The agreement is for a term of three
years and is terminable by the Company only for
43
<PAGE>
"good cause." "Good cause" includes Paterek's fraud, misappropriation of
Company assets, or the commission of a felony during the term of the
agreement which is directly related to the Company and causes it material
harm. Tarek has the right to terminate the agreement upon 30 days notice or
immediately in the event of a change in control. Under this agreement, the
consultant is entitled to compensation of $157,000 annually plus
reimbursement for expenses incurred in performing its duties under the
agreement. In addition, Mr. Paterek is entitled to participate in the
Company's normal benefit programs. If the Company terminates the agreement
without good cause, Tarek shall be entitled to receive full compensation
for the balance of the term of the agreement. The agreement requires Tarek
to enter into an agreement with Mr. Paterek under which he agrees not to
compete with the Company during the term of the agreement and not to
disclose confidential information.
Yield Industries, Inc., a corporation wholly-owned by Messrs. Paterek and
Ferrentino earned a fee of $500,000 related to its interest in COMFORCE
Telecom 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
January 1996. Yield Industries, Inc. was not affiliated with COMFORCE
Telecom.
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 $91,000 in fees during the period from January 1, 1996
through September 30, 1996 for tax-related advisory services.
See "Discontinued Operations" for a description of certain transactions
involving the Company prior to its entry into the technical staffing
business and persons who have ceased to be involved in the Company's on-
going operations.
DISCONTINUED OPERATIONS
HISTORY OF DISCONTINUED OPERATIONS
The Company was incorporated in Illinois in 1954 and became a Delaware
corporation through its merger with a Delaware subsidiary in 1969. From
1985 until September 1995, the Company, under the name The Lori
Corporation, was engaged in the business of designing and distributing
fashion jewelry (referred to as "Lori" as the context may require). Prior
thereto, under the names American Photocopy Equipment Company and APECO
Corporation, the Company engaged in various business activities, including
the manufacture of photocopy machines.
Due to continuing losses in the jewelry business and the erosion of the
markets for its products, in September 1995, Lori adopted a plan to
discontinue the jewelry business and determined to seek to enter into
another line of business. In June 1995, Lori contracted with current
management to direct its entry into the technical staffing business. On
October 17, 1995, Lori acquired all of the capital stock of Spectrum Global
Services, Inc. (formerly d/b/a YIELD Global and subsequently renamed
COMFORCE Telecom, Inc.). In addition, in connection with its new business
direction, Lori changed its name to COMFORCE Corporation. At the time of
the acquisition, COMFORCE Telecom was one of several wholly-owned
subsidiaries of Spectrum Information Technologies, Inc., a Delaware
corporation ("Spectrum"), which had a Chapter 11 petition pending. The
sale of COMFORCE Telecom, which was not a party to the Chapter 11
proceeding, was approved by the bankruptcy court in which Spectrum's
bankruptcy was pending. Spectrum had acquired COMFORCE Telecom in 1993.
44
<PAGE>
In conjunction with the COMFORCE Telecom acquisition, the Company and
ARTRA entered into an Assumption Agreement as of October 17, 1995 (the
"Assumption Agreement"). Under the Assumption Agreement, ARTRA agreed to
pay and discharge substantially all of the then existing liabilities and
obligations of the Company, including indebtedness, corporate guarantees,
accounts payable and environmental liabilities. ARTRA also agreed to
assume responsibility for all liabilities of the jewelry business from and
after October 17, 1995, and is entitled to receive the net proceeds, if
any, from the sale thereof. On April 12, 1996, ARTRA sold the business and
certain of the assets of the Company's Lawrence Jewelry Company subsidiary
("Lawrence") for a selling price of $252,000 plus certain proceeds
subsequently realized from the sale of existing inventory, which proceeds
were applied to pay creditors of Lawrence or deposited in an escrow account
to be applied for such purpose. ARTRA has advised the Company that none of
the proceeds from the sale would remain following the payment of such
creditors.
SELECTED HISTORICAL FINANCIAL INFORMATION
Following is a consolidated summary of selected financial data of the
Company for each of the five years in the period ended December 31, 1995
and for the nine months ended September 30, 1996. Certain selected
financial data for each of the four years in the period ended December 31,
1994 has been reclassified to reflect discontinuance of Lori's operations
prior to its entering into the technical staffing business effective
September 30, 1995. Selected financial data for the year ended December
31, 1995 includes the operations of COMFORCE Telecom from the date of its
acquisition, completed on October 17, 1995. The selected historical
information presented below includes limited results of the Company's
technical staffing operations (all of which, except for COMFORCE Telecom,
were acquired during or after the nine month period ending September 30,
1996) and, in the case of information presented for each of the five years
in the period ended December 31, 1995, related principally to operations
discontinued by Lori in the third quarter of 1995. See "Selected Unaudited
Pro Forma Financial and Operating Data" and "Discontinued Operations."
45
<PAGE>
Selected Historical Financial Information
<TABLE>
<CAPTION>
Nine Months Nine Months
ended ended Year ended December 31,
Sept. 30, Sept. 30,
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- -------- --------- --------- -------- --------- ---------
(thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1) $33,514 -- $ 2,387 $ $ $ -- $ --
Stock compensation charge (2) -- -- 3,425 -- -- -- --
Earnings (loss) from continuing operations 907 (3,675) (4,332) (2,282) (1,456) (421) (5,129)
Loss from discontinued operations (3) -- (16,611) (17,211) (16,220) (216) (34,198) (1,970)
Earnings (loss) before extraordinary credits 907 (20,286) (21,543) (18,502) (1,672) (34,619) (7,099)
Extraordinary credits (4) -- 6,657 6,657 8,965 22,057 -- --
Net earnings (loss) 907 (13,629) (14,886) (9,537) 20,385 (34,619) (7,099)
Dividends on Preferred Stock (7) 193 -- -- -- -- -- --
Income available for Common Stockholders 714 -- -- -- -- -- --
Earnings (loss) per share:
Continuing operations .06 (1.14) (.95) (.72) (.39) (.13) (1.62)
Discontinued operations -- (5.00) (3.74) (5.08) (.06) (10.86) (.63)
Earnings (loss) before extraordinary .06 (6.14) (4.69) (5.80) (.45) (10.99) (2.25)
credits
Extraordinary credits -- 2.04 1.45 2.81 6.03 -- --
Net earnings (loss) .06 (4.10) (3.24) (2.99) 5.58 (10.99) (2.25)
Total assets (5) 26,674 5,278 8,536 18,704 40,174 42,818 66,877
Long-term debt -- -- -- -- -- 6,105 23,548
Receivable from (payable to) ARTRA(6) -- 76 1,046 (289) -- (16,025) (15,981)
Liabilities assumed by ARTRA (6) 350 -- 4,240 -- -- -- --
Liabilities subject to compromise -- -- -- -- -- 41,500 --
Debt subsequently discharged -- -- -- 7,105 -- -- --
Cash dividend 193 -- -- -- -- -- --
</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 nine months ended September 30, 1996 represent revenues of
COMFORCE Telecom, revenues from Williams from the acquisition date of March
3, 1996 through September 30, 1996, revenues from RRA from the acquisition
date of May 10, 1996 through September 30, 1996, revenues from Force Five
from the effective date of acquisition of July 31, 1996 through September
30, 1996. Selected financial data of Lori's operations prior to its entry
into the technical
46
<PAGE>
staffing business for the nine months ended September 30, 1995 and for each
of the four years in the period ended December 31, 1994 has been
reclassified to discontinued operations.
(2) 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 the technical staffing services
business.
(3) The loss from discontinued operations for the year ended December 31,
1995 includes a charge to operations of $12,930,000 to write-off the
remaining goodwill of Lori's discontinued operations effective June 30,
1995 and a provision of $1,600,000 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
$10,800,000 representing a write-off of goodwill of New Dimensions
(formerly a subsidiary of Lori). The loss from discontinued operations
for the year ended December 31, 1992 includes charges to operations of
$8,664,000 representing an impairment of goodwill at December 31, 1992
and $8,500,000 representing increased reserves for markdown allowances
and inventory valuation.
(4) The 1995 and 1994 extraordinary credits represent gains from net
discharge of indebtedness under terms of Lori's debt settlement
agreement with its bank. The 1993 extraordinary credit represents a
gain from a net discharge of indebtedness due to the reorganization of
Lori's New Dimensions subsidiary. See Note 7 to the Company's
consolidated financial statements for the year ended December 31, 1995.
(5) As partial consideration for a debt settlement agreement, in December
1994 Lori's bank lender received all of the assets of Lori's former New
Dimensions subsidiary. See Note 7 to the Company's consolidated
financial statements for the year ended December 31, 1995.
(6) In conjunction with the COMFORCE Telecom acquisition, ARTRA, formerly
the parent of Lori, agreed to assume substantially all pre-existing
liabilities of the Company. During 1995, ARTRA received $399,000 of
advances from Lori. 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 cumulative preferred stock for
100,000 newly issued shares of the Company's Common Stock. During 1994,
ARTRA made net advances to Lori of $2,531,000. Effective December 29,
1994, ARTRA exchanged $2,242,000 of its notes and advances for
additional preferred stock of Lori. In February 1993, ARTRA transferred
all of its notes to Lori's capital account. See Notes 9 and 15 to the
Company's consolidated financial statements for the year ended December
31, 1995 and "Discontinued Operations."
ENVIRONMENTAL MATTERS
Prior to its entry into the jewelry business in 1985, the Company
operated in excess of 20 manufacturing facilities for the production of,
inter alia, photocopy machines, photographic chemical and paper coating.
These operations were sold or discontinued in the late 1970s and early
1980s. Certain of these facilities may have used and/or generated
hazardous materials and may have disposed of the hazardous substances,
particularly before the enactment of laws governing the safe disposal of
hazardous substances, at an indeterminable number of sites. Although the
controlling stockholders and current management had no involvement in such
prior manufacturing operations, the Company could be held to be responsible
for clean-up costs if any hazardous substances were deposited at these
manufacturing sites, or at off-site waste disposal locations, under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), or under other Federal or state environmental laws now or
hereafter enacted. However, except for the Gary, Indiana site described
below, the Company has not been notified by the Federal Environmental
Protection Agency (the "EPA") that it is a potentially responsible party
for, nor is the Company aware of having disposed of hazardous substances
at, any site.
47
<PAGE>
In December 1994, the Company was notified by the EPA that it is a
potentially responsible party under CERCLA for the disposal of hazardous
substances at a site in Gary, Indiana. The alleged disposal occurred in
the mid-1970s at a time when the Company conducted operations as APECO
Corporation (see "--History of Discontinued 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. The plaintiffs have estimated the cost of cleaning up this site
to be $45 million, and have offered to settle the case with the Company for
$991,445. This amount represents the plaintiffs' estimate of the Company's
pro rata share of the clean-up costs. The Company declined to accept this
settlement proposal, which was subsequently withdrawn.
The evidence produced by the plaintiffs to date is the testamentary
evidence of four former employees of a waste disposal company that
deposited wastes at the Gary, Indiana site identifying the Company as a
customer of such disposal company, and entries in such disposal company's
bookkeeping ledgers showing invoices to the Company. The Company, however,
has neither discovered any records which indicate, nor located any current
or former employees who have advised, that the Company deposited hazardous
substances at the site. Management and its counsel cannot state whether a
negative outcome is probable regarding the Company's potential liability at
this site.
Under the terms of the Assumption Agreement and a subsequent agreement
entered into between ARTRA and the Company, ARTRA has agreed to pay and
discharge substantially all of the Company's pre-existing liabilities and
obligations, including environmental liabilities at any sites at which the
Company allegedly operated facilities or disposed of hazardous substances,
whether or not the Company is currently identified as a potentially
responsible party therefor. Consequently, the Company is entitled to
indemnification from ARTRA for any environmental liabilities associated
with the Gary, Indiana site. In addition, ARTRA has deposited 50,000
shares of the Common Stock in escrow to satisfy any judgment adverse to the
Company or to pay any agreed upon settlement amount with respect to the
Gary, Indiana site. No assurance can, however, be given that proceeds from
the sale of the shares held in escrow will be sufficient to satisfy any
such judgment or pay any such settlement amount, or that ARTRA will
otherwise 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.
No assurance can, however, be given that proceeds from the sale of the
shares held in escrow will be sufficient to satisfy any adverse judgment or
pay any agreed upon settlement amount in connection with the Gary, Indiana
case, or that ARTRA will otherwise be financially capable of satisfying any
such judgment or settlement or its obligations with respect to any other
environmental liabilities.
TRANSACTIONS WITH ARTRA
ARTRA owns less than 20% of the Company's issued and outstanding Common
Stock after reflecting the Recent Transactions. ARTRA first acquired an
interest in the Company in August 1982. As of October 6, 1995 (immediately
prior to the issuance of stock to the Designated Individuals), ARTRA held
an approximately 63% interest in the Company, and held 9,701 shares of
Series C Preferred Stock (representing all of the then issued and
outstanding Preferred Stock of the Company). In order to facilitate the
COMFORCE Telecom acquisition, ARTRA agreed to exchange all of the Series C
Preferred Stock of the Company then held by it (9,701 shares) for 100,000
shares of the Company's Common Stock. The liquidation value of the Series
C Preferred Stock was $19.5 million in the aggregate as of the effective
date of the exchange, December 15, 1995. The closing price of the
Company's Common Stock on the American Stock Exchange on October 17, 1995,
the date of the closing of the COMFORCE Telecom acquisition, was $4.50.
Based on this price, the shares awarded to ARTRA had a value of $450,000.
Lori made advances to ARTRA of $399,000 in 1995 and $54,000 in 1996. In
the first quarter of 1996, ARTRA repaid these advances. In August 1994,
ARTRA entered into a $1,850,000 short-term loan agreement with a non-
affiliated corporation, the proceeds of which were advanced to Lori and
used to fund amounts due Lori's bank. The loan, due June 30, 1995, was
collateralized by 100,000 shares of Common Stock. In August 1995, these
shares were transferred to the lender in consideration of extending the
loan, and the carrying value of these 100,000 shares ($700,000) was
transferred to ARTRA as reduction of amounts then due to ARTRA by Lori. In
1995, ARTRA
48
<PAGE>
provided certain financial, accounting and administrative services for
Lori's corporate entity. During 1995, the fees for these services
amounted to $91,000. These obligations have been fully discharged.
See "Discontinued Operations -- History of Discontinued Operations" for a
description of the Assumption Agreement entered into between the Company
and ARTRA.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares and percentage of
Common Stock beneficially owned as of January 30, 1997 by (i) each person
who is known by the Company to own beneficially more than 5% of the shares
of Common Stock, (ii) each director and executive officer of the Company,
(iii) all directors and executive officers of the Company as a group (seven
persons). Unless stated otherwise, each person so named exercises sole
voting and investment power as to the shares of Common Stock so indicated.
None of the officers or directors own any shares of the outstanding Series
F Preferred Stock. There were 12,764,934 shares of Common Stock issued
and outstanding as of January 30, 1997.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED/(1)/ BENEFICIALLY OWNED/(1)/
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Management:
Michael Ferrentino/(2)/ 2,503,012 19.3%
2001 Marcus Avenue
Lake Success, New York 11042
Christopher P. Franco/(3)/ 1,112,294 8.7%
2001 Marcus Avenue
Lake Success, New York 11042
Andrew Reiben/(4)/ 10,000 *
Paul Grillo -- --
Dr. Glen Miller 10,000 *
Richard Barber 10,000 *
Keith Goldberg 10,000 *
Directors, director designees
and officers as a group
((7) persons)/(5)/ 2,655,512 20.2%
Other Significant Stockholders:
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C>
ARTRA GROUP Incorporated 1,969,703 15.5%
500 Central Avenue/(6)(7)/
Northfield, Illinois 60093
James L. Paterek/(8)/ 1,947,572 15.0%
2001 Marcus Avenue
Lake Success, New York 11042
Cypress Partners L.P./(9)/ 730,000 5.7%
P.O. Box 71289
Atlantic Richfield Plaza Station
Los Angeles, California 90071
Dobbins Partners, L.P./(10)/ 714,215 5.6%
2651 North Harwood
Suite 500
Dallas, Texas 75201
Manufacturers Indemnity and
Insurance Company of America/(11)/ 1,212,876 9.3%
5775 Flat Iron Parkway
No. 205
Boulder, Colorado 80301
Infinity Investors Ltd. 800,004 6.2%
27 Wellington Road
Cork, Ireland/2/
</TABLE>
_______________________
(1) For purposes of this table, shares are considered
"beneficially owned" if the person directly or indirectly has the sole or
shared power to vote or direct the voting of the securities or the sole or
shared power to dispose of or direct the disposition of the securities. A
person is also considered to beneficially own shares that such person has
the right to acquire within 60 days, and options exercisable within such
period are referred to herein as "currently exercisable."
(2) The shares beneficially owned by Mr. Ferrentino, the
President and a Director of the Company, include (i) 999,794 shares
currently held of record by him, (ii) 281,250 shares issuable to him upon
exercise of an option at an exercise price of $6.75 per share, (iii)
999,794 shares held of record by Christopher P. Franco which are subject to
a voting agreement among him, Mr. Ferrentino, and Kevin W. Kiernan, a Vice
President of COMFORCE Telecom, under which Mr. Ferrentino has voting power
(the "Voting Agreement"), and (iv) 222,174 shares held of record by Mr.
Kiernan which are subject to the Voting Agreement.
(3) The shares beneficially owned by Mr. Franco, the Executive
Vice President and Secretary of the Company, include (i) 999,794 shares
currently held of record by him and (ii) 112,500 shares issuable to him
upon exercise of an option of an exercise price of $6.75 per share.
(4) The shares beneficially owned by Mr. Reiben, the Chief
Accounting Officer and Corporate Controller of the Company, are shares
issuable upon the exercise of an option at an exercise price of $7.00 per
share.
(5) The shares shown to be beneficially owned by the directors
and officers as a group include (i) 1,999,558 shares held of record by
them, (ii) 222,174 shares held of record by Mr. Kiernan (under which Mr.
Ferrentino has voting power), (iii) 10,000 shares issuable upon the
exercise of an option at an exercise price of $7.00 per share and (iv)
423,750 shares issuable upon the exercise of an option at an exercise
price of $6.75 per share.
(6) John Harvey and Peter R. Harvey, each of whom formerly
served as an officer and director of the Company, control the management
and operations of ARTRA, which indirectly owns 15.5% of the Company's
common stock. Insofar as each is deemed to be a beneficial owner of the
Company's shares owned of record in each
51
<PAGE>
case by ARTRA, Peter R. Harvey owns 2,164,536 shares (17.0%) of the
Company's Common Stock and John Harvey owns 2,045,036 shares (16.0%) of the
Company's Common Stock. Each such person maintains a business address at
500 Central Avenue, Northfield, Illinois 60093.
(7) ARTRA, a Delaware corporation, presently owns 200,000 shares
of record in its name and 1,769,703 shares of record through a wholly-owned
subsidiary, Fill-Mor Holding, Inc. ("Fill-Mor")(hereinafter all holdings of
Fill-Mor are referred to as ARTRA's).
(8) The shares beneficially owned by Mr. Paterek include (i)
1,666,322 shares currently held of record by him and (ii) 281,250 shares
issuable to him upon exercise of an option at an exercise price of $6.75
per share.
(9) The shares beneficially owned by Cypress Partners L.P.
include (i) 620,000 shares held of record by it and (ii) 110,000 shares
held of record by Cypress International Partners Limited, an affiliate of
Cypress Partners L.P.
(10) The shares beneficially owned by Dobbins Partners L.P.
consist of 489,215 shares held of record by Dobbins and 225,000 shares
issuable upon the exercise of a warrant held by it.
(11) The shares beneficially owned by Manufacturers Indemnity
and Insurance Company of America ("MIICA") consist of (i) 927,876 shares
held of record by MIICA and (ii) 285,000 shares issuable upon the exercise
of a warrant held by MIICA.
(12) The shares beneficially owned by Infinity Investors Ltd.
consist of (i) 644,286 shares held of record by Infinity Investors Ltd. and
(ii) 155,884 shares issuable upon the exercise of a warrant held by
Infinity Investors.
52
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
shares of Common Stock held by, or issuable upon the exercise of warrants
or the conversion of Preferred Stock of the Company, to the persons
offering shares pursuant to this Prospectus ("Selling Stockholders"). In
cases where the Selling Stockholder serves or has served within the past
three years as an officer, director or employee of the Company or any of
its subsidiaries, this relationship is noted. Because the Selling
Stockholders may offer all or some part of the Common Stock that they hold
pursuant to the offering contemplated by this Prospectus, and because this
offering is not being underwritten (on a firm commitment or any other
basis), no estimate can be given as to the amount of Common Stock that will
be held by Selling Stockholders upon termination of this offering.
Michael Ferrentino, President and a Director of the Company,
Christopher P. Franco, the Executive Vice President and Secretary of the
Company, James L. Paterek and Kevin W. Kiernan, a Vice President of
COMFORCE Telecom, collectively are registering 3,888,084 shares hereby.
Such individuals have advised the Company that they will agree not to sell
any such shares for at least 180 days from the effective date of the
Registration Statement of which this Prospectus is a part.
NUMBER OF SHARES SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERED
HEREBY
Arabella S.A. (1) 25,000 25,000
Avalon Corporation (2) 109,808 109,808
Charles E. Balis (1) 4,066 4,066
Robert Barker (1) 75,000 75,000
William Belzberg (3) 45,000 45,000
Ann W. Bensen (4) 10,000 10,000
Reed Berkey (4)(54) 11,250 11,250
Belmad Enterprises, L.P. (1) 112,500 112,500
Boeckman Investments (5) 55,882 55,882
Salvatore Bova (4) 5,000 5,000
John Bramsen (6)(52) 45,000 45,000
Elliott Broidy (7)(53) 30,000 30,000
Kenneth Buchanan (4)(53) 22,500 22,500
Luke Buse & Brent D. Richardson 40,000 40,000
JTWROS (4)
Callaway, an Arizona Partnership (4) 15,000 15,000
Estate of Sanders H. Campbell (4) 40,000 40,000
Woodrow Chamberlain (8)(52) 56,250 56,250
Charles J. Christian (9)(52) 13,500 13,500
53
<PAGE>
NUMBER OF SHARES SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERED
HEREBY
Matthew D. Coleman (1) 4,066 4,066
Howard Conant (10)(52) 210,000 210,000
Cypress Int'l Partners Ltd. (7)(53) 110,000 110,000
Cypress Partners L.P. (7)(53) 620,000 620,000
James L. Davis (4) 15,000 15,000
Delaware Charter Guarantee & Trust 10,000 10,000
Company, Cust. fbo Mark S. Howells
SEP/IRA (4)
Delaware Charter Guarantee & Trust 16,000 16,000
Company, Cust fbo Jeffrey J. Puglisi
SEP/IRA (4)
Delaware Charter Guarantee & Trust 1,500 1,500
Company, Cust. fbo Irving M.Rollingher
SEP/IRA (4)
Delta Traders (4) 60,000 60,000
Dan T. Doerge (1) 6,750 6,750
David J. Doerge Trust (11)(52) 74,997 74,997
Dobbins Partners, L.P. (12) 714,215 714,215
Mark Dorian (13)(52) 45,000 45,000
Michael F. Dura (4) 5,000 5,000
Empire Metals Profit Sharing Plan (4) 5,000 5,000
Stephen N. Engberg Associates Pension Plan 45,000 45,000
and Trust (14)(52)
Fairway Capital Ltd. (15) (A) 79,538 79,538
Michael Ferrentino (16) 999,794 999,794
Christopher P. Franco (16) 999,794 999,794
William A. Franke (4) 15,000 15,000
David Furth (7)(53) 4,000 4,000
Gifford Fund Ltd. (17) 63,796 63,796
Matthew A. Gohd (18)(54) 59,214 59,214
Matthew A. Gohd & Frann Setzer-Gohd (7) 13,400 13,400
G.P.S. Fund Ltd. (17) 4,557 4,557
54
<PAGE>
NUMBER OF SHARES SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERED
HEREBY
Howard Grafman (19)(52) 22,500 22,500
Thomas Gries (20)(52) 11,250 11,250
Clark Gunderson (21)(54) 35,000 35,000
Peter Harvey (1) 150,000 150,000
Parris H. Holmes, Jr. (4) 10,000 10,000
Mark S. Howells (4) 9,000 9,000
Infinity Investors, Ltd. (15) (B) 800,004 800,004
Irvine Capital Partners (4) 20,000 20,000
JMG Capital Partners (17) 91,137 91,137
Robert Jones (22)(54) 48,200 48,200
S. Houston Jones II (1) 1,000 1,000
Anna Gambrelle Jones (1) 1,000 1,000
Genin Quinn Jones (1) 1,000 1,000
Robert G. Jones (1) 1,000 1,000
Cynthia McGee (1) 300 300
Kevin Kiernan (16) 222,174 222,174
KFT Ltd. (4) 5,000 5,000
Thomas E. Kigin (23)(52) 22,500 22,500
Patrick Koo (24)(54) 70,000 70,000
Stephen M. Levy, FBO (25) 5,000 5,000
David J. Lewittes (1) 4,066 4,066
Levy S.D. (26) 10,000 10,000
Maynard Louis (27) 10,000 10,000
Philip P. Lovell (4) 10,000 10,000
Philip P. Lovell Pension Plan (4) 15,000 15,000
C.G.E. Manolovici (7)(53) 20,000 20,000
Manufacturers Indemnity and Insurance 1,212,876 1,212,876
Company of America (28)
James McGill (29)(52) 22,500 22,500
55
<PAGE>
NUMBER OF SHARES SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERED
HEREBY
Johanna McGill (30)(52) 22,500 22,500
MSAM Partners (31) 10,000 10,000
John and Else Muehlstein (32)(52) 13,500 13,500
James L. Paterek (16) 1,666,322 1,666,322
Robert C. Pearson & Nancy L. Pearson 5,000 5,000
JTWROS (4)
Porpoise Fund (33) 49,999 49,999
Porpoise Investors I, L.P. (7)(53) 26,700 26,700
Pro Futures Special Equities Fund, L.P. (17) 91,137 91,137
Jeffrey J. Puglisi (4) 50,000 50,000
Ray Rashkin (34) 12,500 12,500
Stanley Rashkin (34) 100,000 100,000
Charles Reeder (35)(52) 90,000 90,000
Julia L. Reynolds Trust #2 (36)(52) 22,500 22,500
Evan D. Ritchie Living Trust (37)(52) 22,500 22,500
Irving M. Rollingher (4) 8,500 8,500
Rubenstein Family Ltd. Partnership #1 (4) 15,000 15,000
Byron H. Rubin (4) 20,000 20,000
Gerald Rubin (4) 70,000 70,000
Jay Rubin (4) 20,000 20,000
Seymour Sacks & Star Sacks JTWROS (4) 5,000 5,000
John M. Schottenstein Revocable Trust (4) 7,500 7,500
Seacrest Capital Limited (15) (C) 129,350 129,350
Michael Dain Searle (38)(52) 13,500 13,500
Martha Seelbach (39)(52) 6,750 6,750
Aaron M. Shenkman & Cynthia Shenkman 20,000 20,000
JTWROS (4)
Norman F. Siegel (40) 66,667 66,667
Paul Smeets (41)(52) 45,000 45,000
Lillian D. Snow (4) 10,000 10,000
56
<PAGE>
NUMBER OF SHARES SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERED
HEREBY
Jim Sowell Construction Co., Inc. (4) 20,000 20,000
John C. Stacey, DDC, SC, Pension Plan (4) 10,000 10,000
A. E. Staley III Trust (42)(52) 45,000 45,000
Henry M. Staley Trust (43)(52) 51,300 51,300
Robert C. Staley Trust (44)(52) 22,500 22,500
STK&K Profit Sharing Plan & Trust (4) 5,000 5,000
Avery Stone Trust (45)(52) 27,000 27,000
Shephard C. Swift Trust (46)(52) 45,000 45,000
Michael Targoff (1) 41,765 41,765
Michael Targoff Family Foundation (1) 11,765 11,765
E. B. Tarrson (47)(52) 45,000 45,000
Ronald Tarrson (48)(52) 45,000 45,000
Steve Tarrson (49)(52) 45,000 45,000
Christiane L. Turner (7)(53) 3,000 3,000
Marc Werner (1) 100,000 100,000
Michael Werner (7)(53) 30,000 30,000
Ronald Werner (7)(53) 30,000 30,000
Westminster Capital (50)(52) 15,000 15,000
Whitney Holdings Incorporated (1) 75,000 75,000
Whittier Ventures L.L.C. (17) 45,568 45,568
Diane Wilson (51)(52) 9,450 9,450
Timothy Wright (4) 6,000 6,000
Jack Zerelli & Ray Ann Zerelli JTWROS (4) 5,000 5,000
Robert Calabrese (55) 5,000 5,000
Michael Laundrie (56) 35,000 35,000
Millison Investment Management (57) 16,250 16,250
---------- ----------
Total 11,096,157 11,096,157
- ----------------------------
(1) The shares offered by the named stockholder are owned of record by
the stockholder.
(2) The shares offered by Avalon Corporation are owned of record and
were transferred to it by the David J. Doerge Trust.
(3) The shares offered by William Belzberg are (i) 30,000 shares owned
of record and (ii) 15,000 shares issuable to him upon the exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
57
<PAGE>
(4) The shares offered by the named stockholder are shares issuable to
the stockholder upon conversion of Series D Preferred Stock held by the
stockholder, such Series D Preferred Stock convertible at a ratio of 83.33
shares of Common Stock for each share of convertible Series D Preferred
Stock pursuant to an offering under Regulation D in April and May 1996.
(5) The shares offered by Boeckman Investments are (i) 16,667 shares
issuable to it upon its exercise of a warrant at an exercise price of
$3.375 per share, which warrant expires October 17, 2000, and (ii) 39,215
shares owned of record by it.
(6) The shares offered by John Bramsen are (i) 30,000 shares owned of
record and (ii) 15,000 shares issuable to him upon the exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires on
June 1, 2001.
(7) The shares offered by the named stockholder are shares issued to
the stockholder upon the automatic conversion of Series E Convertible
Preferred Stock held by the stockholder as of October 28, 1996 at a ratio
of 100 shares of Common Stock for each share of Series E Preferred Stock.
(8) The shares offered by Woodrow Chamberlain are (i) 37,500 shares
owned of record and (ii) 18,750 shares issuable to him upon his exercise of
a warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
(9) The shares offered by Charles J. Christian are (i) 9,000 shares
owned of record and (ii) 4,500 shares issuable to him upon the exercise of
a warrant at an exercise price of $3.375 per share, which warrant expires
on June 1, 2001.
(10) The shares offered by Howard Conant are (i) 30,000 shares
issuable to him upon his exercise of a warrant at an exercise price of
$2.00 per share, which warrant expires September 11, 2000, (ii) 50,000
shares issuable to him upon his exercise of a warrant at an exercise price
of $3.375 per share, which warrant expires October 17, 2000, and (iii)
130,000 shares owned of record by him.
(11) The shares offered by David J. Doerge Trust are (i) 15,881 shares
owned of record and (ii) 70,666 shares issuable to it upon its exercise of
a warrant at an exercise price of $3.375 per share, which warrant expires
on June 1, 2001.
(12) The shares offered by Dobbins Partners, L.P. are (i) 225,000
shares issuable to it upon its exercise of a warrant at an exercise price
of $3.375 per share, which warrant expires October 17, 2000, and (ii)
489,215 shares owned of record by it.
(13) The shares offered by Mark Dorian are (i) 30,000 shares owned of
record and (ii) 15,000 shares issuable to him upon his exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires on
June 1, 2001.
(14) The shares offered by Stephen N. Engberg Associates Pension Plan
and Trust are (i) 30,000 shares owned of record and (ii) 15,000 shares
issuable to him upon his exercise of a warrant at an exercise price of
$3.375 per share, which warrant expires on June 1, 2001.
(15) (A) The shares offered by Fairway Capital Ltd. are (i) 65,780
shares owned of record and (ii) 13,758 shares issuable to it upon exercise
of a warrant at $19.00 per share, which warrant expires on December 26,
1999.
(15) (B) The shares offered by Infinity Investors, Ltd. are (i)
644,120 shares owned of record, (ii) 155,884 shares issuable to it upon
exercise of warrants at $19.00 per share, which warrants expire on December
26, 1999 the named stockholder are owned of record by such stockholder.
(15) (C) The shares offered by Seacrest Capital Limited are (i)
110,000 shares owned of record and (ii) 29,250 shares issuable to it upon
exercise of a warrant at $19.00 per share, which warrant expires on
December 26, 1999.
(16) The shares offered by the named stockholder are shares owned of
record by the stockholder. The shares were issued to the named stockholder
in consideration for agreeing to direct the Company's entry into the
technical staffing business. James L. Paterek is Principal Consultant to
to the Company, Michael Ferrentino is the
58
<PAGE>
President of the Company, Christopher Franco is the Executive Vice
President and Secretary of the Company, and Kevin Kiernan is Vice President
of COMFORCE Telecom.
(17) The shares offered by the named stockholder are shares issuable
upon conversion of Series F Preferred Stock held by the stockholder,
convertible into such number of shares of Common Stock determined by
dividing $1,000 plus all accrued, unpaid dividends thereon by the per share
conversion rate, which for purposes of this disclosure we have assumed to
be equal to $10.97 per share, representing 77% of the closing price of the
Company's Common Stock on December 31, 1996. See "Description of the
Company's Securities -- Preferred Stock."
(18) The shares offered by Matthew Gohd are (i) 6,666 shares issuable
to him upon his exercise of a warrant at an exercise price of $3.375 per
share, which warrant expires October 17, 2000, (ii) 33,333 shares issuable
to him for payment of service and (iii) 19,215 shares owned of record by
him.
(19) The shares offered by Howard Grafman are (i) 15,000 shares owned
of record and (ii) 7,500 shares issuable to him upon his exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
(20) The shares offered by Thomas Gries are (i) 7,500 shares owned of
record and (ii) 3,750 shares issuable to him upon his exercise of a warrant
at an exercise price of $3.375 per share, which warrant expires June 1,
2001.
(21) The shares offered by Clark Gunderson are (i) 10,000 shares
issuable to him upon his exercise of a warrant at an exercise price of
$2.00 per share, which warrant expires August 30, 2000 and (ii) 25,000
shares to be issued to him for conversion of a note in the amount of
$50,000 at a price per share of $2.00.
(22) The shares offered by Robert Jones are (i) 15,000 shares issuable
to him upon his exercise of a warrant at an exercise price of $2.00 per
share, which warrant expires August 30, 2000, and (ii) 33,200 shares owned
of record.
(23) The shares offered by Thomas E. Kigin are (i) 15,000 shares owned
of record and (ii) 7,500 shares issuable to him upon his exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
(24) The shares offered by Patrick Koo are (i) 20,000 shares issuable
to him upon his exercise of a warrant at an exercise price of $2.00 per
share, which warrant expires October 3, 2000, and (ii) 50,000 shares to be
issued to him for conversion of a note in the amount of $100,000 at a price
per share of $2.00.
(25) The shares offered by Stephen M. Levy are 5,000 shares issuable
to it upon its exercise of a warrant at an exercise price of $2.00 per
share, which warrant expires September 12, 2000.
(26) The shares offered by Levy S.D. are 10,000 shares usable to it
upon its exercise of a warrant at an exercise price of $2.00 per share,
which warrant expires September 12, 2000.
(27) The shares offered by Maynard Louis are 5,000 shares issuable to
him upon his exercise of a warrant at an exercise price of $2.00 per share,
which warrant expires September 11, 2000 and 5,000 shares owned of record.
(28) The shares offered by Manufacturers Indemnity and Insurance
Company of America are (i) 174,000 shares issuable to it upon its exercise
of a supplemental warrant at an exercise price of $9.00 per share, (ii)
927,876 shares held of record by it, and (iii) 111,111 shares issuable to
it upon exercise of a supplemental warrant at an excerise price of $13.25
per share.
(29) The shares offered by James McGill are (i) 15,000 shares owned of
record and (ii) 7,500 shares issuable to him upon his exercise of a warrant
at an exercise price of $3.375 per share, which warrant expires June 1,
2001.
(30) The shares offered by Johanna McGill are (i) 15,000 shares owned
of record and (ii) 7,500 shares issuable to her upon her exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
59
<PAGE>
(31) The shares offered by MSAM Partners are 10,000 shares issuable to
it upon its exercise of a warrant at an exercise price of $2.062 per share,
which warrant expires July 16, 2000.
(32) The shares offered by John and Else Muehstein are (i) 9,000
shares owed of record and (ii) 4,500 shares issuable to them upon the
exercise of a warrant at an exercise price of $3.375 per share, which
warrant expires on June 1, 2001.
(33) The shares offered by Porpoise Fund are (i) 26,666 shares
issuable to it upon its exercise of a warrant at an exercise price of
$3.375 per share, which warrant expires October 17, 2000 and (ii) 23,333
shares owned of record by it.
(34) The shares offered by the named stockholder are shares issuable
to the stockholder upon the exercise of an option at $7.375 per share,
which option expires May, 2006.
(35) The shares offered by Charles Reeder are (i) 60,000 shares owned
of record and (ii) 30,000 shares issuable to her upon her exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
(36) The shares offered by Julia L. Reynolds Trust #2 are (i) 15,000
shares owned of record and (ii) 7,500 shares issuable to it upon its
exercise of a warrant at an exercise price of $3.375 per share, which
warrant expires June 1, 2001.
(37) The shares offered by Evan D. Ritchie Living Trust are (i) 15,000
shares owned of record and (ii) 7,500 shares issuable to it upon its
exercise of a warrant at an exercise price of $3.375 per share, which
warrant expires June 1, 2001.
(38) The shares offered by Michael Dain Searle are (i) 9,000 shares
owned of record and (ii) 4,500 shares issuable to him upon the exercise
price of $3.375 per share, which warrant expires on June 1, 2001.
(39) The shares offered by Martha Seelbach are (i) 2,250 shares owned
of record by her, and (ii) 4,500 shares issuable to her upon her exercise
of a warrant at an exercise price of $3.375 per share, which warrant
expires June 1, 2001.
(40) The shares offered by Norman F. Siegel are (i) 40,000 shares held
of record by him and (ii) 16,667 shares issuable to him upon his exercise
of a supplemental warrant at an exercise price of $9.00 per share.
(41) The shares offered by Paul Smeets are (i) 30,000 shares owned of
record and (ii) 15,000 shares issuable to him upon his exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
(42) The shares offered by A.E. Staley III Trust are (i) 30,000 shares
owned of record and (ii) 15,000 shares issuable upon the exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
(43) The shares offered by Henry M. Staley Trust are (i) 30,000 shares
owned of record and (ii) 17,100 shares issuable upon the exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
(44) The shares offered by Robert C. Staley Trust are (i)15,000 shares
owned of record and (ii) 7,500 share issuable upon the exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
(45) The shares offered by Avery Stone Trust are (i) 18,000 shares
owned of record and (ii) 9,000 shares issuable upon the exercise of a
warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
(46) The shares offered by Shepard C. Swift Trust are (i) 30,000
shares owned of record and (ii) 15,000 shares issuable upon the exercise of
a warrant at an exercise price of $3.375 per share, which warrant expires
June 1, 2001.
60
<PAGE>
(47) The shares offered by E.B. Tarrson are (i) 30,000 shares owned of
record and (ii) 15,000 shares issuable upon the exercise of a warrant at an
exercise price of $3.375 per share, which warrant expires June 1, 2001.
(48) The shares offered by Ronald Tarrson are (i) 30,000 shares owned
of record and (ii) 15,000 shares issuable upon the exercise of a warrant at
an exercise price of $3.375 per share, which warrant expires June 1, 2001.
(49) The shares offered by Steve Tarrson are (i) 30,000 shares owned
of record and (ii) 15,000 shares issuable upon the exercise of a warrant at
an exercise price of $3.375 per share, which warrant expires June 1, 2001.
(50) The shares offered by Westminster Capital are 15,000 shares
issuable upon the exercise of a warrant at an exercise price of $3.375 per
share.
(51) The shares offered by Diane Wilson are (i) 6,300 shares issuable
to her upon her exercise of a warrant at an exercise price of $3.375 per
share, which warrant expires June 1, 2001, and (ii) 5,166 shares owned of
record by her.
(52) These shares were offered pursuant to a private placement during
October and November 1995.
(53) These shares were offered in connection with the sale of Series E
Preferred Stock pursuant to an offering under Regulation D in April and May
1996.
(54) The warrant or convertible note, as applicable, was issued in
connection with extension of credit to the Company during the period from
July through October 1995.
(55) The shares offered by Robert A. Calabrese are 5,000 shares owned
of record.
(56) The shares offered by Michael Laundrie are (i) 10,000 shares
issuable to him upon his exercise of a warrant at an exercise price of $2.00
per share, which warrant expires September 8, 2000, and (ii) 25,000 shares
owned of record.
(57) The shares offered by Millison Investment Management are 16,250
shares issuable to it upon the exercise of a warrant at an exercise price of
$4.00 per share.
PLAN OF DISTRIBUTION
The manner in which the Common Stock covered by this Prospectus is to
be distributed is set forth on the cover page hereof. Any sales effected
through securities brokers or dealers will be on an "agency" basis, unless
as a result of a privately negotiated transaction a broker or dealer enters
into an agreement with a Selling Stockholder to purchase shares for its own
account. At the date of this Prospectus, none of the Selling Stockholders
contemplate entering into such a contractual relationship with a broker or
dealer, although one or more of them may decide to do so in the future.
To comply with certain states' securities laws, if applicable, the
Common Stock will be sold in such states only through brokers or dealers.
In addition, in certain states the Common Stock may not be sold unless they
have been registered or qualify for sale in such states or an exemption
from registration or qualification is available and is complied with. From
time to time, to the extent required by the rules of the Securities and
Exchange Commission, the Company will distribute Prospectus Supplements.
The Selling Stockholders and any broker-dealers who participate in a
sale of their shares of Common Stock may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, and any
commissions received by them, and proceeds of any such sales as principal,
may be deemed to be underwriting discounts and commissions under the
Securities Act.
All expenses of the registration of Common Stock offered hereby,
estimated to be approximately $210,000, will be borne by the Company. As
and when the Company is required to update this Prospectus, it may incur
additional expenses in excess of this estimated amount. Normal commission
expenses and brokerage fees, as well as any applicable transfer taxes, are
payable individually by the Selling Stockholders.
Since the Selling Stockholders will be subject to the anti-
manipulation rules promulgated under the Exchange Act, including Rule 10b-
2, 10b-6 and 10b-7, in connection with transactions in the Common Stock
during the effectiveness of the Registration Statement of which this
Prospectus is a part, the Company advised the Selling Stockholders to
consult competent securities counsel prior to initiating any such
transaction. The Company will notify each Selling Stockholder of the
Commission's rules and, as a condition to agreeing to register the shares
of a Selling Stockholder, will require that such Selling Stockholder agree
to comply with such rules.
61
<PAGE>
The Company will not receive any proceeds from the sale of the Common
Shares offered hereby by the Selling Stockholders. However, insofar as the
holders of warrants to purchase shares of the Common Stock are expected to
exercise their warrants in order to sell the underlying shares (which are
registered hereby), the Company will receive the amount of the exercise
prices of any warrants so exercised. The Company cannot predict when or if
it will receive proceeds from the exercise of warrants, or the amount of
any such proceeds. The Company intends to use the proceeds, if any,
received from the exercise of warrants for working capital purposes.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed
upon for the Company by Doepken, Keevican &Weiss Professional Corporation,
Pittsburgh, Pennsylvania.
EXPERTS
The consolidated balance sheets of COMFORCE Corporation and
Subsidiaries as of December 31, 1994 and 1995 and September 30, 1996, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for each of the three years in the period
ended December 31, 1995 and for the nine month period ended September 30,
1996, the balance sheets of COMFORCE Telecom, Inc. (formerly COMFORCE
Global, Inc.) as of December 31, 1994 and September 30, 1995 and the
related statements of operations and retained earnings and cash flows for
the year ended December 31, 1994 and for the nine month period ended
September 30, 1995, the balance sheets of Williams Communication Services,
Inc. as of December 31, 1995 and March 3, 1996 and the related statements
of operations and retained earnings and cash flows for the year ended
December 31, 1995 and for the period January 1, 1996 through March 3, 1996,
the balance sheets of Force Five, Inc. as of December 31, 1995 and July 31,
1996 and the related statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1995 and for the period January
1, 1996 through July 31, 1996, the balance sheets of AZATAR Computer
Systems, Inc. as of November 30, 1995 and August 31, 1996 and the related
statements of operations and retained earnings and cash flows for the year
ended December 31, 1995 and for the nine month period ended August 31,
1996, the combined balance sheets of Continental Field Services Corporation
and Progressive Telecom, Inc. as of December 31, 1995 and September 30,
1996 and the related combined statements of income, changes in
shareholders' equity and cash flows for the year ended December 31, 1995
and for the nine month period ended September 30, 1996, and the combined
balance sheets of RRA, Inc., Project Staffing Support Team, Inc. and
DataTech Technical Services, Inc. as of May 10, 1996 and the related
combined statements of income, changes in shareholders' equity and cash
flows for the period January 1, 1996 through May 10, 1996 included in this
Prospectus, have been included herein in reliance on the report of Coopers
& Lybrand LLP, independent accountants, given on the authority of that firm
as experts in accounting and auditing.
The consolidated balance sheets of RRA Inc. and affiliates as of
December 31, 1994 and 1995, and the related combined statements of income,
changes in shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1995, included in this Prospectus, have
been incorporated herein in reliance on the report of Alexander & Devoley
P.C., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
The balance sheets of RHO Company Incorporated as of December 31, 1995
and September 30, 1996, and the related statements of income, changes in
shareholders' deficit and cash flows for the year ended December 31,
1995 and the nine month period ended September 30, 1996, included in this
Prospectus, have been incorporated herein in reliance on the report of
Arthur Andersen LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing. The statements of income
and cash flows of RHO Company Incorporated for the year ended December 31,
1994, included in this Prospectus, have been incorporated herein in
reliance on the report of Benson & McLaughlin, P.S., independent
accountants, given on the authority of that firm as experts in accounting
and auditing.
62
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission
(the "Commission"), in Washington, D.C., a Registration Statement on Form
S-1, together with all amendments and exhibits thereto (the "Registration
Statement") under the Securities Act, with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the Rules and Regulations of the Commission. Statements
made in the Prospectus as to the contents of any contract, agreement or
other document referred to are not necessarily complete; with respect to
each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. The Registration
Statement, including exhibits and schedules filed therewith, may be
inspected at the Commission's Public Reference Section, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048 and Suite 1400, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material may be obtained upon written request from the
Public Reference Section of the Commission at the address set forth above
upon payment of prescribed fees. The Commission also maintains a Web site
at "http://www.sec.gov" which contains reports, proxy statements and other
information regarding registrants that file electronically with the
Commission.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports,
proxy statements and other information with the Commission. Such reports,
proxy statements and other information may be inspected at the Public
Reference Section of the Commission or the Commission's regional offices at
the addresses set forth above or accessed through the Commission's Web site
identified above, and copies of such material may be obtained upon written
request from the Public Reference Section of the Commission upon payment of
prescribed fees.
The Common Stock of the Company is listed on the American Stock
Exchange and such reports, proxy material and other information are also
available for inspection at the American Stock Exchange, 86 Trinity Place,
New York, New York 10006.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PRO FORMA
Unaudited Pro Forma Financial Statements as of September 30, 1996 and
for the years ended December 31, 1994 and 1995 and for the nine
month periods ended September 30, 1995 and 1996...................... F-5
Unaudited Pro Forma Balance Sheets.............................. F-6
Unaudited Pro Forma Statements of Operations.................... F-7
Unaudited Pro Forma Notes to Pro Forma Financial Statements..... F-11
COMFORCE CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements as of September 30, 1996 (audited) and
for the nine month periods ended September 30, 1995 (unaudited) and 1996
(audited)
Report of Independent Accountants............................... F-15
Consolidated Balance Sheets..................................... F-16
Consolidated Statements of Operations........................... F-17
Consolidated Statements of Changes in Shareholders' Equity...... F-18
Consolidated Statements of Cash Flows........................... F-19
Notes to Consolidated Financial Statements...................... F-21
Consolidated Financial Statements as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995
Report of Independent Accountants............................... F-39
Consolidated Balance Sheets..................................... F-40
Consolidated Statements of Operations........................... F-42
Consolidated Statements of Changes in Shareholders' Equity...... F-43
Consolidated Statements of Cash Flows........................... F-44
Notes to Consolidated Financial Statements...................... F-46
Schedules:
II. Valuation and Qualifying Accounts........................ F-65
</TABLE>
F-1
<PAGE>
COMFORCE GLOBAL, INC. (NOW KNOWN AS COMFORCE TELECOM, INC.)
<TABLE>
<S> <C>
Financial Statements as of September 30, 1995 and for the nine month period
ended September 30, 1995 and as of December 31, 1994 and for the year then
ended
Report of Independent Accountants................................ F-67
Balance Sheets................................................... F-68
Statements of Operations and Retained Earnings
(accumulated deficit)
F-69
Statements of Cash Flows......................................... F-70
Notes to Financial Statements.................................... F-71
WILLIAMS COMMUNICATION SERVICES, INC.
Financial Statements as of March 3, 1996 and for the period January 1, 1996
to March 3, 1996 and as of December 31, 1995 and for the year then ended
Report of Independent Accountants................................ F-76
Balance Sheets................................................... F-77
Statements of Operations and Retained Earnings................... F-78
Statements of Cash Flows......................................... F-79
Notes to Financial Statements.................................... F-80
</TABLE>
F-2
<PAGE>
RRA, INC. AND AFFILIATES
<TABLE>
<S> <C>
Combined Financial Statements as of May 10, 1996 and for the period January
1, 1996 through May 10, 1996
Report of Independent Accountants................................ F-83
Combined Balance Sheet........................................... F-84
Combined Statement of Income..................................... F-85
Combined Statement of Changes in Shareholders' Equity............ F-86
Combined Statement of Cash Flows................................. F-87
Notes to Combined Financial Statements........................... F-88
Combined Financial Statements as of December 31, 1994 and 1995 and for each
of the three years for the period ended December 31, 1995
Report of Independent Accountants................................ F-95
Combined Balance Sheets.......................................... F-96
Combined Statements of Income.................................... F-97
Combined Statements of Changes in Shareholders' Equity........... F-99
Combined Statements of Cash Flows................................ F-100
Notes to Combined Financial Statements........................... F-102
FORCE FIVE, INC.
Financial Statements as of July 31, 1996 and for the period January 1, 1996
through July 31, 1996 and as of December 31, 1995 and for the year then
ended
Report of Independent Accountants................................ F-111
Balance Sheets................................................... F-112
Statements of Operations......................................... F-113
Statements of Stockholders' Equity............................... F-114
Statements of Cash Flows......................................... F-115
Notes to Financial Statements.................................... F-116
AZATAR COMPUTER SYSTEMS INC.
</TABLE>
F-3
<PAGE>
<TABLE>
<S> <C>
Financial Statements as of September 30, 1996 and for the nine month period
then ended and as
of December 31, 1995 and for the year then ended
Report of Independent Accountants................................ F-121
Balance Sheets................................................... F-122
Statements of Operations and Retained Earnings................... F-123
Statements of Cash Flows......................................... F-124
Notes to Financial Statements.................................... F-125
CONTINENTAL FIELD SERVICES CORPORATION AND PROGRESSIVE TELECOM, INC.
Financial Statements as of August 31, 1996 and for the nine month period
then ended and as of
November 30, 1995 and for the year then ended
Report of Independent Accountants................................ F-129
Combined Balance Sheets.......................................... F-130
Combined Statements of Income.................................... F-131
Combined Statements of Changes in Shareholders' Equity........... F-132
Conbined Statements of Cash Flows................................ F-133
Notes to Financial Statements.................................... F-134
RHO COMPANY, INC.
Financial Statements as of September 30, 1996 (audited) and for the nine
month periods ended September 30, 1996 (audited) and September 30, 1995
(unaudited) and as of December 31, 1995 and 1994 and for the years then
ended
Report of Independent Accountants................................ F-140
Balance Sheets................................................... F-142
Income Statements................................................ F-143
Statements of Changes in Shareholders' Deficit................... F-144
Statements of Cash Flows......................................... F-145
Notes to Financial Statements.................................... F-146
</TABLE>
Schedules other than those listed are omitted as they are not applicable or
required or equivalent information has been included in the financial
statements or notes thereto.
F-4
<PAGE>
COMFORCE Corporation and Subsidiaries
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements reflect (i) the
treatment of the operation of the Company's jewelry business prior to September
1995 as a discontinued operation and (ii) the acquisition of business operating
in the staffing industry, including COMFORCE Telecom, Inc. (for a purchase price
of 6.7 million) in 1995, the acquisitions of Williams Communications Services,
Inc. (for a purchase price of $2 million dollars and a contingent payout not to
exceed $2 million dollars), RRA, Inc. (for a purchase price of $5.1 million and
a contingent payout not to exceed $650,000), Force Five, Inc. (for a purchase
price of $2 million and contingent payouts not to exceed $2 million),
Continental Field Services Corp. (for a purchase price of $5 million and a
contingent payout not to exceed $1.02 million) and AZATAR Computer Systems,
Inc. (for a purchase price of $5.15 million and a contingent payout not to
exceed $1.2 million), completed in 1996, and the proposed acquisition of RHO
Company Incorporated (for a purchase price of $14.8 million and a contingent
payout not to exceed $3.3 million) as if such acquisitions had occurred on
January 1, 1994 (other than the unaudited pro forma balance sheet at September
30, 1996, which has been prepared as if all such acquisitions were consummated
as of such date and accounted for by the purchase method). Prior to its
acquisition by the Company, each of these acquired businesses operated as a
separate independent entity. Since the unaudited pro forma financial statements
set forth below show the combined financial condition and operating results of
these recently acquired businesses during periods when they were not under
common control or management, the information presented may not be indicative of
the results which would have actually been obtained had such acquisitions been
completed on the dates indicated, or of the Company's future financial or
operating results.
F-5
<PAGE>
Unaudited Pro Forma Balance Sheet
As Of September 30, 1996
<TABLE>
<CAPTION>
Current Assets: COMFORCE AZATAR Continental RHO Adjustments Pro Forma
-------- ------ ----------- ----- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents 952 739 476 69 672 B 2,908
Restricted cash and equivalents 50 394 444
Accounts receivable, net 10,081 1,502 1,611 8,362 (3,113) A 18,443
Prepaid expenses 86 8 60 377 531
Due from related party 322 (322) A --
Officer loans 367 367
Deferred income taxes 54 54
Other assets 325 328
-------- ------ ----------- ----- ----------- --------
Total current assets 11,915 2,571 2,150 9,202 (2,763) 23,075
-------- ------ ----------- ----- ----------- --------
Property and equipment, net of
accumulated depreciation 492 233 63 640 1,428
Intangible assets, net of
accumulated amortization 14,036 13 23,152 F 37,201
Mortgage receivable 331 (331) A --
Other assets 231 32 39 51 (71) A 282
-------- ------ ----------- ----- ----------- --------
Total assets 26,674 2,836 2,583 9,906 19,987 61,986
======== ====== =========== ===== =========== ========
Current liabilities:
Borrowings under revolving line
of credit 3,250 5,664 8,914
Current portion of long-term debt 395 (395) A --
Accounts payable 283 35 116 168 (151) A 451
Accrued expenses 2,785 23 171 553 (194) A 3,338
Accrued payroll and payroll taxes 119 143 2,090 (262) A 2,090
Income taxes 694 601 (601) A 694
Notes payable 13 (13) A --
Accrued interest 112 114 (226) A --
Liabilities to be assumed by ARTRA
GROUP Incorporated 350 350
-------- ------ ----------- ----- ----------- --------
Total current liabilities 7,362 890 443 8,984 (1,842) 15,837
-------- ------ ----------- ----- ----------- --------
Obligations to be settled by the
issuance of Common Stock 541 (541) C --
Deferred income tax 55 55
Long-term debt 9,360 (9,360) A --
Borrowings for the purchase of RHO 15,000 B 15,000
Commitments and contingencies
Stockholders equity:
Series E convertible preferred stock 1 (1) D --
Series D Senior convertible preferred
stock 1 1
Series F Senior convertible preferred
stock 1 B 1
Common Stock 98 1 37 50 (52) E 134
Additional paid-in capital 17,902 12,342 G 30,244
Other capital 2,180 (2,180) A --
Deferred stock option charge net (1,983) 1,983 A --
Retained earnings, since January 1,
1996 714 714
Retained earnings (deficit) 1,945 2,169 (8,685) 4,571 A --
Treasury stock (66) 66 A --
-------- ------ ----------- ----- ----------- --------
Total stockholders equity 18,716 1,946 2,140 (8,438) 16,730 31,094
-------- ------ ----------- ----- ----------- --------
Total liabilities and stockholders
equity 26,674 2,836 2,583 9,906 19,987 61,986
======== ====== =========== ===== =========== ========
</TABLE>
See notes to unaudited pro forma financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
COMFORCE CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996(2)
COMFORCE FORCE
Corporation* Williams* RRA* FIVE* RHO*
------------ -------- --------- ------ -----------
<S> <C> <C> <C> <C> <C>
Revenues $33,514 $657 $22,799 $4,589 $63,556
Cost of revenues 28,690 499 20,959 3,454 56,656
-------- -------- -------- -------- --------
Gross profit 4,824 158 1,840 1,144 6,900
Operating expenses:
Selling, general and administrative 2,891 64 1,375 1,274 5,321
Depreciation and amortization 343 1 34 14 226
-------- -------- -------- -------- --------
Income (loss) from operations 1,590 93 431 (144) 1,353
Other (income) expenses:
Other (29) 197
Interest 102 34 7 984
-------- -------- -------- -------- --------
73 - 34 7 1,181
-------- -------- -------- -------- --------
Income (loss) before income taxes 1,517 93 397 (151) 172
Provision (credit) for income taxes 610 39 - (49) -
-------- -------- -------- -------- --------
Net income (loss) 907 $54 $397 $(102) $172
======== ======== ======== ========
Dividends on preferred stock (193)
Dividends on Common Stock equivalents 18
--------
Income available for Common Stock $732
========
Income per share $0.06
========
Weighted average shares outstanding
and common stock equivalents 12,661
========
<CAPTION>
Pro Forma Pro
AZATAR*** Continental Adjustments(3) Forma
------------ ----------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues $5,781 $7,377 $138,282
Cost of revenues 4,619 6,259 121,136
-------- -------- -------- --------
Gross profit 1,162 1,118 17,146
Operating expenses:
Selling, general and administrative 555 802 12,282
Depreciation and amortization 25 13 558 1,214
-------- -------- -------- --------
Income (loss) from operations 582 303 (558) 3,650
Other (income) expenses:
Other (54) (23) 91
Interest 29 5 443 1,604
-------- -------- -------- --------
(25) (18) 443 1,695
-------- -------- -------- --------
Income (loss) before income taxes 607 321 (1,001) 1,955
Provision (credit) for income taxes 254 - 124 978
-------- -------- -------- --------
Net income (loss) $353 $321 $(1,125) 977
======== ======== ========
Dividends on preferred stock (323) (7)
Dividends on Common Stock equivalents 26
--------
Income available for Common Stock $ 680
========
Income per share $0.05
========
Weighted average shares outstanding 14,067 (6)
and common stock equivalents ========
</TABLE>
* The financial statements of these companies for the nine month period
ended September 30, 1996 have been audited by Coopers & Lybrand L.L.P.,
which financial statements are included in this Prospectus.
** The financial statements of this company for the nine month period ended
September 30, 1996 have been audited by Arthur Andersen L.L.P., which
financial statements are included in this Prospectus.
*** The financial statements of this company for the nine months ended August
31, 1996 have been audited by Coopers & Lybrand L.L.P., which financial
statements are included in this Prospectus.
See notes to unaudited pro forma financial statements
F-7
<PAGE>
<TABLE>
<CAPTION>
COMFORCE CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995(2)
COMFORCE COMFORCE
Corporation Telecom Williams RRA FORCE FIVE
----------- -------- -------- ------ ----------
<S> <C> <C> <C> <C> <C>
Revenues $9,007 $2,975 $37,441 $4,941
Cost of revenues 6,765 2,120 34,559 3,761
-------- -------- -------- -------- --------
Gross profit 2,242 855 2,882 1,180
Operating Expenses:
Selling, general and administrative 265 1,017 418 2,016 849
Depreciation and amortization 142 - 86 14
Non-recurring items:
Stock Compensation 3,000 (4)
Management fees to former parent
company 1,140 (5)
-------- -------- -------- -------- --------
Income (loss) from operations (3,265) (57) 437 780 317
Other (income) expenses:
Other (7) (36)
Interest expense 410 1 115 36
-------- -------- -------- -------- --------
410 (7) 1 115 -
-------- -------- -------- -------- --------
Income (loss) before income taxes (3,675) (50) 436 665 317
Provision (credit) for income taxes - 15 203 - 98
-------- -------- -------- -------- --------
Net income (loss) (3,675) $(65) $233 $665 $219
======== ======== ======== ========
Dividends on preferred stock -
--------
Income available for common stock $(3,675)
========
Loss per share from operations $(1.11)
========
Weighted average shares outstanding 3,321
========
<CAPTION>
Pro Forma Pro
RHO AZATAR Continental Adjustments(3) Forma
------------ ---------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $62,833 $5,071 $7,371 $129,639
Cost of revenues 56,481 4,196 6,098 113,980
-------- -------- -------- --------
Gross profit 6,352 875 1,273 15,659
Operating Expenses:
Selling, general and administrative 4,465 359 744 10,133
Depreciation and amortization 178 21 29 $725 1,195
Non-recurring items:
Stock Compensation 3,000
Management fees to former parent
company 1,140
-------- -------- -------- -------- --------
Income (loss) from operations 1,709 495 500 (725) 191
Other (income) expenses:
Other (30) (48) (121)
Interest expense 1,249 28 24 (428) 1,435
-------- -------- -------- -------- --------
1,249 (2) (24) (428) 1,314
-------- -------- -------- -------- --------
Income (loss) before income taxes 460 497 524 (297) (1,123)
Provision (credit) for income taxes - 201 - 317 834
-------- -------- -------- -------- --------
Net income (loss) $460 $296 $524 $(614) (1,957)
======== ======== ======== ========
Dividends on preferred stock (148)(7)
--------
Income available for common stock $(2,105)
========
Loss per share from operations $(0.22)
========
Weighted average shares outstanding 9,741 (6)
========
</TABLE>
See notes to unaudited pro forma financial statements
F-8
<PAGE>
<TABLE>
<CAPTION>
COMFORCE CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995(2)
COMFORCE COMFORCE
Corporation* Telecom* Williams* RRA*** FORCE FIVE*
------------ -------- --------- ------ -----------
<S> <C> <C> <C> <C> <C>
Revenues $2,387 $9,007 $4,178 $52,011 $7,067
Cost of revenues 1,818 6,765 3,022 47,830 5,287
-------- -------- -------- -------- --------
Gross profit 569 2,242 1,156 4,181 1,780
Operating expenses:
Selling, general and administrative 765 1,017 449 2,877 1,373
Depreciation and amortization 58 142 1 115 19
Non-recurring expenses:
Stock compensation 3,425 (4)
Management fees to former parent
company 1,140 (5)
-------- -------- -------- -------- --------
Income (loss) from operations (3,679) (57) 706 1,189 388
Other (income) expenses:
Other 33 (7) (42) (36)
Interest 585 175 48
-------- -------- -------- -------- --------
618 (7) - 133 12
-------- -------- -------- -------- --------
Income (loss) before income taxes (4,297) (50) 706 1,056 376
Provision (credit) for income taxes 35 15 354 - 120
-------- -------- -------- -------- --------
Net income (loss) $(4,332) $(65) $352 $1,056 $256
======== ======== ======== ========
Dividends on preferred stock 0
Income available for common stock $(4,332)
--------
Loss per share $(0.95)
========
Weighted average shares outstanding 4,596
========
<CAPTION>
Pro Forma Pro
RHO** AZATAR**** Continental* Adjustments(3) Forma
------------ ---------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $83,631 $7,071 $9,850 $175,202
Cost of revenues 74,978 5,578 8,125 153,493
-------- -------- -------- --------
Gross profit 8,653 1,493 1,635 21,709
Operating expenses:
Selling, general and administrative 6,283 571 1,126 14,461
Depreciation and amortization 227 28 39 989 1,618
Non-recurring expenses:
Stock compensation 3,425
Management fees to former parent
company 1,140
-------- -------- -------- -------- --------
Income (loss) from operations 2,143 894 470 (989) 1,065
Other (income) expenses:
Other (44) (80) (176)
Interest 1,643 40 60 179 2,730
-------- -------- -------- -------- --------
1,643 (4) (20) 179 2,554
-------- -------- -------- -------- --------
Income (loss) before income taxes 500 898 490 (1,168) (1,489)
Provision (credit) for income taxes - 363 - (54) 833
-------- -------- -------- -------- --------
Net income (loss) $500 $535 $490 $(1,114) (2,322)
======== ======== ======== ========
Dividends on preferred stock (197)(7)
--------
Income available for common stock (2,529)
========
Loss per share $(0.26)
========
Weighted average shares outstanding 9,876 (6)
========
</TABLE>
* The financial statements of these companies have been audited
for the periods referenced in footnote 2 by Coopers & Lybrand
L.L.P., which financial statements are included in this
Prospectus.
** The financial statements of this company for the year ended
December 31, 1995 have been audited by Arthur Andersen L.L.P.,
which financial statements are included in this Prospectus.
*** The financial statements of this company for the year ended
December 31, 1995 have been audited by Alexander & Devoley,
P.C., which financial statements are included in this
Prospectus.
**** The financial statements of this company for the year ended
November 30, 1995 have been audited by Coopers & Lybrand L.L.P.,
which financial statements are included in this Prospectus.
See notes to unaudited pro forma financial statements
F-9
<PAGE>
<TABLE>
<CAPTION>
COMFORCE CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994(2)
COMFORCE COMFORCE
Corporation* Telecom* Williams RRA*** FORCE FIVE
------------ -------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
Revenues $8,245 $2,930 $38,559 $3,234
Cost of revenues 6,417 2,107 35,601 2,485
-------- -------- -------- --------
Gross profit 1,828 823 2,958 749
Operating expenses:
Selling, general and administrative 966 959 582 2,156 625
Depreciation and amortization 175 15 133 5
Non-recurring charges:
Management fees to former parent
company 803 (4)
-------- -------- -------- -------- --------
(966) (109) 226 669 119
Income (loss) from operations
Other (income) expense (9) (25)
Interest expense 1,316 26 168 16
-------- -------- -------- -------- --------
1,316 (9) 26 143 16
-------- -------- -------- -------- --------
Income (loss) before income taxes (2,282) (100) 200 526 103
Provision (credit) for income taxes 15 78 - 48
-------- -------- -------- -------- --------
Net income (loss) (2,282) $(115) $122 $526 $55
======== ======== ======== ========
Dividends on preferred stock -
Dividends on common stock equivalents -
--------
$(2,282)
========
Income (loss) per share operations $(0.72)
========
Weighted average shares outstanding 3,195
========
<CAPTION>
Pro Forma Pro
RHO** AZATAR Continental Adjustments(3) Forma
------------ -------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $76,170 $4,923 $8,386 $142,447
Cost of revenues 69,157 3,982 7,181 126,930
-------- -------- -------- --------
Gross profit 7,013 941 1,205 15,517
Operating expenses:
Selling, general and administrative 5,066 423 1,347 12,124
Depreciation and amortization 200 24 74 967 1,593
Non-recurring charges:
Management fees to former parent
company 803
-------- -------- -------- -------- --------
1,747 494 (216) (967) 997
Income (loss) from operations
Other (income) expense (20) (74) (128)
Interest expense 1,435 39 3 460 3,463
-------- -------- -------- -------- --------
1,435 19 (71) 460 3,335
-------- -------- -------- -------- --------
Income (loss) before income taxes 312 475 (145) 1,427 (2,338)
Provision (credit) for income taxes - 242 - (383) -
-------- -------- -------- -------- --------
Net income (loss) $312 $233 $(145) $(1,044) $(2,338)
======== ======== ======== ========
Dividends on preferred stock (197) (7)
Dividends on common stock equivalents -
--------
$(2,535)
========
Income (loss) per share operations $ (0.26)
========
Weighted average shares outstanding 9,615 (6)
========
</TABLE>
* The financial statements of these companies for the year ended
December 31, 1994 have been audited by Coopers & Lybrand L.L.P.,
which financial statements are included in this Prospectus.
** The financial statements of this company for the year ended
December 31, 1994 have been audited by Benson & McLaughlin,
which financial statements are included in this Prospectus.
*** The financial statements of this company for the year ended
December 31, 1995, have been audited by Alexander & Devoley,
P.C., which financial statements are included in this
Prospectus.
See notes to unaudited pro forma financial statements
F-10
<PAGE>
COMFORCE Corporation
Notes to Unaudited Pro Forma Financial Statements
(1) The pro forma adjustments of the unaudited pro forma balance sheet consist
of:
(A) Record acquisition by AZATAR, Continental, and Rhotech and related
entries and the elimination of AZATAR, Continental and Rhotech assets and
liabilities not purchased or assumed. (B) Record proceeds from the debt
financing of 15,000,000, proceeds from the sale of 3,250 Shares of preferred
stock Series F, proceeds from the sale of 460,000 shares of common stock and
related payment right, and proceeds from the exercise of warrants amounting to
$7,142,000 less payments for the purchase of AZATAR, Continental, and Rhotech of
$20,255,000, and less cash not included as purchased assets of $1,215,000. The
Company is seeking to raise between $11.4 million to $17.0 million through the
private placement of debt instruments bearing interest at 8% per annum. Such
private placement of debt will require additional redemption premiums ranging
from 2.5% to 15% based upon, among other factors, the timing of the redemptions,
which premiums are not reflected in the unaudited pro from data presented. (C)
Record the settlement of obligations to be settled by the issuance of common
stock. (D) Record the conversion of 8,871 shares of Series E preferred stock to
887,100 shares of common stock. (E) To record the net change on common stock
outstanding. (F) to record the purchase price of AZATAR, Continental and RHO
over the nets assets acquired over intangibles, primarily goodwill. (G) to
record the transaction described in (A) through (D) above as follows: (i)
proceeds from the sale of Series F Preferred, sale of 460,000 shares of common
stock, and the issuance of 111,111 warrants, (ii) shares issued in connection
with the acquisition of AZATAR and Continental with values of $4,120,000 and
$575,000, respectively, (iii) value of shares issued to settle obligations to be
settled by common stock of $541,000 (iv) less par value of common or preferred
stock sold or issued upon conversion of Preferred Stock, or issued in settlement
of obligations equal to $27,000.
(2) The unaudited pro forma statements of operations include the statements of
operations for the companies listed for the periods prior to their
acquisition by COMFORCE. The unaudited pro forma statement of operations
for the period ended September 30, 1996 presents the financial statements
of COMFORCE, AZATAR, Continental and RHO for their respective 1996 nine
month periods and the results of operations for companies acquired during
the nine month period ended September 30, 1996 as follows: Williams
Communications Services, Inc. (Williams) (January 1 through March 3, 1996),
RRA, Inc. (RRA) (January 1 through May 10, 1996) and Force Five, Inc.,
(Force five) (January 1 through July 31, 1996). The financial statements
for the year ended December 31, 1995 includes the annual 1995 results of
operations of each entity, except for COMFORCE Telecom, Inc. which reflects
results of operations for the period January 1 through September 30, 1995
prior to its acquisition on October 16, 1995. The financial statements for
all companies for the nine month period ended September 30, 1995 and
year ended December 31, 1994 present the nine and twelve month results of
operations of the respective companies. All periods presented exclude the
revenues and expenses related to the jewelry business of COMFORCE which was
discontinued in September 1995. The pro forma results of operations are
presented as if these companies were acquired on January 1, 1994 and do not
purport to be an indication of the results of operation had these
acquisitions been made as of that date or of results which may occur in the
future.
(3) Pro forma adjustments include the following:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, December 31,
----------------- -----------------
1996 1995 1995 1994
(in thousands)
<S> <C> <C> <C> <C>
Additional amortization of intangibles (a) (558) (725) (989) (967)
(Increase) decrease in interest expense (b) (443) 428 (179) (460)
(Increase) decrease in provision for income taxes (c) (124) (317) (54) 383
---- ----- ----- ----
Total pro forma adjustments $(1,125) $(614) $(1,114) $(1,044)
</TABLE>
F-11
<PAGE>
(a) Amortization of intangibles assumes all of the acquisitions and proposed
acquisitions occurred on January 1, 1994. The table below reflects the
amortization of intangibles with lives ranging from 5 to 40 years:
Nine months ended Year ended
September 30, December 31,
----------------- --------------
1996 1995 1995 1994
---- ---- ---- ----
(in thousands)
Pro forma amortization
Telecom $ 182 $ 182 $ 243 $ 243
Williams 39 39 52 52
RRA 123 123 164 164
Force Five 39 39 52 52
Continental 94 94 125 125
AZATAR 97 97 129 129
RHO 277 277 370 370
Less: historical amortization (293) (126) (146) (168)
------ ----- ------ ------
Pro forma adjustment $ 558 $ 725 $ 989 $ 967
====== ===== ====== ======
(b) Interest expense relates to the elimination of interest expense on notes
and other liabilities assumed by ARTRA totaling $410,000 for September
and December 1995, the elimination of interest expense on debt due to
RHO shareholders which was not assumed, interest expense on the
$15,000,000 debt financing for RHO at an interest rate of 8%, interest
expense on the line of credit used to purchase Williams and Force Five
(assuming all $3,350,000 was outstanding for 1994 and 1995 at an interest
rate of 8.5%) and interest expense for 1996 on the line of credit used to
purchase Williams and Force Five (assuming that $3,350,000 was
outstanding from January 1, 1996 to March 3, 1996 and $1,450,000 was
outstanding from March 3, 1996 to July 31, 1996). The interest expense
eliminated in 1995 was for interest and notes directly related to The
Lori Corporation activities and was incurred in 1996. The Company is
seeking to raise between $11.4 million to $17.0 million through the
private placement of debt instruments bearing interest at 8% per annum.
Such private placement of debt will require additional redemption
premiums ranging from 2.5% to 15% based upon, among other factors, the
timing of the redemptions, which premiums are not reflected in the
unaudited pro forma data presented.
(c) The proforma adjustment for income taxes reflects the tax effect of the
proforma adjustment (excluding non-deductible amortization), the tax
effect of S Corporation earnings treated as C Corporation earnings and
the tax benefit of losses by other entities within the pro forma combined
group.
(4) 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 staffing business.
(5) Represent a non-recurring management fee paid by Telecom to its former
parent company prior to its acquisition by the Company.
F-12
<PAGE>
(6) Pro forma weighted average shares outstanding are calculated as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, December 31,
-------------- -------------
1996 1995 1995 1994
---- ---- ---- ----
(In thousands of shares)
<S> <C> <C> <C> <C>
Historical weighted average shares outstanding 12,900 3,321 4,596 3,195
Shares issued as compensation * 3,091 2,464 3,091
Shares issued-Telecom acquisition * 2,562 2,049 2,562
Shares issued-Force Five acquisition * 27 27 27
Shares issued-AZATAR acquisition 243 243 243 243
Shares issued-Continental acquisition 37 37 37 37
Common shares sold to fund Continental acquisition (a) 460 460 460 460
Common stock equivalents Series E preferred * ** ** **
Common stock equivalents on Series D and F Preferred Stock ** ** ** **
Warrants issued in connection with the Continental acquisition 111 ** ** **
Warrants issued in connection with the Telecom acquisition * ** ** **
Shares issued to certain shareholders * ** ** **
Contingent shares:
AZATAR (b) 84 ** ** **
RHO (c) 232 ** ** **
------ ------ ------ ------
TOTAL PRO FORMA SHARES 14,067 9,741 9,876 9,615
====== ====== ====== ======
</TABLE>
* Included in historical weighted average shares outstanding.
** Excluded as the effect would be anti-dilutive.
(a) In December 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 equal to
the amount, if any, by which $10.00 per share exceeds the average
closing bid price for the five trading days prior to a specified date
(not later than May 1, 1997).
(b) AZATAR's contingent purchase price of $1,200,000 is payable in stock at
a rate of $400,000 per year for a three year period, if certain earnings
criteria are met. The stock price is based on the average stock price
for the last ten days in each year such shares are earned. The per share
price at December 31, 1996 of $14.25 has been utilized to calculate
contingent shares for pro forma purposes. Such shares actually earned
may differ from these calculations.
(c) RHO's contingent purchase price of up to $3,300,000 is payable in stock
if certain earnings criteria are being met. The conversion price to
calculate shares to be issued is based upon the price of the Company's
common stock at the closing of the acquisition. The per share price at
December 31, 1996 of $14.25 has been utilized to calculate contingent
shares for pro forma purposes. Such shares actually earned and the price
per share may differ from this calculation.
(7) The following summarizes the pro forma dividends on Preferred Stock
<TABLE>
<CAPTION>
Nine Months ended Year Ended
September 30, December 31,
1996 1995 1995 1994
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Series D Preferred Stock 175 * * *
Series E Preferred Stock 26 26 35 35
Series F Preferred Stock (a) 122 122 162 162
---- ---- ---- ----
323 148 197 197
==== ==== ==== ====
</TABLE>
(a) Certain discounts upon conversion of Series F Preferred Stock aggregating
approximately $665,000 will be recorded as an additional dividend attributable
to holders of Preferred Stock in the fourth quarter of 1996.
* Series D not deemed issued in prior periods as proceeds were utilized in
1996 for working capital requirements.
F-13
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996
F-14
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of Comforce
Corporation, Inc.:
We have audited the accompanying consolidated balance sheet of
Comforce Corporation and Subsidiaries (the "Company") as of
September 30, 1996, and the related consolidated statement of
operations and shareholders' equity and cash flows for the nine
month period ended September 30, 1996. 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 audit.
We conducted our audit 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 audit provides 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 September 30, 1996, and consolidated the
results of their operations and their cash flows for the nine
month period ended September 30, 1996, in conformity with
generally accepted accounting principles.
Melville, New York /s/ Coopers and Lybrand L.L.P.
November 16, 1996, except as to Note 18
for which the date is December 26, 1996.
F-15
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Balance Sheet
as of September 30, 1996 (in thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 952
Restricted cash 50
Receivables, including $315 unbilled receivables, less
allowance for doubtful accounts of $75,000 10,081
Prepaid expenses 86
Officer loans 367
Other assets 325
Deferred income tax 54
------
Total current assets 11,915
Property and equipment, net of accumulated depreciation of $95 492
Intangible assets, net of accumulated amortization of $341 14,036
Other assets 231
------
Total assets $26,674
======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ 3,250
Accounts payable 283
Accrued expenses 2,785
Income taxes 694
Liabilities to be assumed by ARTRA GROUP Incorporated 350
-----
Total current liabilities 7,362
Obligations expected to be settled by the issuance of common
stock 541
Deferred income tax 55
-----
Total liabilities 7,958
-----
Commitments and contingencies
Stockholders' equity:
Series E convertible preferred stock, $.01 par value;
10,000 shares authorized, 8,871 shares issued and
outstanding, liquidation value of $100 per share
($887,100) 1
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
Common stock, $.01 par value; 100,000,000 shares
authorized, 9,817,000 shares issued and outstanding 98
Additional paid-in capital 17,902
Retained earnings, since January 1, 1996 714
------
Total stockholders' equity 18,716
------
Total liabilities and stockholders' equity $26,674
======
The accompanying notes are an integral part of the financial
statements.
F-16
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Operations
for the nine month period ended September 30, 1996 and 1995
(unaudited) (in thousands, except per share data)
September 30,
----------------------
1996 1995
(Unaudited)
Net sales $33,514
------ ------
Costs and expenses:
Cost of goods sold 28,690
Selling, general and administrative expenses 2,891 $ 3,265
Depreciation and amortization 343
------ ------
Total costs and expenses 31,924 3,265
Operating income (loss) 1,590 (3,265)
Other income (expense):
Interest expense (102) (410)
Other income, net 29
------ ------
(73) (410)
Income from continuing operations before
income taxes and extraordinary credit 1,517 (3,675)
Provision for income taxes 610
------ ------
Income (loss) from continuing operations 907 (3,675)
Loss from discontinued operations (16,611)
------ ------
Income (loss) before extraordinary credit 907 (20,286)
Extraordinary credit, net discharge of
indebtedness 6,657
------ ------
Net income 907 (13,629)
Dividends on Preferred Stock 193
------ ------
Income available to common
shareholders $ 714 $(13,629)
====== ======
Earnings (loss) per share:
Continuing operations $ .06 $ (1.11)
Discontinued operations (5.00)
------ -------
Income (loss) before extraordinary credit .06 (6.11)
Extraordinary credit 2.01
------ ------
Net income (loss) $ .06 $ (4.10)
====== ======
Weighted average number of shares of common
stock and common stock equivalent
outstanding 12,661 3,321
====== ======
The accompanying notes are an integral part of the financial
statements.
F-17
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
for the nine month period ended September 30, 1996 (in
thousands, except share amounts)
<TABLE>
<CAPTION>
Retained
Series E Series D Earnings
Common Stock Preferred Stock Preferred Stock Additional Since Total
-------------- --------------- --------------- Paid-In Accumulated January 1, Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit 1996 Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1995 9,309,198 $ 92 $ 95,993 $(93,847) $ 2,238
Quasi-Reorganization
as of January 1,
1996 (93,847) 93,847
Exercise of stock
options 4,500 23 23
Exercise of stock
warrants 338,334 4 1,042 1,046
Issuance of Series E
convertible preferred
stock 8,871 $ 1 4,635 4,636
Issuance of Series D
senior convertible
preferred stock 7,002 $ 1 6,415 6,416
Registration costs (101) (101)
Common stock issued as
consideration for
the purchase of Force
Five 27,398 1 499 500
Common stock issued to
pay liabilities 137,500 1 275 276
Liabilities assumed by
ARTRA 2,968 2,968
Net income $907 907
Dividends
Series E. preferred
stock (18) (18)
Series D preferred
stock (175) (175)
======== ==== ====== === ====== ========== ======== ===== ======== =======
Balance at September
30, 1996 9,816,930 $ 98 8,871 $ 1 7,002 $ 1 $ 17,902 $ - $ 714 $18,716
</TABLE>
The accompanying notes are an integral part of the financial
statements.
F-18
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the nine month period ended September 30, 1996 and 1995
(unaudited) (in thousands)
<TABLE>
<CAPTION>
September 30,
1996 1995
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 907 $ (13,629)
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation of property, plant and equipment 54 76
Amortization of excess of cost over net assets acquired 289 267
Allowance for doubtful accounts 75 1,600
Extraordinary gain from net discharge of indebtedness (6,657)
Impairment of goodwill 13,140
Common stock compensation 2,742
Changes in assets and liabilities, net of the effects of the acquisition
of Williams, RRA and Force Five:
(Increase) decrease in receivables (8,402) 814
Decrease in receivable from ARTRA 400
(Increase) decrease in prepaid expenses and other current assets (194) 269
Increase in other noncurrent assets (107) (145)
Increase (decrease) in payables and accrued expenses 2,177 (3,115)
Increase in income taxes 480
Decrease in inventories 2,105
-------- --------
Net cash used by operating activities (4,321) (2,533)
-------- --------
Cash flows from investing activities:
Acquisition of Williams, RRA and Force Five (9,442)
Additions to property, plant and equipment (183) (20)
Increase in receivable from officers (367)
Increase in restricted cash (50)
Payment of liabilities with restricted cash 550
Investment in Yield Global (753)
Retail fixtures (631)
-------- --------
Net cash used by investing activities (10,042) (854)
-------- --------
Cash flows from financing activities:
Payment of note payable (500)
Proceeds from line of credit 4,150
Repayment on line of credit (900)
Proceeds from issuance of preferred stock 11,052
Proceeds from exercise of stock options 23
Proceeds from exercise of warrants 1,046
Payment of registration costs (100)
Dividend paid (105)
Net increase in short-term debt, including liability of discontinued operations 3,356
Reduction of long-term debt (750)
-------- --------
Net increase provided by financing activities 14,666 2,606
</TABLE>
Continued
F-19
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Cash Flows, continued
for the nine month period ended September 30, 1996 and 1995 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
September 30,
1996 1995
(Unaudited)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents 303 (781)
Cash and cash equivalents, beginning of year 649 783
----------- ---------
Cash and cash equivalents, end of period $ 952 $ 2
=========== =========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 103 $ 131
Income taxes 119 9
Supplemental schedule of noncash investing and financing activities:
Quasi-reorganization (93,847)
Common stock issued for purchase of Force Five, Inc. 500
Common stock issued to settle liabilities 276
Net change in ARTRA receivables and liabilities 2,968
Dividends accrued but not yet paid 88
Common stock issued as consideration for debt restructuring and
short-term loans $ 567
Common stock issued as consideration for acquisition guarantee 168
Common stock issued as additional consideration for
short-term borrowings 700
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<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 September 30, 1996, ARTRA owned less than 20% of the
Company's stock.
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. ("Telecom"), COMFORCE Technical
Services, Inc. ("CTS") and COMFORCE Information Technology, Inc. ("CIT").
All significant intercompany balances and transactions have been eliminated
in consolidation.
F-21
<PAGE>
Revenue Recognition
Revenue for providing staffing services is recognized at the
time such services are rendered.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid short-term
investments with an original maturity of three months or less.
Cash equivalents consists primarily of money market funds.
Accounts Receivable and Unbilled Accounts Receivable
Accounts receivable consists of those amounts due to the Company
for staffing services rendered to various customers. Accrued
revenue consists of revenues earned and recoverable costs for
which billings have not yet been presented to the customers as
of the balance sheet date.
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.
Intangibles
The net assets of a purchased business are recorded at their
fair value at the date of acquisition. At September 30, 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
25-40 years.
The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through forecasted
future operations. Impairment is evaluated by comparing future
cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual
disposition, to the carrying amount of the asset.
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
F-22
<PAGE>
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.
Unaudited Information
The unaudited financial statements as of September 30, 1995 have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. These unaudited financial
statements reflect, in the opinion of Company management, all
adjustments (which include only normal recurring adjustments)
necessary to fairly present the results of operations, changes
in cash flows and financial position as of and for the periods
presented. These unaudited financial statements should be read
in conjunction with the audited financial statements and related
notes. The results for the interim periods presented are not
necessarily indicative of results to be expected for a full year.
Recently Issued Accounting Pronouncements
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 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.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and
other equity instruments to employees based on new fair value
accounting rules. Although expense recognition for employee
stock based compensation is not mandatory, the pronouncement
requires companies that choose not to adopt the new fair value
accounting, to disclose the pro forma net income and earnings
per share under the new method. This new accounting principle
is effective for the Company's fiscal year ending December 31,
1996. The Company believes that adoption will not
F-23
<PAGE>
have a material impact on its financial statements and will comply with the
disclosure requirements.
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 $700,000, including a fee
of $500,000 to a related party, and 500,000 shares of the Company's common
stock valued at $843,000 (at a price per share of $1.68) issued as
consideration for various fees and guarantees associated with the
transaction. The 500,000 shares issued by the Company consisted of (i)
100,000 shares issued to 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 has 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. The excess purchase price over the fair value of
COMFORCE Telecom's net assets acquired (goodwill) of $4,864,000 is being
amortized on a straight-line basis over 20 years. In connection with the re-
focus of the Company's business, Lori changed its name to COMFORCE
Corporation.
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 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
F-24
<PAGE>
purchase method and, accordingly, Williams' operations are included in the
Company's statement of operations from the date of acquisition. The excess
purchase price over the fair value of Williams' net assets acquired (goodwill)
of $2,000,000 plus related direct costs of the acquisition of $93,000 are being
amortized on a straight-line basis over 40 years.
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. The acquisition of RRA was accounted for by the
purchase method and, accordingly, RRA operations are included in
the Company's statement of operations from the date of
acquisition. The excess purchase price over the fair value of
RRA net assets acquired (goodwill) of $5,410,000 plus related
acquisition costs, are being amortized on a straight-line basis
over 40 years. 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, 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.
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, $500,000
Comforce stock (27,398 shares), plus a three-year contingent
payout based on future earnings of Force Five in an aggregate
amount not to exceed $2,000,000. 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. The excess purchase
price over the fair value of net assets acquired (goodwill) of
$2,100,000 plus related acquisition costs, are being amortized
on a straight-line basis over 40 years. Force Five, renamed
COMFORCE Information Technologies, Inc., located in Dallas,
Texas, provides information technology consulting services to
leading companies nationwide.
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).
Nine-month
Period Ended Year Ended
September 30, December 31,
1996 1995
Revenue $ 61,568 $ 74,650
Income (loss) from continuing operations 2,176 (1,621)
Net income (loss) from continuing operations 1,095 (2,580)
Loss from discontinued operations (17,211)
F-25
<PAGE>
Notes to Consolidated Financial Statements, Contined
Extraordinary credits, net discharge of indebtedness 6,657
Net income (loss) (13,134) 1,095
Income (loss) per share from continuing operations (.29) .07
Income (loss) per share from discontinued operations (1.89)
Extraordinary credits .73
Net income (loss) (1.45) .07
The above proforma data assume the issuance of Series E
preferred stock and the borrowing under the revolving line of
credit to finance these transactions. Proforma adjustments
include a reduction of interest expense of $126,000 and $98,000
in the 1995 and 1996 periods and additional goodwill
amortization of $368,000 and $94,000 in the 1995 and 1996
periods, respectively, a reduction of non-recurring officers'
compensation of $200,000 in 1995 and $300,000 in 1996 and the
related income effect.
4. Discontinued Operations:
In September 1995, the Company adopted a plan to discontinue its
Jewelry Business. Additionally, in conjunction with the
Comforce Global 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 consolidated balance sheet reports
separately the remaining net liabilities to be assumed by ARTRA,
including net liabilities of the discontinued Jewelry Business
(see Note 9). In April 1996, ARTRA sold the business and
certain assets of the Jewelry Business. ARTRA is entitled to
realize the proceeds of such sale and will pay assumed
liabilities of the Jewelry Business.
5. Fixed Assets:
Fixed assets consist of (in thousands):
Estimated
Useful Lives
in Years 1996
Office equipment 3-5 $ 140
Furniture, fixtures and vehicles 3-7 374
Leasehold improvements 3-7 73
-----
587
Less, accumulated depreciation and
amortization 95
-----
$ 492
=====
F-26
<PAGE>
6. Accrued Expenses:
Accrued expenses consist of the following (in thousands):
Payroll and payroll taxes $ 1,577
Pension plan 396
Other 812
-------------
$ 2,785
=============
7. Income Taxes:
The provision (benefit) for income taxes as of September 30,
1996 consists of (in thousands):
Current:
Federal $ 487
State 122
Deferred 1
-----------
$ 610
===========
The difference between the statutory Federal income tax rate and
the effective income tax rate is reconciled as follows (in
thousands):
Earnings
Before
Income Taxes
Statutory Federal tax rate provision $ 515
State and local taxes, net of Federal benefit 86
Amortization of goodwill 39
Other (30)
-----------
$ 610
===========
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 September 30, 1996 (in thousands) are as follows:
Deferred tax assets:
Bad debt reserve $ 30
Accrued liabilities 24
----------
54
----------
Deferred tax liability:
Deductible intangibles 55
----------
Net deferred tax liability $ 1
==========
F-27
<PAGE>
8. Notes Payable:
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 agrees 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 may not elect, and Chase shall have 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
September 30, 1996). Amount outstanding at September 30, 1996
was $3,250,000.
Chase may also issue letters of credit, not to exceed $250,000
in the aggregate, to support off-site payroll services, as
security in connection with operating leases, and for other
general corporate purposes with the consent of Chase. Interest
on drawings under letters of credit shall be calculated at the
prime rate of interest. One percent of the face amount of each
letter of credit is payable to Chase per annum and certain fees
on each letter of credit issued, payable at the time of issuance.
Available advances under the Credit Agreement are based upon the
amount equal to 80% of eligible receivables of COMFORCE Telecom
and COMFORCE Technical Services, Inc., less the aggregate amount
of accrued payroll taxes due by those companies.
The Credit Agreement contains certain affirmative and negative
covenants, including restrictions on the creation of
indebtedness or liens, the sale of assets, the acquisition of
stock or assets of another entity, the payment of dividends,
capital expenditures, and other financial covenants. Borrowings
under the Credit Agreement are secured by all goods, equipment,
inventory, accounts, contract rights, chattel paper, notes
receivable, instruments, documents, general intangibles,
credits, claims, and obligations of the Company and its
subsidiaries. Additionally, all of the issued and outstanding
stock of COMFORCE Telecom, COMFORCE Technical Services, Inc. and
PSST are pledged as security.
As of September 30, 1996, the Company was not in compliance with
certain loan covenants. In addition, due to certain
acquisitions in November 1996 (see Note 3), the Company was not
in compliance with additional loan provisions. In November
1996, Chase modified certain loan provisions and waived
compliance with other provisions, subject to payment of certain
outstanding amounts which was made in November 1996.
9. Liabilities to be Assumed by ARTRA Group Incorporated:
Under the Assumption Agreement between the ARTRA and the Company
in October 1995 (the "Assumption Agreement") entered into in
connection with the COMFORCE Telecom acquisition (see Note 3),
ARTRA had agreed to assume substantially all pre-existing Lori
liabilities
F-28
<PAGE>
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.
As of September 30, 1996, remaining pre-existing Lori
liabilities assumed by ARTRA are $350,000. To the extent ARTRA
is able to make subsequent payments, they will be recorded as
additional paid-in capital. The ability of ARTRA to satisfy
these obligations is uncertain. The financial statements of
ARTRA include an explanatory paragraph indicating substantial
doubt about the ability of ARTRA to continue as a going concern.
(See Note 18.)
10. Related Party Transactions:
Effective July 4, 1995, Lori's management agreed to issue up to
a 35% common stock interest in the Company to certain
individuals to manage the Company's entry into the 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
will be issued in 1996 after shareholder approval of an increase
in the Company's authorized common shares. The Company
recognized a non-recurring compensation charge of $3,425,0000 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 to be
issued in 1996 is classified in the Company's consolidated
balance sheet at September 30, 1996 as obligations expected to
be settled by the issuance of common stock.
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
$500,000 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 January 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 $91,000 in fees during the
period from January 31, 1996 through September 30, 1996 for
tax-related advisory services.
F-29
<PAGE>
11. 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 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 (see
Note 18).
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 will have 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 July 1996, the Company issued 137,500 shares of common stock
to pay certain liabilities. Management believes that these
liabilities were covered under the Assumption Agreement with
ARTRA and in seeking reimbursement for such shares from ARTRA.
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.)
12. 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,
warrants, and the Series E Preferred Stock. For this
computation, shares of the Series E Preferred Stock are
considered common stock equivalents at a rate of one share of
Series E Preferred Stock to 100 shares of common stock. The
shares of Series
F-30
<PAGE>
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 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.
Primary earnings per share is calculated as follows (in
thousands):
Earnings available for common shareholders $ 714
Add: Dividends on Series E Preferred
deemed a common stock equivalent 18
-----------
$ 732
===========
Weighted average number of shares outstanding
for the period 9,548
Dilutive effect of common stock equivalents 3,113
-----------
12,661
===========
Primary earnings per share $ .06
===========
13. Stock Options and Warrants:
Long-Term Stock Investment Plan
On December 16, 1993, Lori's stockholders approved the Long-Term
Stock Investment Plan (the "1993 Plan"), effective January 1,
1993, which authorizes the grant of options to purchase the
Company's common stock to executives, key employees and
non-employee consultants and agents of the Company and its
subsidiaries. The 1993 Plan authorizes the awarding of Stock
Options, Incentive Stock Options and Alternative Appreciation
Rights. The 1993 Plan reserved 1,500,000 shares of the
Company's common stock for grant on or before December 31, 2002.
As of March 16, 1993, the Company's Board of Directors approved
the issuance of non-qualified options to purchase an aggregate
of 555,628 shares of the Company's common stock at an exercise
price of $1.125 per share (the closing price of Lori common
stock on March 15, 1993) to a corporation controlled by the
former vice chairman, president and director of the Company and
to an agent of the Company. The options were granted in
connection with management agreements entered into with them
pursuant to which they agreed to provide managerial and
supervisory services to the Company and its discontinued fashion
costume jewelry subsidiaries. Additionally, as of March 16,
1993, the Company's Board of Directors approved the issuance of
options to purchase an aggregate of 370,000 shares of the
Company's common stock at an exercise price of $1.125 per share
(the closing price of the Company's common stock on March 15,
1993) to then certain executives, key employees, agents and a
director of the Company. The options were granted under the
Company's 1982 Stock Option Plan (the "1982 Plan"), subject to
stockholder approval of the amendment of the 1982 Plan.
Subsequent thereto, counsel to the Company advised the Board
that the 1982 Plan, which had expired, could not be amended and
extended.
F-31
<PAGE>
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. On October 28,
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.
Summary of Options
A summary of stock option transactions for the year ended
September 30, 1996 is as follows:
Outstanding at January 1, 1996:
Shares 940,128
Prices $1.125 to $5.00
Options granted:
Shares 1,627,350
Price $6.00 to $18.38
Options exercised:
Shares (4,500)
Price $5.00
Options cancelled:
Shares (557,128)
Price $1.125 to $5.00
Outstanding at September 30, 1996:
Shares 2,005,850
=========
Price $1.125 to $18.38
Options exercisable at September
30, 1996 428,628
=======
Options available for future grant
at September 30, 1996 0
=
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
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
F-32
<PAGE>
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. During the third quarter of 1996, 20,000
warrants were exercised for $42,500. 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, 16,667
warrants were exercised for $56,251. 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.
At September 30, 1996, total warrants were outstanding to
purchase a total of 1,147,249 of the Company's common shares at
prices ranging from $2.00 per share to $9.00 per share. The
warrants expire five years from the date of issue at various
dates through 2000.
14. 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
F-33
<PAGE>
the Federal
Environmental Protection Agency (the "EPA") that it is a
potentially responsible-party for, nor is the Company aware of
having disposed of hazardous substances at any site.
In December 1994, the Company was notified by the EPA that it is
a potentially responsible party under CERCLA for the disposal of
hazardous substances at a site in Gary, Indiana. The alleged
disposal occurred in the mid-1970s at a time when the Company
conducted operations as APECO. In this connection, in December
1994, the Company was named as one of approximately 80
defendants in a case brought in the United States District Court
for the Northern District of Indiana by a group of 14
potentially responsible parties who agreed in a consent order
entered into with the EPA to clean up this site. The plaintiffs
have estimated that the cost of cleaning up this site to be $45
million and have offered to settle the case with the Company for
$991,445. This amount represents the plaintiffs' estimate of
the Company's pro rata share of the clean-up costs. The Company
declined to accept this settlement proposal, which was
subsequently withdrawn.
The 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. ARTRA has advised that it intends to vigorously defend
this case. No assurance can, however, be given that ARTRA will
otherwise be financially capable of satisfying any such judgment
or settlement or its obligations with respect to any other
environmental liabilities. (See Note 18.)
In September 1996, the Company received notice of litigation
from a competitor who charged that RRA obtained and benefitted
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.
F-34
<PAGE>
15. 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.
The Company contributes annually an amount equal to a
percentage, as determined by the Board of Directors, of
participants' basic contributions made during the Plan year. As
of September 30, 1996, no percentage was determined to date.
Expense for the period January 1, 1996 through September 30,
1996 totaled $1,000.
16. 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 approximated $133,058.
As of September 30, 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
September (in thousands)
1997 $ 260
1998 242
1999 138
2000 56
2001 3
-----------
$ 699
===========
The aggregate commitment for future salaries at September 30,
1996, excluding bonuses, during the remaining term of all
management and employment agreements, are approximately:
Year ending Total
September (in thousands)
1996 $ 1,411
1997 1,421
1998 1,421
1999 1,421
-------------
$ 5,674
=============
F-35
<PAGE>
17. 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.
The Company's accounts receivable as of September 30, 1996
consist primarily of amounts due from telecommunication
companies. As a result, the collectibility of these receivables
is dependent, to an extent, upon the economic condition of the
telecommunications industry. At September 30, 1996, the Company
had 6 customers with accounts receivable balances that
aggregated 42 % of the Company's total accounts receivable.
Percentages of total revenues from significant customers for the
nine month period ended September 30, 1996:
Customer 1 18%
Customer 2 10%
Customer 3 5%
18. Subsequent Events:
On October 5, 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 discount granted in connection with the conversion of the
Series F Preferred Stock (issued in October and November 1996) into Common Stock
of approximately $665,000 will be recorded as an additional dividend
attributable to holders of preferred stock in the fourth quarter of 1996.
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-36
<PAGE>
At the Company's annual meeting held on October 28, 1996, the
Company's stockholders ratified, among other matters, 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) to
ratify 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) to approve 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) to approve 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) to
provide for 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.
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.
F-37
<PAGE>
On November 4, 1996, the Company, through its subsidiary
COMFORCE Technical Services, Inc., entered into a definitive
agreement with RHO Company, Inc. ("RHO"), and J. Scott Erbe,
formerly the controlling stockholder of RHO, to purchase all of
the stock of RHO for $14.8 million in cash, plus a three year
contingent payout based on future earnings of RHO payable in
stock in an aggregate amount not to exceed $3.3 million. RHO
provides specialists for its customers primarily in the
technical services and information technology sectors.
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., for a purchase price of
$4.425 million in 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.
On December 26, 1996, the Company and ARTRA agreed to settle
various differences in the interpretation of the Assumption
Agreement dated October 1995 (Note 9). As a result, all shares
due under that original agreement are to be issued. 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 14, and (3) the remaining assumed liabilities
of the jewelry operations of $350,000 due to certain creditors.
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 five trading days
prior to a specified payment date (not later than May 1, 1997).
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 five
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 May 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.
In connection with this private placement of Common Stock, the Company issued
warrants to purchase 99,464 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.
F-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors COMFORCE Corporation
We have audited the consolidated financial statements and the financial
statement schedules of COMFORCE Corporation (formerly The Lori Corporation)
and Subsidiaries as listed in the index on page F-1 of this Definitive Proxy
Statement. These financial statements and financial statement schedules are
the responsibility of COMFORCE Corporation's management. Our responsibility is
to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of COMFORCE Corporation and Subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Chicago, Illinois April 15, 1996
F-39
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.............................. $ 649 $ 783
Restricted cash and equivalents................... -- 550
Receivables, including $56 of amounts due from
related parties and $151 of unbilled revenue in
1995 and allowance for doubtful accounts and
markdowns of $1,338 in 1994...................... 1,754 814
Inventories....................................... -- 2,105
Other............................................. 61 260
Receivable from ARTRA GROUP Incorporated.......... 1,046 --
-------- --------
Total current assets............................ 3,510 4,512
-------- --------
Property and equipment
Equipment......................................... 97 1,376
Leasehold improvements............................ -- 187
-------- --------
97 1,563
Less accumulated depreciation and amortization...... 7 1,119
-------- --------
90 444
-------- --------
Other assets:
Excess of cost over net assets acquired, net of
accumulated amortization of $51 in 1995 and
$3,415 in 1994................................... 4,801 13,140
Other............................................. 135 608
-------- --------
4,936 13,748
-------- --------
$ 8,536 $ 18,704
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-40
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Current liabilities:
Notes payable..................................... $ 500 --
Current maturities of long-term debt.............. -- $ 750
Accounts payable, including $289 due to ARTRA
GROUP Incorporated in 1994....................... 75 3,703
Accrued expenses, including $250 due to a related
party in 1995.................................... 719 905
Income Taxes...................................... 214 --
Liabilities to be assumed by ARTRA GROUP Incorpo-
rated,
and net liabilities of discontinued operations... 3,699 --
-------- --------
Total current liabilities....................... 5,207 5,358
-------- --------
Debt subsequently discharged........................ -- 7,105
-------- --------
Noncurrent liabilities to be assumed by ARTRA GROUP
Incorporated....................................... 541 --
-------- --------
Obligations expected to be settled by the issuance
of common stock.................................... 550 --
-------- --------
Other noncurrent liabilities........................ -- 963
-------- --------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 1,000
shares, all series; Series C, issued 10 shares in
1994, including accrued dividends.................. -- 19,515
Common stock, $.01 par value; authorized 10,000
shares; issued 9,309 shares in 1995 and 3,265
shares in 1994..................................... 92 32
Less restricted common stock (100 shares)........... -- (700)
Additional paid-in capital.......................... 95,993 65,392
Accumulated deficit................................. (93,847) (78,961)
-------- --------
2,238 5,278
-------- --------
$ 8,536 $ 18,704
======== ========
F-41
<PAGE>
COMFORCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994* 1993*
--------- ------- --------
<S> <C> <C> <C>
Revenues......................................... $ 2,387
---------
Costs and expenses:
Cost of revenues............................... 1,818
Stock compensation............................. 3,425
Selling, general and administrative............ 823 $ 966 $ 701
--------- ------- --------
6,066 966 701
--------- ------- --------
Operating loss................................... (3,679) (966) (701)
--------- ------- --------
Other expense:
Interest expense............................... (585) (1,316) (754)
Other expense, net............................. (33) -- (1)
--------- ------- --------
(618) (1,316) (755)
--------- ------- --------
Loss from continuing operations before income
taxes........................................... (4,297) (2,282) (1,456)
Provision for income taxes....................... (35) -- --
--------- ------- --------
Loss from continuing operations.................. (4,332) (2,282) (1,456)
Loss from discontinued operations................ (17,211) (16,220) (216)
--------- ------- --------
Loss before extraordinary credits................ (21,543) (18,502) (1,672)
Extraordinary credits, net discharge of indebted-
ness............................................ 6,657 8,965 22,057
--------- ------- --------
Net earnings (loss).............................. $(14,886) $(9,537) $ 20,385
========= ======= ========
Earnings (loss) per share:
Continuing operations.......................... $ (0.95) $ (0.72) $ (0.39)
Discontinued operations........................ (3.74) (5.08) (0.06)
--------- ------- --------
Loss before extraordinary credits.............. (4.69) (5.80) (0.45)
Extraordinary credits.......................... 1.45 2.81 6.03
--------- ------- --------
Net earnings (loss).......................... $ (3.24) $ (2.99) $ 5.58
========= ======= ========
Weighted average number of shares
of common stock and common
stock equivalents outstanding................... 4,596 3,195 3,656
========= ======= ========
</TABLE>
- --------
* As reclassified for discontinued operations.
The accompanying notes are an integral part of the consolidated financial
statements.
F-42
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
PREFERRED RESTRICTED
STOCK COMMON STOCK COMMON STOCK
--------------- ------------------ -----------------
TOTAL
ADDITIONAL SHAREHOLDERS'
PAID-IN ACCUMULATED EQUITY
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS CAPITAL (DEFICIT) (DEFICIT)
------ ------- --------- ------- -------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... 7,459 $17,273 3,148,526 $31 $44,626 ($89,809) ($27,879)
Net earnings............ -- -- -- -- -- 20,385 20,385
Transfer of notes pay-
able to ARTRA to Lori's
capital account........ -- -- -- -- 15,990 -- 15,990
Exercise of stock op-
tions and warrants..... -- -- 9,250 -- 38 -- 38
Common stock issued to
pay liabilities........ -- -- 5,532 -- 32 -- 32
Fractional shares pur-
chased................. -- -- (536) -- (6) -- (6)
------ ------- --------- --- -------- ----- ------- -------- --------
Balance at December 31,
1993................... 7,459 17,273 3,162,772 31 60,680 (69,424) 8,560
Net loss................ -- -- -- -- -- (9,537) (9,537)
ARTRA capital contribu-
tions.................. -- -- -- -- 4,000 -- 4,000
Lori preferred stock is-
sued in exchange for
ARTRA notes and advanc-
es..................... 2,242 2,242 -- -- -- -- 2,242
Common stock issued un-
der terms of debt set-
tlement agreement...... -- -- 100,000 1 699 -- 700
Restricted common stock. -- -- -- 100,000 ($700) -- -- (700)
Exercise of stock op-
tions and warrants..... -- -- 2,500 -- -- -- 13 -- 13
Fractional shares pur-
chased................. -- -- (253) -- -- -- -- -- --
------ ------- --------- --- -------- ----- ------- -------- --------
Balance at December 31,
1994................... 9,701 19,515 3,265,019 32 100,000 (700) 65,392 (78,961) 5,278
Net earnings............ -- -- -- -- -- -- -- (14,886) (14,886)
Common stock issued as
consideration for debt
restructuring.......... -- -- 150,000 2 -- -- 335 -- 337
Common stock issued as
additional
consideration for
short-term borrowings.. -- -- 141,176 1 -- -- 229 -- 230
Common stock issued to
pay liabilities........ -- -- 115,098 1 -- -- 374 -- 375
Common stock sold
through private
placements............. -- -- 1,946,667 19 -- -- 5,820 -- 5,839
Common stock issued un-
der compensation agree-
ments with individuals
to manage the Company's
telecommunications and
computer technical
staffing services busi-
ness................... -- -- 3,091,304 31 -- -- 2,844 -- 2,875
Common stock issued as
additional
consideration for
Global purchase
guarantee.............. -- -- 350,000 3 -- -- 587 -- 590
Common stock issued as
compensation for Global
acquisition fees....... -- -- 150,000 2 -- -- 251 -- 253
Common stock issued to
ARTRA in
exchange for the
Company's entire
preferred stock issue.. (9,701) (19,515) 100,000 1 -- -- 19,514 -- --
Restricted common stock
issued as additonal
consideration for
short-term borrowings.. -- -- -- -- (100,000) 700 -- -- 700
Liabilities assumed by
ARTRA.................. -- -- -- -- -- -- 647 -- 647
Fractional shares pur-
chased................. -- -- (66) -- -- -- -- -- --
------ ------- --------- --- -------- ----- ------- -------- --------
Balance at December 31,
1995................... -- -- 9,309,198 $92 -- -- $95,993 ($93,847) $ 2,238
====== ======= ========= === ======== ===== ======= ======== ========
</TABLE>
(IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of the consolidated financial
statements.
F-43
<PAGE>
COMFORCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................... $(14,886) $(9,537) $20,385
Adjustments to reconcile net earnings (loss) to
cash flows from operating activities:
Extraordinary gain from net discharge of indebt-
edness......................................... (6,657) (8,965) (22,057)
Provision for disposal of fashion costume jew-
elry business.................................. 1,600 -- --
Depreciation of property, plant and equipment... 101 438 503
Amortization of excess of cost over net assets
acquired....................................... 261 1,018 1,018
Impairment of goodwill.......................... 12,930 10,800 --
Amortization of other assets.................... 374 648 217
Common stock compensation....................... 3,657 -- --
Changes in assets and liabilities, net of the ef-
fects of the acquisition of
COMFORCE Global and the discontinued fashion
costume jewelry business:
(Increase) decrease in receivables.............. 857 2,117 (1,503)
Decrease in inventories......................... 2,105 1,098 1,453
Decrease in other current and noncurrent assets. 170 153 574
Decrease in payables and accrued expenses....... (2,127) (513) (616)
Increase (decrease) in other current and
noncurrent liabilities......................... (408) (468) (521)
-------- ------- -------
Net cash flows used by operating activities........ (2,023) (3,211) (547)
-------- ------- -------
Cash flows from investing activities:
Acquisition of COMFORCE Global, net of cash ac-
quired......................................... (5,580) -- --
Additions to property, plant and equipment...... (25) (32) (108)
Retail fixtures................................. (631) (665) (951)
Payment of liabilities with restricted cash..... 550 (550) --
-------- ------- -------
Net cash flows used by investing activities ....... (5,686) (1,247) (1,059)
-------- ------- -------
Cash flows from financing activities:
Net increase in short-term debt................. 2,486 (138) (12)
Proceeds from long-term borrowings.............. -- 1,241 4,863
Reduction of long-term debt..................... (750) (444) (3,587)
Proceeds from private placement of common stock. 5,839 -- --
ARTRA capital contribution...................... -- 1,500 --
Notes and advances from ARTRA................... -- 2,531 --
Other........................................... -- 11 49
-------- ------- -------
Net cash flows from financing activities........... 7,575 4,701 1,313
-------- ------- -------
Increase (decrease) in cash and cash equivalents... (134) 243 (293)
Cash and equivalents, beginning of year............ 783 540 833
-------- ------- -------
Cash and equivalents, end of year.................. $ 649 $ 783 $ 540
======== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
<PAGE>
COMFORCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---- ------ -------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:...........................
Interest............................................... $273 $ 435 $ 1,421
Income taxes paid (refunded), net...................... 7 24 12
Supplemental schedule of noncash investing and financing
activities:
Common stock issued as consideration for debt
restructuring and short-term loans...................... $567 -- --
Common stock issued for fees and costs in conjunction
with the acquisition of COMFORCE Global................. 843 -- --
Issue common stock to pay liabilities.................... 374 -- --
ARTRA common stock issued to Lori's bank lender under
terms of the debt settlement agreement.................. -- $2,500 --
Transfer New Dimensions assets, net of cash of $674, to
Lori's bank lender under terms of the debt settlement
agreement............................................... -- 6,475 --
Lori preferred stock issued in exchange for ARTRA notes
and advances............................................ -- 2,242 --
Notes payable to ARTRA transferred to Lori's capital
account................................................. -- -- $15,990
Debt refinanced.......................................... -- -- 6,105
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-45
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of COMFORCE Corporation
("COMFORCE" or the "Company"), formerly The Lori Corporation ("Lori"), are
presented on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
The Company currently operates in one industry segment as a provider of
telecommunications and computer technical staffing and consulting services
worldwide. As discussed in Note 4, in September 1995, the Company adopted a
plan to discontinue its Jewelry Business ("Jewelry Business") conducted by its
two wholly-owned subsidiaries Lawrence Jewelry Corporation ("Lawrence") and
Rosecraft, Inc. ("Rosecraft").
At December 31, 1994, ARTRA GROUP INCORPORATED ("ARTRA"), a public company
whose shares are traded on the New York Stock Exchange, owned, through its
wholly-owned subsidiary Fill-Mor Holding, Inc. ("Fill-Mor"), approximately
62.9% of the common stock and all of the outstanding preferred stock of the
Company. As discussed in Note 15, at December 31, 1995, ARTRA owned
approximately 25% of the Company's common stock.
As discussed in Note 3, on September 11, 1995, Lori signed a stock purchase
agreement to participate in the acquisition of one hundred percent of the
capital stock of COMFORCE Global Inc. ("COMFORCE Global"), formerly Spectrum
Global Services, Inc. d/b/a YIELD Global, a wholly-owned subsidiary of
Spectrum Information Technologies, Inc. COMFORCE Global provides
telecommunications and computer technical staffing and consulting services
worldwide to Fortune 500 companies and maintains an extensive, global database
of technical specialists, with an emphasis on wireless communications
capability. On October 17, 1995, Lori completed the acquisition of one hundred
percent of the capital stock of COMFORCE Global. In connection with the re-
focus of Lori's business, Lori changed its name to COMFORCE Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. Intercompany accounts and
transactions are eliminated.
B. Cash Equivalents
Short-term investments with an initial maturity of less than ninety days are
considered cash equivalents.
As required under terms of a debt settlement agreement (see Note 7), at
December 31, 1994, the Company maintained a deposit in trust of $550,000 to
fund the installment payment due December 31, 1994 for unsecured claims
arising from the May 3, 1993 reorganization of the Company's former New
Dimensions Accessories, Ltd., ("New Dimensions") subsidiary. The installment
payment was made in January, 1995.
C. Accounts Receivable and Unbilled Accounts Receivable
Accounts receivable consists of those amounts due to the Company for
staffing services rendered to various customers. Accrued revenue consists of
revenues earned and recoverable costs for which billings have not yet been
presented to the customers as of the balance sheet date.
F-46
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
D. Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operations as incurred and expenditures for major
renovations are capitalized. Depreciation is computed on the basis of
estimated useful lives principally by the straight line method for financial
statement purposes and principally by accelerated methods for tax purposes.
Leasehold improvements are amortized over the shorter of the estimated useful
life of the asset or the period covered by the lease.
The costs of property retired or otherwise disposed of are applied against
the related accumulated depreciation to the extent thereof, and any profit or
loss on the disposition is recognized in earnings.
E. Intangible Assets and Other Assets
The net assets of a purchased business are recorded at their fair value at
the date of acquisition. At December 31, 1995, the excess of purchase price
over the fair value of net assets acquired (goodwill) is reflected as an
intangible asset and amortized on a straight-line basis over a period of 20
years.
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through forecasted future operations.
Impairment is evaluated by comparing future cash flows (undiscounted and
without interest charges) expected to result from the use or sale of the asset
and its eventual disposition, to the carrying amount of the asset.
F. Revenue Recognition
Revenue for providing staffing services is recognized at the time such
services are rendered.
G. Income Taxes
Income taxes are accounted for as prescribed in Statement of Financial
Accounting Standards No. 109--Accounting for Income Taxes. Under the asset and
liability method of Statement No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities,
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years those temporary differences are expected to recovered or settled.
H. Use of Estimates In Preparation of Financial Statements
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-47
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
I. Recently Issued Accounting Pronouncements
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual disposition, to the
carrying amount of the asset. This new accounting principle is effective for the
Company's fiscal year ending December 31, 1996. The Company believes that
adoption will not have a material impact on its financial statements.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but
does not require, companies to recognize compensation expense for grants of
stock, stock options, and other equity instruments to employees based on new
fair value accounting rules. Although expense recognition for employee stock
based compensation is not mandatory, the pronouncement requires companies that
choose not to adopt the new fair value accounting, to disclose the pro-forma
net income and earnings per share under the new method. This new accounting
principle is effective for the Company's fiscal year ending December 31, 1996.
The Company believes that adoption will not have a material impact on its
financial statements as the Company will not adopt the new fair value
accounting, but instead comply with the disclosure requirements.
3. COMFORCE GLOBAL ACQUISITION
On September 11, 1995, Lori signed a stock purchase agreement to participate
in the acquisition of one hundred percent of the capital stock of COMFORCE
Global for consideration of approximately $6.4 million, net of cash acquired.
This consideration consisted of cash to the seller of approximately $5.1
million, fees of approximately $700,000, including a fee of $500,000 to a
related party, and 500,000 shares of the Company's Common Stock valued at
$843,000 (at a price per share of $1.68) issued as consideration for various
fees and guarantees associated with the transaction. The 500,000 shares issued
by the Company consisted of (i) 100,000 shares issued to an unrelated party
for guaranteeing the purchase price to the seller, (ii) 100,000 shares issued
to ARTRA, then the majority stockholder of the Company, in consideration of
its guaranteeing the purchase price to the seller and agreeing to enter into
the Assumption Agreement, (iii) 150,000 issued to two unrelated parties for
advisory services in connection with the acquisition, and (iv) 150,000 shares
issued to Peter R. Harvey, then a Vice President and director of the Company,
for guaranteeing the payment of the purchase price to the seller and other
guarantees to facilitate the transaction. Current management has questioned
its obligation issue the 150,000 shares to Peter Harvey and the 100,000 shares
to ARTRA in consideration of their guarantees. However, for purposes of
presenting earnings per share data, the Company is recognizing these shares as
being issued and outstanding pending resolution of the disagreement among the
parties. Additionally, in conjunction with the COMFORCE Global acquisition,
ARTRA has agreed to pay and discharge substantially all pre-existing Lori
liabilities and indemnify COMFORCE in the event any future liabilities arise
concerning pre-existing environmental matters and business related litigation.
COMFORCE Global provides telecommunications and computer technical staffing
services worldwide to Fortune 500 companies and maintains an extensive, global
database of technical specialists, with an emphasis on wireless communications
capability. The acquisition of COMFORCE Global, completed on October 17, 1995,
was accounted for by the purchase method and, accordingly, the assets and
liabilities of COMFORCE Global were included in the Company's financial
statements at their estimated fair market value at the date of acquisition and
of COMFORCE Global's operations are included in the Company's statement of
operations from the date of acquisition. The excess of purchase price over the
fair value of COMFORCE Global's net assets acquired (goodwill) of $4,852,000
is being amortized on a straight-line basis over twenty years. In connection
with the re-focus of the Company's business, Lori changed its name to COMFORCE
Corporation.
F-48
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The acquisition of COMFORCE Global was funded principally by private
placements of approximately 1,950,000 shares of the Company's common stock at
$3.00 per share (total proceeds of approximately $5,800,000) plus detachable
warrants to purchase approximately 970,000 shares of the Company's common
stock at $3.375 per share. The warrants expire five years from the date of
issue.
The following unaudited pro forma condensed consolidated statements of
operations for the years ended December 31, 1995 and 1994, present the
Company's results of operations as if the acquisition of COMFORCE Global and
the related private placement of the Company's common stock had been
consummated as of January 1, 1994.
COMFORCE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMFORCE PRO FORMA
HISTORICAL GLOBAL (A) ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues........................... $ 2,387 $9,568 $ 11,955
-------- ------ --------
Operating costs and expenses:
Stock compensation (E)........... 3,425 3,425
Spectrum corporate management
fees (D)........................ 1,140 1,140
Other operating costs and
expenses........................ 2,641 8,575 $ 50 (B) 11,266
-------- ------ ---- --------
6,066 9,715 50 14,691
-------- ------ ---- --------
Operating earnings (loss).......... (3,679) (147) (50) (2,736)
-------- ------ ---- --------
Interest and other non-operating
expenses.......................... (618) 7 410 (C) (201)
-------- ------ ---- --------
(618) (7) 410 (201)
-------- ------ ---- --------
Earnings (loss) from continuing
operations before income taxes.... (4,297) (140) 360 (4,077)
(Provision) credit for income
taxes............................. (35) 21 (14)
-------- ------ ---- --------
Loss from continuing operations.... $ (4,332) $ (119) $360 $ (4,091)
======== ====== ==== ========
Loss per share from continuing
operations........................ $ (.95) $ (.44)
======== ========
Weighted average shares outstanding
(F)............................... 4,596 9,309
======== ========
</TABLE>
F-49
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COMFORCE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMFORCE PRO FORMA
HISTORICAL GLOBAL (A) ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.......................... $8,245 $ 8,245
Spectrum corporate management fees
(D).............................. 803 803
Operating costs and expenses...... $ 966 7,551 $ 68 (B) 8,585
-------- ------ ----- --------
Operating earnings (loss)......... (966) (109) (68) (1,143)
-------- ------ ----- --------
Interest and other non-operating
expenses......................... (1,316) 9 (1,307)
-------- ------ ----- --------
(1,316) (9) (1,307)
-------- ------ ----- --------
Loss from continuing operations
before income taxes.............. (2,282) (100) (68) (2,450)
Provision for income taxes........ (15) (15)
-------- ------ ----- --------
Loss from continuing operations... $ (2,282) $ (115) $ (68) $ (2,465)
======== ====== ===== ========
Loss per share from continuing
operations....................... $ (.72) $ (.28)
======== ========
Weighted average shares
outstanding (F).................. 3,195 8,833
======== ========
</TABLE>
Pro forma adjustments to the unaudited condensed consolidated statement of
operations:
(A) The pro forma data presented for COMFORCE Global's operations is for
the periods prior to its acquisition on October 17, 1995, or January
1, 1995 through October 16, 1995 and January 1, 1994 through December
31, 1994, respectively.
(B) Amortization of goodwill arising from the COMFORCE Global
Acquisition. The table below reflects where amortization of goodwill
has been recorded.
1995 1994
-------- --------
Historical Lori (COMFORCE)........................... $ 51,000 $ --
Historical COMFORCE Global 142,000 175,000
Pro forma Adjustments................................ 50,000 68,000
Adjusted pro forma per financial statements.......... $243,000 $243,000
======== ========
(C) Reverse interest expense on notes and other liabilities to be assumed
by ARTRA. The interest adjustment in 1995 was for interest on notes
directly related to Lori activities and were incurred in 1995. These
liabilities were not outstanding during 1994 and, accordingly, a
similar interest adjustment is not required.
(D) Corporate management fees from COMFORCE Global's former parent,
Spectrum Information Technologies,Inc. The amount of these management
fees may not be representative of costs incurred by COMFORCE Global
on a stand alone basis.
(E) Represents a non-recurring compensation charge related to the
issuance of the 35% common stock interest in the Company to certain
individuals to manage the Company's entry into and development of the
telecommunications and computer technical staffing business.
(F) Pro forma weighted average shares outstanding includes shares of the
Company's common stock issued in the private placement that funded
the COMFORCE Global transaction, including 100,000 shares issued to a
non-related party, and 150,000 shares issued to Peter R. Harvey, then
a Vice President of the Company, for guaranteeing the payment of the
purchase price to the seller and other guarantees associated with the
COMFORCE Global acquisition and shares issued certain individuals to
manage the Company's entry into and development of the
telecommunications and computer technical staffing business. Current
management of the Company has questioned its obligation to issue the
150,000 shares to Peter Harvey and the 100,000 shares to ARTRA in
consideration of their guarantees. However, for purposes of
presenting earnings per share data, the Company is recognizing these
shares as being issued and outstanding pending resolution of the
disagreement among the parties.
F-50
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. DISCONTINUED OPERATIONS
In September 1995, the Company adopted a plan to discontinue its Jewelry
Business. A provision of $1,000,000 was recorded in September 1995 and an
additional provision of $600,000 was recorded during the fourth quarter of
1995 for the estimated costs to complete the disposal of the Jewelry Business.
The Company's consolidated financial statements have been reclassified to
report separately results of operations of the discontinued Jewelry Business.
Additionally, in conjunction with the COMFORCE Global acquisition (see Note
3), ARTRA agreed to assume sustantially all pre-existing liabilities of the
Company and its discontinued Jewelry Business and indemnify COMFORCE in the
event any future liabilities arise concerning pre-existing environmental
matters and business related litigation. Accordingly at December 31, 1995, the
Company's consolidated balance sheet has been reclassified to report
separately the net liabilities to be assumed by ARTRA, including net
liabilities of the discontinued Jewelry Business (see Note 9). The December
31, 1994 consolidated balance has not been reclassified.
The operating results of the discontinued Jewelry Business for the nine
months ended September 30, 1995 and the years ended December 31, 1994 and 1993
(in thousands) consists of:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -------
<S> <C> <C> <C>
Net sales................................... $ 10,588 $ 34,431 $46,054
========= ========= =======
Loss from operations before income taxes.... $ (15,606) $ (16,210) $ (183)
Provision for income taxes.................. (5) (10) (33)
--------- --------- -------
Loss from operations........................ (15,611) (16,220) (216)
--------- --------- -------
Provision for disposal of business ......... (1,600) -- --
Provision for income taxes ................. -- -- --
--------- --------- -------
Loss on disposal of business ............... (1,600) -- --
--------- --------- -------
Loss from discontinued operations........... $ (17,211) $ (16,620) $ (216)
========= ========= =======
</TABLE>
In April 1996, ARTRA sold the business and certain assets of the Jewelry
Business. As discussed above, ARTRA agreed to assume any liabilities of the
discontinued Jewelry Business and will be entitled to the net proceeds, if any
from its disposition.
F-51
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INVENTORIES
At December 31, 1994 inventories of the Company's discontinued Jewelry
Business (in thousands) consisted of:
Raw materials and supplies $ 115
Work in process 19
Finished goods 1,971
------
$2,105
======
Inventories were stated at the lower of cost or market, with cost determined
by the first-in, first-out (FIFO) method.
6. CONCENTRATION OF RISK
The accounts receivable of the Company's COMFORCE Global subsidiary at
December 31, 1995 consist primarily of amounts due from telecommunication
companies. As a result, the collectibility of these receivables is dependent,
to an extent, upon the economic condition of the telecommunications industry.
At December 31, 1995, COMFORCE Global had 9 customers with accounts receivable
balances that aggregated 67% of the Company's total trade accounts receivable.
Percentages of total revenues from significant customers from the date of
COMFORCE Global's acquisition (October 17, 1995) through December 31, 1995 are
summarized as follows:
Customer 1................................ 17.3%
Customer 2................................ 12.6%
Customer 3................................ 10.1%
The Company's COMFORCE Global subsidiary maintains cash in bank accounts
which at times may exceed federally insured limits. COMFORCE Global has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on its cash balances. Management believes it mitigates
such risk by investing its cash through major financial institutions.
7. EXTRAORDINARY GAINS RELATED TO DISCONTINUED OPERATIONS
Per terms of a debt settlement agreement, borrowings due a bank under the
loan agreements of Lori and its fashion costume jewelry subsidiaries and Fill-
Mor (approximately $25,000,000 as of December 23, 1994), plus amounts due the
bank for accrued interest and fees were reduced to $10,500,000 (of which
$7,855,000 pertained to Lori's obligation to the bank and $2,645,000 pertained
to Fill-Mor's obligation to the bank). Upon the satisfaction of certain
conditions of the Amended Settlement Agreement in March 1995, as discussed
below, the balance of this indebtedness was discharged.
In conjunction with the debt settlement agreement, ARTRA entered into a
$1,850,000 short-term loan agreement with a non-affiliated corporation, the
proceeds of which were advanced to Lori and used to fund amounts due the bank
as discussed below. The loan, due June 30, 1995, with interest payable monthly
at 10%, was collateralized by 100,000 shares of the Company's common stock.
The 100,000 shares of
F-52
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company's common stock, originally issued to the bank under terms of a debt
settlement agreement, were carried in the Company's consolidated balance sheet
at December 31, 1994 as restricted common stock. In August, 1995 the loan was
extended until September 15, 1995 and the lender received the above mentioned
100,000 shares of the Company's common stock as consideration for the loan
extension. The loan was repaid by ARTRA in February, 1996.
The Company recognized an extraordinary gain of $8,965,000 ($2.81 per share)
in December 1994 as a result of the reduction of amounts due the bank under
the loan agreements of Lori and its operating subsidiaries and Fill-Mor to
$10,500,000 (of which $7,855,000 pertained to Lori's obligation to the bank
and $2,645,000 pertained to Fill-Mor's obligation to the bank) as of December
23, 1994. The 400,000 shares of ARTRA common stock issued as consideration for
the debt settlement agreement (with a fair market value of $2,500,000 based
upon the closing market price on the date of issue) were contributed by ARTRA
to Lori's capital account. The extraordinary gain was calculated (in
thousands) as follows:
Amounts due the bank under loan agreements of Lori and its
fashion costume jewelry subsidiaries......................... $22,749
Less amounts due the bank at December 29, 1994................ (7,855)
-------
Bank debt discharged.......................................... 14,894
Accrued interest and fees discharged.......................... 3,635
Other liabilities discharged.................................. 1,985
Less consideration to the bank per terms of the
amended settlement agreement.................................
Cash........................................................ (1,900)
ARTRA common stock (400,000 shares)......................... (2,500)
New Dimensions assets assigned to the bank at
estimated fair value....................................... (7,149)
-------
Net extraordinary gain...................................... $ 8,965
=======
On March 31, 1995 the $750,000 note due the bank was paid and the remaining
indebtedness of Lori and Fill-Mor was discharged, resulting in an additional
extraordinary gain to the Company of $6,657,000 ($1.45 per share) in the first
quarter of 1995. The $750,000 note payment was funded with the proceeds of a
$850,000 short-term loan from a former director of the Company. As
consideration for assisting in the debt restructuring, the former director
received 150,000 shares of the Company's common stock valued at $337,500 ($2.25
per share) based upon the Company's closing market value on March 30, 1995. The
first quarter 1995 extraordinary gain was calculated (in thousands) as follows:
Amounts due the bank under loan agreements of Lori and its
operating subsidiaries....................................... $ 7,855
Less amounts due the bank applicable to Lori.................. (561)
-------
Bank debt discharged.......................................... 7,294
Less fair market value of the Company's common stock issued as
consideration for the debt restructuring..................... (337)
Other fees and expenses....................................... (300)
-------
Net extraordinary gain........................................ $ 6,657
=======
F-53
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reorganization of Lori's former New Dimensions subsidiary resulted in a
1993 extraordinary gain of $22,057,000 ($6.03 per share) from a net discharge
of indebtedness calculated (in thousands) as follows:
Amount due on New Dimensions' 12.75% Senior Notes, including
accrued interest.............................................. $22,822
Trade liabilities and accrued expenses......................... 3,231
-------
Total unsecured claims....................................... 26,053
Less present value of payments due to unsecured creditors...... (2,725)
Less present value of bank restructuring loan fee.............. (1,271)
-------
Net extraordinary gain....................................... $22,057
=======
8. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt (in thousands) consists of:
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Notes payable
Amount due to a former related party, interest
at the prime rate plus 1%..................... $ 750
Accounts receivable credit facility,
discontinued operations....................... 1,535
Other, interest principally at 15%............. 1,736
4,021
Less:
Liabilities to be assumed by ARTRA........... (1,986)
Liabilities included with discontinued
operations.................................. (1,535)
-------
$ 500
=======
Long-term debt
Amounts due a bank term under terms of a debt
settlement agreement.......................... $ 7,855
Current scheduled maturities................... (750)
Debt subsequently discharged................... (7,105)
-------
$ --
=======
In October 1995, COMFORCE Global entered into an agreement with a bank that
provides for a revolving line of credt with interest at the prime rate plus
1/2%. Borrowings, collateralized by the assets of COMFORCE Global and an
unlimited guarantee of COMFORCE, are limited to a borrowing base, as defined
in the agreement, up to a maximum of $800,000. As of December 31, 1995,
COMFORCE Global had not yet utilized any funds available under the revolving
credit loan. The fair value of the Company's notes payable is estimated based
on the quoted market prices of the same or similar issues or on the current
rates offered to the Company for notes of the same remaining maturity.
F-54
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As discussed in Note 7, ARTRA, Fill-Mor, Lori and Lori's fashion costume
jewelry subsidiaries entered into an agreement with Lori's bank lender to
settle obligations due the bank. As partial consideration for the debt
settlement agreement the bank received a $750,000 Lori note payable due March
31, 1995.
The $750,000 note due the bank was paid and the remaining indebtedness of Lori
and Fill-Mor was discharged, resulting in an additional extraordinary gain to
Lori of $6,657,000 in 1995. The $750,000 note payment was funded with the
proceeds of a $850,000 short-term loan from a former director of the Company.
The loan provided for interest at the prime rate plus 1%. As consideration for
assisting with the debt restructuring, the former director received 150,000
shares of the Company's common stock valued at $337,500 ($2.25 per share) based
upon the closing market value on March 30, 1995. The $337,500 represented
additional compensation for debt restructuring and as such was charged against
the extraordinary gain from debt restructuring in 1995. The principal amount of
the loan was reduced $750,000 at July 31, 1995. The remaining loan 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
acquisition, with the remainder used to fund working capital requirements of
the Company's discontinued Jewelry Business. At December 31, 1995, short-term
loans with an aggregate principal balance of $1,236,000 were classified in the
Company's consolidated balance sheet as liabilities to be assumed by ARTRA.
In August, 1995 Lori obtained a credit facility for the factoring of the
accounts receivable of its discontinued Jewelry Business. The credit facility
provides for advances of 80% of receivables assigned, less allowances for
markdowns and other merchandise credits. The factoring charge, a minimum of
1.75% of the receivables assigned, increases on a sliding scale if the
receivables assigned are not collected within 45 days. Borrowings under the
credit facility are collateralized by the accounts receivable, inventory and
equipment of Lori's discontinued fashion costume jewelry subsidiaries and
guaranteed by Lori. At December 31, 1995 outstanding borrowings under this
credit facility of $1,535,000, along with other net liabilities of the
discontinued Jewelry Business, were classified in the Company's consolidated
balance sheet as liabilities to be assumed by ARTRA and net liabilities of the
discontinued Jewelry Business.
9. LIABILITIES TO BE ASSUMED BY ARTRA GROUP INCORPORATED AND NET LIABILITIES
OF DISCONTINUED OPERATIONS
In conjunction with the COMFORCE Global acquisition (see Note 3), ARTRA
agreed to assume substantially all pre-existing Lori liabilities and indemnify
COMFORCE in the event any future liabilities arise concerning pre-existing
environmental matters and business related litigation. Additionally, ARTRA
agreed to assume all of the assets and liabilities of the Company's
discontinued Jewelry Business. In April 1996, ARTRA sold the business and
certain assets of the Jewelry Business.
F-55
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 liabilities to be assumed by ARTRA GROUP Incorporated
and net liabilities of the discontinued Jewelry Business (in thousands)
consist of:
Current:
Liabilities to be assumed by ARTRA
Notes payable.................................................. $1,986
Court ordered payments......................................... 990
Accrued expenses............................................... 349
------
3,325
Net liabilities of the discontinued Jewelry Business............. 374
------
$3,699
======
Noncurrent:
Liabilities to be assumed by ARTRA Court ordered payments........ $ 541
======
As noted in the table above, as of December 31, 1995, ARTRA agreed to assume
$3,866,000 of pre-existing Lori liabilities. Subsequent to December 31, 1995
ARTRA made net payments of $647,000 to reduce pre-existing Lori liabilities.
Such payments have been included in the Company's consolidated financial
statements at December 31, 1995 as amounts receivable from ARTRA and as
additional paid-in capital. To the extent ARTRA is able to make subsequent
payments, they will be recorded as additional paid-in capital. The ability of
ARTRA to satisfy these obligations is uncertain. The financial statements of
ARTRA include an explanatory paragraph indicating substantial doubt about the
ability of ARTRA to continue as a going concern. The amounts receivable from
ARTRA, exclusive of subsequent payments have not been reflected in the Company's
financial statements at December 31, 1995. No collateral has been provided in
support of these obligations.
At December 31, 1995, liabilities to be assumed by ARTRA included $1,531,000
of court ordered payments arising from the May 3, 1993 reorganization of New
Dimensions. As of April 15, 1996, the $541,000 installment payment due
December 31, 1995 has not been paid.
10. PREFERRED STOCK
The Company's Series C cumulative preferred stock, owned in its entirety by
ARTRA, accrued dividends at the rate of 13% per annum on its liquidation
value. Book value and accumulated dividends of $7,011,000 on this stock
aggregated $19,515,000 at December 31, 1994. In the fourth quarter of 1995,
ARTRA exchanged its Series C cumulative preferred stock for 100,000 newly
issued shares of the Company's common stock. The issuance of these shares of
the Company's common stock to ARTRA is subject to ratification by the
Company's shareholders.
F-56
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. STOCK OPTIONS AND WARRANTS
Long-Term Stock Investment Plan
On December 16, 1993 Lori's stockholders approved the Long-Term Stock
Investment Plan (the "1993 Plan"), effective January 1, 1993, which authorizes
the grant of options to purchase the Company's common stock to executives, key
employees and non-employee consultants and agents of the Company and its
subsidiaries. The 1993 Plan authorizes the awarding of Stock Options, Incentive
Stock Options and Alternative Appreciation Rights. The 1993 Plan reserved
1,500,000 shares of the Company's common stock for grant on or before December
31, 2002.
As of March 16, 1993, the Company's Board of Directors approved the issuance
of non-qualified options to purchase an aggregate of 555,628 shares of the
Company's common stock at an exercise price of $1.125 per share (the closing
price of Lori common stock on March 15, 1993) to a corporation controlled by the
former vice chairman, president and director of the Company and to an agent of
the Company. The options were granted in connection with management agreements
entered into with them pursuant to which they agreed to provide managerial and
supervisory services to the Company and its discontinued fashion costume jewelry
subsidiaries. Additionally, as of March 16, 1993, the Company's Board of
Directors approved the issuance of options to purchase an aggregate of 370,000
shares of the Company's common stock at an exercise price of $1.125 per share
(the closing price of the Company's common stock on March 15, 1993) to then
certain executives, key employees, agents and a director of the Company. The
options were granted under the Company's 1982 Stock Option Plan (the "1982
Plan"), subject to stockholder approval of the amendment of the 1982 Plan.
Subsequent thereto, counsel to the Company advised the Board that the 1982 Plan,
which had expired, could not be amended and extended.
Accordingly, on October 12, 1993, the Board of Directors of the Company
approved a proposed Long-Term Stock Investment Plan of the Company (the "Plan"
or the "Option Plan") which authorizes the grant of options to purchase the
Company's common stock to executives, key employees and agents of the Company
and its subsidiaries. In connection with this approval, the Board approved the
issuance under the Plan (subject to the approval and adoption of the Plan by the
stockholders) of options on the same terms as the original March 16, 1993
options which it had previously authorized under the 1982 Plan. The Plan was
approved by the stockholders at the December 16, 1993 annual meeting, effective
as of January 1, 1993.
Incentive Stock Option Plan
Options to purchase common shares of the Company have been granted to
certain officers and key employees under the 1982 Incentive Stock Option Plan
("the plan"), which initially reserved 250,000 shares of the Company's common
stock. On December 19, 1990, the Company's stockholders approved an increase
in the number of shares available for grant under the plan to 500,000. The
plan expired in 1992. At December 31, 1995, options to purchase 4,500 shares
of the Company's common stock at $5.00 per share were outstanding. The options
expire June 9, 1998.
F-57
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summary of Options
A summary of stock option transactions for the years ended December 31 is as
follows:
1995 1994 1993
------- --------- ---------
Outstanding at January 1:
Shares................................... 959,378 1,098,544 19,416
Prices................................... $ 1.125 $ 1.125 $ 5.00
to to to
$ 5.00 $ 12.19 $ 12.19
Options granted:
Shares................................... -- -- 1,079,628
Prices................................... -- -- $ 1.125
to
$ 3.125
Options exercised:
Shares................................... -- (2,500) (500)
Price.................................... -- $ 5.00 $ 5.00
Options canceled:
Shares................................... (19,250) (136,666) --
Prices................................... $ 3.125 $ 3.125
to to --
$ 5.00 $ 12.19
Outstanding at December 31:
Shares................................... 940,128 959,378 1,098,544
======= ========= =========
Prices................................... $ 1.125 $ 1.125 $ 1.125
to to to
$ 5.00 $ 5.00 $ 12.19
Options exercisable at December 31....... 940,128 940,710 18,916
======= ========= =========
Options available for future grant
at December 31......................... 564,372 546,372 420,372
======= ========= =========
F-58
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Warrants
At December 31, 1995, warrants were outstanding to purchase a total of
1,184,583 of the Company's common shares at prices ranging from $2.00 per
share to $4.00 per share. The warrants expire five years from the date of
issue at various dates through 2000.
The acquisition of COMFORCE Global was funded principally by private
placements of approximately 1,950,000 of the Company's common shares at $3.00
per share (total proceeds of approximately $5,800,000) plus detachable
warrants to purchase 973,333 Lori common shares at $3.375 per share. The
warrants expire five years from the date of issue.
Principally during the second and third quarters of 1995, Lori entered into
a series of agreements with certain unaffiliated investors that provided for
$1,800,000 of short-term loans that provide for interest at 15%. As additional
compensation certain lenders received an aggregate of 91,176 Lori common
shares and certain lenders received warrants to an aggregate of 195,000 shares
of the Company's common stock at prices ranging from $2.00 per share to $2.50
per share, the fair market value at the dates of grant. The warrants expire
five years from the date of issue.
On November 23, 1988, Lori issued warrants to purchase 25,000 of its common
shares, at $4.00 per share, to an investment banker as additional compensation
for certain financial and advisory services. During 1993, the warrant holder
exercised warrants to purchase 8,750 shares of the Company's common stock. At
December 31, 1995, warrants to purchase 16,250 shares of the Company's common
stock at $4.00 per share remained outstanding.
12. COMMITMENTS AND CONTINGENCIES
The Company's COMFORCE Global subsidiary leases certain office space and
equipment used in its telecommunications and computer technical staffing
services business. At December 31, 1995, future minimum lease payments under
operating leases that have an initial or remaining noncancellable term of more
than one year (in thousands) are:
YEAR
----
1996................... $ 62
1997................... 64
1998................... 65
1999................... 63
2000................... 38
----
$292
====
Rental expense from continuing operations was $17,000 in 1995.
The aggregate commitment for future salaries at December 31, 1995, excluding
bonuses, during the remaining term of all management and employment agreements
is approximately $700,000.
F-59
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES
A summary of the provision (credit) for income taxes relating to operations
is as follows:
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
Continuing operations:
State............................................ $ 35 $ 10 $ 33
====== ====== ======
The 1995 and 1994 extraordinary credits represent net gains from discharge of
bank indebtedness under the loan agreements of Lori and its discontinued
fashion costume jewelry subsidiaries. The 1993 extraordinary credit represents
a gain from a net discharge of indebtedness at the Company's former New
Dimensions subsidiary. No income tax expense is reflected in the Company's
financial statements resulting from the extraordinary credits due to the
utilization of tax loss carryforwards.
The difference between the statutory Federal income tax rate and the
effective income tax rate is reconciled as follows:
% OF EARNINGS (LOSS)
BEFORE INCOME TAXES
----------------------
1995 1994 1993
------ ------ ------
Statutory Federal tax rate Provision (Benefit)..... (34.0) (34.0) 35.0
State and local taxes, net of Federal benefit...... .3 .1 .2
Current year tax loss not utilized................. 4.7 -- --
Amortization of goodwill........................... .6 3.6 .8
Impairment of goodwill............................. 30.0 38.6 --
Previously unrecognized benefit from utilizing
tax loss carryforwards............................ -- (8.2) (35.8)
------ ------ ------
1.6 .1 .2
====== ====== ======
F-60
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
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, 1995 and 1994
and their approximate tax effects (in thousands) are as follows:
1995 1994
--------------------- ---------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCE DIFFERENCE DIFFERENCE DIFFERENCE
---------- ---------- ---------- ----------
Trade accounts receivable..... $ 500 $ 200 $ 1,300 $ 500
Inventories................... 700 300 300 100
Accrued other................. 900 300 400 200
Net operating loss............ 42,000 16,400 54,000 21,100
======== ========
Total deferred tax asset.... 17,200 21,900
======== ========
Machinery and equipment....... (200) (100) (400) (200)
Total deferred tax liabili-
ty......................... (100) (200)
======== ========
Valuation allowance......... (17,100) (21,700)
======== ========
Net deferred tax asset...... $ -- $ --
======== ========
The Company has recorded a valuation allowance with respect to the future
tax benefits and the net operating loss reflected in deferred tax assets as a
result of the uncertainty of their ultimate realization.
At December 31, 1995, the Company and its subsidiaries had Federal income
tax loss carryforwards of approximately $42,000,000 available to be applied
against future taxable income, if any, expiring principally in 1996-2010.
Section 382 of the Internal Revenue Code of 1986 limits a corporation's
utilization of its Federal income tax loss carryforwards when certain changes
in the ownership of a corporation's common stock occurs. The Company has
recently issued a significant number of shares of its common stock in
conjunction with the COMFORCE Global acquisition and certain related
transactions. Accordingly, the Company is currently subject to significant
limitations regarding the utilization of its Federal income tax loss
carryforwards.
14. EARNINGS PER SHARE
Earnings (loss) per share is computed by dividing net earnings (loss) by the
weighted average number of shares of common stock and common stock equivalents
(options and warrants), unless anti-dilutive, outstanding during the year.
Fully diluted earnings per share is not presented since the result is
equivalent to primary earnings per share.
F-61
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. RELATED PARTY TRANSACTIONS
Effective July 4, 1995, Lori's management agreed to issue up to a 35% common
stock interest in the Company to certain individuals to manage the Company's
entry into the telecommunications and computer technical staffing business
(approximatley 3,700,000 shares after ceratain anti-dilutive provisions). In
October 1996, the Company issued approximately 3,100,000 shares of its common
stock to the above individuals. The remaining common shares due the above
individuals will be issued in 1996 after shareholder approval of an increase
in Company's authorized common shares. The Company recognized a non-recurring
charge of $3,425,000 related to 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 consumation of the COMFORCE Global
acquisition. Accordingly, this compensation charge was fully recognized in
1995. The cost of the remaining common shares to be issued in 1996 ($550,000)
is classified in the Company's consolidated balance sheet at December 31, 1995
as obligations expected to be settled by the issuance of common stock. The
shares of the Company's common stock issued and to be issued in accordance
with the above agreements were valued at $.93 per share. Management valued the
Company based on its discussions with market makers and other advisors, taking
into account (i) that the Jewelry Business, which was discontinued at the end
of the second quarter of 1995, had a negligible value, and (ii) the value of
the Company was principally related to the potential effect that a purchase of
COMFORCE Global, if successfully concluded, would have market value of the
Company's Common Stock. Management believes this value of $.93 per share to be
a fair and appropriate value based upon the Company's financial condition as
of the date the Company became obligated to issue these shares. After the
issuance of these common shares, plus the effects of the issuance of common
shares sold by private placements and other common shares issued in
conjunction with the COMFORCE Global acquisition, ARTRA's common stock
ownership interest in the Company was reduced to approximately 25% at December
31, 1995.
In December 1995 the Company made loans totaling $56,000 to the above named
individuals to cover income tax liabilities relating to the issuances of
shares of the Company's common stock. Subsequent to December 31, 1995, the
Company made additional loans to these individuals totaling $289,000. All
loans are evidenced by notes which bear interest at 6% per annum and mature
December 10, 1997.
In connection with the COMFORCE Global acquisition, a $500,000 fee was
earned by the above mentioned consultant, of which $250,000 was paid in 1995.
In conjunction with an agreement (see Note 7) to settle borrowings due a
bank under the loan agreements of Lori and its fashion costume jewelry
subsidiaries and Fill-Mor, ARTRA entered into a $1,850,000 short-term loan
agreement with a non-affiliated corporation, the proceeds of which were advanced
to Lori and used to fund amounts due Lori's bank. The loan, due June 30, 1995,
was collateralized by 100,000 shares of Lori common stock. These 100,000 Lori
common shares, originally issued to the bank under terms of the August 18, 1994
Settlement Agreement, were carried in the Company's consolidated balance sheet
at December 31, 1994 as restricted common stock. In August, 1995 the loan was
extended until September 15, 1995 and the lender received the above mentioned
100,000 Lori common shares as consideration for the loan extension. The loan was
repaid by ARTRA in February, 1996. Accordingly, the carrying value of these
100,000 Lori common shares was transferred to ARTRA as reduction of amounts due
to ARTRA.
In the fourth quarter of 1995, ARTRA exchanged its interest in the entire
issue of the Company's Series C cumulative preferred stock for 100,000 newly
issued shares of the Company's common stock. The issuance of these shares of
the Company's common stock to ARTRA are subject to ratification by the
Company's shareholders. During 1995, ARTRA received $399,000 of advances from
the Company. In 1996, the Company advanced ARTRA an additional $54,000. ARTRA
repaid the above advances and paid down $647,000 of the pre-existing Lori
liabilities it assumed in conjunction with the COMFORCE Global acquisition as
discussed in Note 9. The $399,000 advance to ARTRA and the $647,000 payment on
pre-existing Lori liabilities made by ARTRA have been classified in the
Company's consolidated financial statements at December 31, 1995 as amounts
receivable from ARTRA.
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.
F-62
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective December 29, 1994 ARTRA exchanged $2,242,000 of its notes and
advances for additional Lori Series C preferred stock. Additionally, the
August 18, 1994 Settlement Agreement required ARTRA to contribute cash of
$1,500,000 and ARTRA common stock with a fair market value of $2,500,000 to
Lori's capital account.
In February, 1993, ARTRA transferred all of its notes (with a principal
value of $15,990,000) to Lori's capital account.
Through 1995, ARTRA had provided certain financial, accounting and
administrative services for the Company's corporate entity. Additionally, the
Company's corporate entity had leased its administrative office space from
ARTRA. During 1995, 1994 and 1993 fees for these services amounted to $91,000,
$151,000 and $115,000, respectively.
16. LITIGATION
Prior to its entry into the Jewelry Business in 1985, the Company operated
in excess of 20 manufacturing facilities for the production of, inter alia,
photocopy machines, photographic chemical and paper coating. These operations
were sold or discontinued in the late 1970s and early 1980s. Certain of these
facilities may have used and/or generated hazardous materials and may have
disposed of the hazardous substances, particularly before the enactment of
laws governing the safe disposal of hazardous substances, at an indeterminable
number of sites. Although the controlling stockholders and current management
had no involvement in such prior manufacturing operations, the Company could
be held to be responsible for clean-up costs if any hazardous substances were
deposited at these manufacturing sites, or at off-site waste disposal
locations, under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), or under other Federal or state
environmental laws now or hereafter enacted. However, except for the Gary,
Indiana site described below, the Company has not been notified by the Federal
Environmental Protection Agency (the "EPA") that it is a potentially
responsible party for, nor is the Company aware of having disposed of
hazardous substances at, any site.
In December 1994, the Company was notified by the EPA that it is a
potentially responsible party under CERCLA for the disposal of hazardous
substances at a site in Gary, Indiana. The alleged disposal occurred in the
mid-1970s at a time when the Company conducted operations as APECO. In this
connection, in December 1994, the Company was named as one of approximately 80
defendants in a case brought in the United States District Court for the
Northern District of Indiana by a group of 14 potentially responsible parties
who agreed in a consent order entered into with the EPA to clean-up this site.
The plaintiffs have estimated the cost of cleaning up this site to be $45
million, and have offered to settle the case with the Company for $991,445.
This amount represents the plaintiffs' estimate of the Company's pro rata
share of the clean-up costs. The Company declined to accept this settlement
proposal, which was subsequently withdrawn.
The plaintiffs have produced only limited testamentary evidence, and no
documentary evidence, linking the Company to this site, and the Company has
neither discovered any records which indicate, nor located any current or
former employees who have advised, that the Company deposited hazardous
substances at the site. Based on the foregoing, management of the Company does
not believe that it is probable that the Company will have any liability for
the costs of the clean-up of this site. The Company intends to vigorously
defend itself in this case.
Under the terms of the Assumption Agreement, ARTRA agreed to pay and
discharge substantially all of the Company's pre-existing liabilities and
obligations, including environmental liabilities at any sites at which the
Company allegedly operated facilities or disposed of hazardous substances,
whether or not the Company is currently identified as a potentially
responsible party therefor. Consequently, the Company is entitled to
indemnification from ARTRA for any environmental liabilities associated with
the Gary, Indiana site. No assurance can, however, be given that ARTRA will be
financially capable of satisfying its obligations under the Assumption
Agreement.
The Company is a party to routine contract and employment-related litigation
matters in the ordinary course of its business. No such pending matters,
individually or in the aggregate, if adversely determined, are believed by
management to be material to the business, results of operations or financial
condition of the Company. The Company maintains general liability insurance,
property insurance, automobile insurance, employee benefit liability
insurance, owner's and contractor's protective insurance and exporter's
foreign operations insurance with coverage of $1 million on a per claim basis
and $2 million aggregate (with $3 million umbrella coverage). The Company
insures against workers' compensation in amounts required under applicable
state law and in the amount of $500,000 in the case of foreign workers. The
Company also maintains fidelity insurance in the amount of $25,000 per claim
and directors' and officers' liability insurance in the amount of $2 million.
The Company is presently soliciting quotations to obtain and errors and
omissions coverage.
17. SUBSEQUENT EVENTS
On March 1, 1996, COMFORCE Global, a wholly-owned subsidiary of COMFORCE,
acquired substantially all of the assets of Williams Communication Services
("Williams"), a privately owned company engaged in the technical staffing,
consulting and outsourcing business for consideration consisting of cash of
$2,000,000 and contingent rights to future payments based on earnings over a
four year period. The acquisition of Williams, funded principally by a $2.25
million revolving credit facility with a bank, will be accounted for by the
purchase method.
F-63
<PAGE>
The Company has entered into an agreement to acquire the assets and business
of RRA Inc. ("RRA"), a provider of technical staffing services in the
electronics, telecommunications and information technology business sectors.
The completion of the acquisition of RRA is subject to certain contingencies
which include the completion of and satisfaction with due diligence, as well
as satisfactory financing to complete the acquisition.
F-64
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------
ADDITIONS
---------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS (DESCRIBE) PERIOD
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year ended De-
cember 31, 1995:
Deducted from assets
to which they apply:
Allowance for inven-
tory valuation..... $ 207 $ 25 $ 232 $ --
====== ====== ====== ======
Allowance for mark-
downs.............. $ 835 $ 291 $1,126(A) $ --
Allowance for doubt-
ful accounts....... 503 424 927(A) --
------ ------ ------ ------
$1,338 $ 715 $2,053 $ --
====== ====== ====== ======
For the year ended De-
cember 31, 1994:
Deducted from assets
to which they apply:
Allowance for inven-
tory valuation..... $4,150 $ 218 $4,161(B) $ 207
====== ====== ====== ======
Allowance for mark-
downs.............. $2,499 $4,799 $6,463(C) $ 835
Allowance for doubt-
ful accounts....... 432 269 198(D) 503
------ ------ ------ ------
$2,931 $5,068 $6,661 $1,338
====== ====== ====== ======
For the year ended De-
cember 31, 1993:
Deducted from assets
to which they apply:
Allowance for inven-
tory valuation..... $4,900 $ 172 $ 922(B) $4,150
====== ====== ====== ======
Allowance for mark-
downs................ $5,280 $5,722 $8,503(C) $2,499
Allowance for doubtful
accounts............. 557 335 460(D) 432
------ ------ ------ ------
$5,837 $6,057 $8,963 $2,931
====== ====== === ====== ======
</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-65
<PAGE>
COMFORCE GLOBAL, INC.
(FORMERLY SPECTRUM GLOBAL SERVICES, INC.)
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
F-66
<PAGE>
Report of Independent Accountants
To the Board of Directors of COMFORCE Global, Inc.:
We have audited the accompanying balance sheets of COMFORCE Global, Inc.
(formerly Spectrum Global Services, Inc., the "Company") as of September 30,
1995 and December 31, 1994, and the related statements of operations and
retained earnings (accumulated deficit) and cash flows for the nine month period
ended September 30, 1995 and the year ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of COMFORCE Global, Inc. as of
September 30, 1995 and December 31, 1994, and the results of its operations and
its cash flows for the nine month period ended September 30, 1995 and the year
ended December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Melville, New York
December 1, 1995.
F-67
<PAGE>
COMFORCE Global, Inc.
Balance Sheets
as of September 30, 1995 and December 31, 1994
September 30, December 31,
ASSETS: 1995 1994
------------ ------------
Current assets:
Cash and cash equivalents $ 1,186,868 $ 426,334
Accounts receivable 1,602,659 1,456,583
Unbilled accounts receivable 279,626 158,793
Prepaid expenses and other assets 23,173 32,664
------------ ------------
Total current assets 3,092,326 2,074,374
Property and equipment, net 93,708 55,877
Intangible assets 2,149,661 2,272,890
Other assets 14,491 25,477
------------ ------------
Total assets $ 5,350,186 $ 4,428,618
============ ============
LIABILITIES AND STOCKHOLDERS'EQUITY(DEFICIENCY):
Current liabilities (deficiency):
Accounts payable $ 42,792 $ 27,714
Accrued liabilities 423,580 229,703
Income taxes payable 24,453
Accounts payable - parent 978,855 178,106
Accounts payable - affiliates 30,980 30,086
------------ ------------
Total current liabilities 1,476,207 490,062
------------ ------------
Stockholders' equity (deficiency):
Capital stock 1 1
Additional paid-in capital 3,919,999 3,919,999
Retained earnings (accumulated deficit (46,021) 18,556
------------ ------------
Total stockholders' equity 3,873,979 3,938,556
------------ ------------
Total liabilities and
stockholders' equity (deficiency) $ 5,350,186 $ 4,428,618
============ ============
The accompanying notes are an integral part of the financial statements.
F-68
<PAGE>
COMFORCE Global, Inc.
Statements of Operations and Retained Earnings (Accumulated Deficit)
<TABLE>
<CAPTION>
Nine month
period ended Year ended
September 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Sales $ 9,007,461 $ 8,244,721
------------ ------------
Direct costs and expenses:
Cost of sales 6,764,942 6,417,395
Operating expenses 1,159,168 1,133,298
Overhead charges from parent (Note 9) 1,139,560 803,280
------------ ------------
Total direct costs and expenses 9,063,670 8,353,973
------------ ------------
(56,209) (109,252)
------------ ------------
Other income (expense):
Interest income 6,632 8,975
------------ ------------
Other income (expense) 6,632 8,975
------------ ------------
Loss before provision for income taxes (49,577) (100,277)
Income tax provision 15,000 14,740
------------ ------------
Net loss (64,577) (115,017)
Retained earnings, beginning of year 18,556 133,573
------------ ------------
Retained earnings(accumulated deficit),
end of period $ (46,021) $ 18,556
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-69
<PAGE>
COMFORCE Global, Inc.
Statements of Cash Flows
Nine month
period ended Year ended
September 30, December 31,
1995 1994
------------ ------------
Cash flows from operating activities:
Net (loss) income $ (64,577) $ (115,017)
Adjustments to reconcile net income to cash
flows provided by operating activities:
Depreciation 18,836 10,173
Amortization 123,229 164,305
Changes in operating assets and liabilities:
Accounts receivable (146,076) (256,348)
Unbilled accounts receivable (120,833) (158,793)
Prepaid expenses 9,491 (9,186)
Deposits 10,986 (24,360)
Accounts payable 15,078 22,645
Accrued liabilities 193,877 139,216
Accounts payable - parent 800,749 178,106
Income taxes payable (24,453) (18,657)
Accounts payable - affiliate 894 30,086
------------ ------------
Net cash provided by (used in)
operating activities 817,201 (37,830)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (56,667) (54,318)
------------ ------------
Net cash used in investing activities (56,667) (54,318)
------------ ------------
Net increase (decrease) in cash
and cash equivalents 760,534 (92,148)
------------ ------------
Cash and cash equivalents, beginning of year 426,334 518,482
------------ ------------
Cash and cash equivalents, end of period $ 1,186,868 $ 426,334
============ ============
Cash paid for:
Income taxes $ 35,371 $ 51,884
============ ============
The accompanying notes are an integral part of the financial statements.
F-70
<PAGE>
COMFORCE Global, Inc.
Notes to Combined Financial Statements
1. Description of Business:
Comforce Global, Inc. (formerly Spectrum Global Services, Inc.) (the
"Company"), a Delaware Corporation, became a wholly owned subsidiary of Spectrum
Information Technologies, Inc. through an acquisition of the Company's assets on
October 31, 1993. On October 17, 1995, 100% of the stock of Spectrum Global
Services, Inc. was sold to The Lori Corporation (now know as COMFORCE
Corporation) ("Lori"), at which time the Company changed its name to COMFORCE
Global, Inc.. The Company provides telecommunications and computing staffing and
consulting services worldwide.
2. Summary of Significant Accounting Policies:
Revenue Recognition
Revenue for providing staffing services is recognized at the time such services
are rendered.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid short-term investments with an
original maturity of three months or less. Cash equivalents consists primarily
of money market funds.
Accounts Receivable and Unbilled Accounts Receivable
Accounts receivable consists of those amounts due to the Company for staffing
services rendered to various customers. Accrued revenue consists of revenues
earned and recoverable costs for which billings have not yet been presented to
the customers as of the balance sheet dates.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operations as incurred. Expenditures for betterments and
major renewals are capitalized. The cost of assets sold or retired and the
related amounts of accumulated depreciation are eliminated from the accounts in
the year of disposal, with any resulting profit or loss included in income.
Depreciation and amortization of assets are provided using the straight-line
method over the estimated useful life of the asset.
Intangibles
Goodwill is amortized over 15 years on a straight line basis.
F-71
<PAGE>
Notes to Combined Financial Statements, Continued
Income Taxes
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse. A
valuation allowance is recorded to reduce deferred tax assets to their expected
realizable value. The cumulative effect of implementing SFAS No.
109 as of January 1, 1994 was not significant.
3. Purchase of Assets:
On October 31, 1993, Spectrum Information Technologies, Inc. purchased the
assets and assumed the liabilities of the Company (then known as
Yield Industries, Inc.) and Wintec Corporation ("Wintec"). Subsequent to
this, the name was changed to Spectrum Global Services, Inc. The acquisition has
been accounted for as a purchase. The fair value of the assets acquired,
including goodwill, was $4,120,000 and liabilities assumed totaled $199,000.
Goodwill of approximately $2,465,000 is being amortized over 15 years on a
straight-line basis.
4. Property and Equipment:
Property and equipment are summarized as follows:
Life of
equipment 1995 1994
--------- --------- ---------
Office equipment 3-5 years $ 61,311 $ 37,211
Furniture and fixtures 5-years 65,144 32,577
--------- ---------
126,455 69,788
Less, accumulated depreciation 32,747 13,911
--------- ---------
$ 93,708 $ 55,877
========= =========
F-72
<PAGE>
Notes to Combined Financial Statements, Continued
5. Income Taxes:
The provision for income taxes of $15,000 for the nine months ended September
30, 1995 and $14,740 for the year ended December 31, 1994 reflects minimum state
and local income taxes as the Company has state net operating losses on separate
Company returns. The Company files its federal income tax return as part of its
parent's consolidated return. Due to significant losses of the parent, the
Company has provided a full valuation on the potential future benefit from its
federal net operating losses. Net losses for financial reporting purposes do not
differ significantly from net losses for income tax purposes.
6. Concentration of Credit Risk:
The Company's accounts receivable as of September 30, 1995 and December 31, 1994
consist primarily of amounts due from telecommunication companies. As a result,
the collectibility of these receivables is dependent, to an extent, upon the
economic condition of the telecommunications industry. At September 30, 1995 and
December 31, 1994, the Company had four customers with accounts receivable
balances that aggregated 48% and 46%, respectively, of the Company's total
accounts receivable. Percentages of total revenues from significant customers
for the nine month period ended September 30, 1995 and the year ended December
31, 1994 are summarized as follows:
September 30, December 31,
1995 1994
------------ ------------
Customer 1 19.2% 19.9%
Customer 2 12.9% 12.8%
Customer 3 10.5% 9.9%
The Company maintains cash in bank accounts which at times may exceed federally
insured limits. The Company has not experienced any losses in such accounts and
believes they are not exposed to any significant credit risk on their cash
balances. The Company believes it mitigates such risk by investing its cash
through major financial institutions.
7. Accrued Expenses:
Accrued expenses consist of the following:
1995 1994
------------ ------------
Payroll and payroll taxes $ 274,864 $ 143,449
Workers' compensation 70,000 70,000
Professional fees 42,408 7,531
Vacation 27,595 8,723
Other 8,713
------------ ------------
$ 423,580 $ 229,703
============ ============
F-73
<PAGE>
Notes to Combined Financial Statements, Continued
8. Commitments and Contingencies:
Leases
At September 30, 1995, future minimum annual rental commitments under
noncancelable operating leases are as follows:
1996 $ 57,388
1997 58,583
1998 60,703
1999 62,913
2000 54,111
----------
$ 293,698
==========
Total rent expense for the nine month period ended September 30, 1995 and the
year ended December 31, 1994 was $25,627 and $46,498, respectively.
9. Charges From Parent:
For the nine months ended September 30, 1995 and the year ended December 31,
1994, approximately $1,139,560 and $803,280, respectively, was charged to the
Company by its parent, Spectrum Information Technologies, Inc. as a management
charge which reflects an allocation of corporate overhead. Management expects
that such charges will no longer continue as a result of the sale of the Company
to Lori. Such charges may not represent expenses that would have
been incurred had the Company operated as a stand-alone entity. In addition, the
Company was charged by its parent company for insurance, rent, payroll,
professional fees, and other miscellaneous office expenses. Such charges
amounted to $236,808 and $506,113 for the nine month period ended September 30,
1995 and for the year ended December 31, 1994, respectively, and are included in
general and administrative expenses. The Company purchased furniture and
equipment and was charged miscellaneous office expenses from its affiliates.
Such charges amount to $1,014 and $29,967 in 1995 and 1994, respectively.
10. Other Matters:
On January 26, 1995, Spectrum Information Technologies, Inc., filed petition for
relief under Chapter 11 of the Bankruptcy Code (the Company was not included in
such filing). The sale of the stock of the Company to Lori on October 17, 1995
was formally approved by the bankruptcy court.
F-74
<PAGE>
WILLIAMS COMMUNICATION SERVICES, INC.
--------
FINANCIAL STATEMENTS,
TOGETHER WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND FOR THE PERIOD ENDED MARCH 3, 1996
(DATE OF ACQUISITION)
F-75
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder
Williams Communication Services, Inc.
Englewood, Florida
We have audited the accompanying balance sheets of Williams Communication
Services, Inc. as of December 31, 1995 and March 3, 1996 and the related
statements of operations and retained earnings and cash flows for the periods
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 Williams Communication
Services, Inc. as of December 31, 1995 and March 3, 1996 and the results of
its operations and its cash flows for the periods then ended in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Fort Myers, Florida
October 19, 1996
F-76
<PAGE>
WILLIAMS COMMUNICATION SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND MARCH 3, 1996
<TABLE>
<CAPTION>
MARCH 3, DECEMBER 31
1996 1995
-- -------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $253,336 $ 0
Accounts receivable.................................... 471,528 599,607
Unbilled accounts receivable........................... 159,676 173,904
-------- --------
Total current assets................................. 884,540 773,511
PROPERTY AND EQUIPMENT, net.............................. 27,198 25,329
-------- --------
Total assets......................................... $911,738 $798,840
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................................... $ 97,866 $ 1,500
Accrued liabilities.................................... 50,258 14,486
Bank overdraft......................................... 0 49,313
Income tax payable..................................... 309,960 326,475
-------- --------
Total current liabilities............................ 458,084 391,774
-------- --------
STOCKHOLDERS' EQUITY
Common stock, 1,000 shares, issued and outstanding, $1
par value............................................. 1,000 1,000
Retained earnings...................................... 452,654 406,066
-------- --------
Total stockholders' equity........................... 453,654 407,066
-------- --------
Total liabilities and stockholders' equity........... $911,738 $798,840
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
WILLIAMS COMMUNICATION SERVICES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1995 AND PERIOD ENDED MARCH 3, 1996
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
MARCH 3, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Sales................................................. $656,708 $4,177,871
-------- ----------
Direct costs and expenses:
Cost of sales....................................... 498,504 3,021,251
General and administrative expenses................. 65,100 450,225
-------- ----------
Total direct costs and expenses................... 563,604 3,471,476
-------- ----------
Income before provision for income taxes.......... 93,104 706,395
Income tax provision.................................. 39,016 354,056
-------- ----------
Net income........................................ 54,088 352,339
Retained earnings, beginning.......................... 406,066 53,727
Distributions to shareholder.......................... (7,500) 0
-------- ----------
Retained earnings, end................................ $452,654 $ 406,066
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
WILLIAMS COMMUNICATION SERVICES, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995 AND PERIOD ENDED MARCH 3, 1996
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
MARCH 3, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 54,088 $ 352,339
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation....................................... 173 723
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable.............................. 128,079 (293,361)
Unbilled accounts receivable..................... 14,228 (68,761)
Deposits......................................... 0 3,000
Other assets..................................... 0 240
Increase (decrease) in:
Accounts payable................................. 96,366 (256)
Accrued liabilities.............................. 19,257 290,692
Bank overdraft payable........................... (49,313) 49,313
-------- ---------
Net cash provided by operating activities........ 262,878 333,929
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................. (2,042) (25,299)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to shareholder......................... (7,500) (309,500)
-------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 253,336 (870)
Cash and cash equivalents at beginning........... 0 870
-------- ---------
Cash and cash equivalents at end................. $253,336 $ 0
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.............................. $ 0 $ 1,586
======== =========
Cash paid for income taxes.......................... $ 47,900 $ 27,580
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE>
WILLIAMS COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Williams Communications Services, Inc. (the Company), a Florida corporation,
provides a wide range of technical and consulting services to communication
clients through the use of personnel who are designers, drafters, engineers,
programmers and other types of technicians. The personnel are utilized by the
clients on a temporary, project, or peak-period basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION: Revenue is recognized at the time such services are
rendered to the client.
ACCOUNTS RECEIVABLE AND UNBILLED ACCOUNTS RECEIVABLE: Accounts receivable
consists of those amounts due to the Company for services rendered to various
customers.
Unbilled accounts receivable consists of revenues earned and recoverable
costs for which billings have not yet been presented to the customers as of
the balance sheet date.
PROPERTY AND EQUIPMENT: Property and equipment is recorded at cost.
Expenditures for maintenance and repairs are charged to operations as
incurred. Expenditures for betterments and major renewals are capitalized. The
cost of assets sold or retired and the related amounts of accumulated
depreciation are eliminated from the accounts in the year of disposal, with
any resulting profit or loss included in income.
Depreciation of assets have been computed using the straight-line method
over the estimated useful lives of the assets.
INCOME TAXES: The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
MANAGEMENT'S 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 and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
MARCH 3, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Office equipment...................................... $ 15,000 $ 15,000
Furniture and fixtures................................ 5,384 3,342
Vehicle............................................... 25,300 25,300
-------- --------
45,684 43,642
Less accumulated depreciation......................... (18,486) (18,313)
-------- --------
$ 27,198 $ 25,329
======== ========
</TABLE>
F-80
<PAGE>
WILLIAMS COMMUNICATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
During the normal course of business, the Company extends credit to customers
located throughout the United States. At December 31, 1995 and March 3, 1996,
the Company had approximately 90% or $699,000 and 99% or $631,000,
respectively, of its billed and unbilled accounts receivable due from two
customers. The payment history of each customer has been considered in
determining the need for an allowance for doubtful accounts. The Company
maintains substantially all of its cash investments with what it believes to
be high quality financial institutions. The Company's investment policy is to
limit concentrations of credit risk.
5. INCOME TAXES:
The components of the Company's provision for income taxes are as follows:
<TABLE>
<CAPTION>
MARCH 3, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Federal................................................ $32,365 $302,556
State.................................................. 6,651 51,500
------- --------
$39,016 $354,056
======= ========
</TABLE>
Deferred tax assets and liabilities have not been recorded since the amounts
were immaterial to the financial statements at December 31, 1995 or March 3,
1996.
The provision for income taxes does not bear the normal relationship to net
income due to the following:
<TABLE>
<CAPTION>
MARCH 3, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Expected state and federal income taxes............... $19,905 $279,026
Increase due to non-deductibility of meals............ 19,111 75,030
------- --------
Provision........................................... $39,016 $354,056
======= ========
</TABLE>
6. SUBSEQUENT EVENT:
On March 3, 1996, all of the equipment and intangible assets used in the
operation of the Company's business were acquired by Comforce Global, Inc.
F-81
<PAGE>
RRA, INC.
DATATECH TECHNICAL SERVICES, INC. AND
PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED FINANCIAL STATEMENTS
AS OF MAY 10, 1996 AND FOR THE PERIOD
JANUARY 1, 1996 THROUGH MAY 10, 1996
F-82
<PAGE>
Report of Independent Accountants
To the Shareholders of RRA, Inc., Datatech Technical Services, Inc. and
Project Staffing Support Team, Inc.:
We have audited the accompanying combined balance sheet of RRA, Inc., Datatech
Technical Services, Inc. and Project Staffing Support Team, Inc. (the
"Companies") as of May 10, 1996, and the related combined statements of income,
changes in shareholders' equity, and cash flows for the period January 1, 1996
through May 10, 1996. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of RRA, Inc., Datatech
Technical Services, Inc. and Project Staffing Support Team, Inc. as of May 10,
1996, and the combined results of their operations and their cash flows for the
period January 1, 1996 through May 10, 1996, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Melville, New York
October 28, 1996.
F-83
<PAGE>
RRA, Inc., Datatech Technical Services, Inc. and
Project Staffing Support Team, Inc.
Combined Balance Sheet
as of May 10, 1996
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Current assets:
Accounts receivable - trade 5,698,118
Notes receivable from related parties 443,801
Account receivable - related party 14,000
Other receivables 38,812
Prepaid expenses and other current assets 99,923
--------------
Total current assets 6,294,654
Fixed assets, net 259,779
Long-term note receivables from related parties 10,124
Other assets 14,960
--------------
Total assets $ 6,579,517
==============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY:
<S> <C>
Current liabilities:
Cash overdraft $ 342,866
Accounts payable 44,238
Note payable - bank 575,000
Accrued payroll and benefits 1,533,732
Accrued expenses 594,534
Accrued pension 1,149,648
Note payable - related party 22,966
--------------
Total current liabilities 4,262,984
--------------
Shareholders' equity:
Common stock 19,560
Additional paid-in capital 415,631
Retained earnings 1,881,342
--------------
Total shareholders' equity 2,316,533
--------------
Total liabilities and shareholders' equity $ 6,579,517
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-84
<PAGE>
RRA, Inc., Datatech Technical Services, Inc. and
Project Staffing Support Team, Inc.
Combined Statement of Income
for the period January 1, 1996 through May 10, 1996
<TABLE>
<S> <C>
Revenue:
Sales $ 22,085,811
Other revenue 713,611
---------------
Total revenue 22,799,422
Expenses:
Employee payroll and benefits 20,958,947
General and administrative 1,174,592
Depreciation and amortization 34,431
Legal settlement 200,000
---------------
22,367,970
---------------
Operating income 431,452
Interest expense 34,310
---------------
Net income $ 397,142
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-85
<PAGE>
RRA, Inc., Datatech Technical Services, Inc. and
Project Staffing Support Team, Inc.
Combined Statement of Changes in Shareholders' Equity
for the period January 1, 1996 through May 10, 1996
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 19,560 $ 415,631 $ 1,928,460 $ 2,363,651
Distributions to shareholders (444,260) (444,260)
Net income for the period
January 1, 1996
through May 10, 1996 397,142 397,142
----------- ------------ -------------- ---------------
Balance, May 10, 1996 $ 19,560 $ 415,631 $ 1,881,342 $ 2,316,533
=========== ============ ============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-86
<PAGE>
RRA, Inc., Datatech Technical Services, Inc. and
Project Staffing Support Team, Inc.
Combined Statement of Cash Flows
for the period January 1, 1996 through May 10, 1996
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income $ 397,142
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization 34,431
Changes in operating assets and liabilities:
Increase in accounts receivable (405,339)
Increase in other receivables (34,002)
Increase in prepaid expenses and other assets (45,780)
Decrease in accounts payable (4,820)
Increase in accrued payroll and benefits 595,167
Increase in accrued pension 429,648
Increase in accrued expenses 366,910
--------------
Net cash provided by operating activities 1,333,357
--------------
Cash flows from investing activities:
Capital expenditures (25,330)
Net receipts (advances) on related party loans 3,458
---------------
Net cash used in investing activities (21,872)
---------------
Cash flows from financing activities:
Bank overdraft (154,013)
Net payments under line of credit agreements (645,000)
Principal payments on notes payable (121,874)
Distributions to shareholders (444,260)
--------------
Net cash used in financing activities (1,365,147)
--------------
Net decrease in cash (53,662)
Cash, January 1, 1996 53,662
-------------
Cash, May 10, 1996 $ -
=============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 34,310
=============
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-87
<PAGE>
RRA, Inc., Datatech Technical Services, Inc. and
Project Staffing Support Team, Inc.
Notes to Combined Financial Statements
1. Significant Accounting Policies:
Business Organization
RRA, Inc. ("RRA") was incorporated in 1964 under the laws of the State of New
York. Datatech Technical Services, Inc. ("DTS") was incorporated in 1991
under the laws of the State of Arizona and commenced operations in 1992.
Effective January 1, 1992, certain customer accounts and property and
equipment of RRA were transferred to DTS in exchange for a downpayment of
$25,000 and a note for $150,000. All intercompany transactions have been
eliminated in combination. The Companies are under common management and
control.
Project Staffing Support Team, Inc. ("PSST") was incorporated under the laws
of the State of Arizona and commenced operations in 1994. At inception, PSST
was owned in equal shares by Ray Rashkin and Stanley Rashkin.
Principles of Combination
These combined financial statements include the accounts of RRA, DTS, and
PSST (the "Companies"). All significant intercompany transactions and
balances have been eliminated in combination.
Nature of Business
The Companies provide individuals primarily to large corporate customers that
contract with various governmental entities throughout the United States. The
employees are provided on a temporary or semi-permanent basis. The
individuals are employees of the Companies. The Companies maintain offices in
Arizona, New York, Connecticut, New Mexico, Missouri, Washington, South
Carolina and California.
Cash and Cash Equivalents
The Company considers investments with a maturity of three months or less
when purchased to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the assets.
Amortization of leasehold improvements is provided using the straight-line
method over the lesser of the lease term or the estimated useful lives of the
assets.
F-88
<PAGE>
Notes to Combined Finacial Statements, Continued
Income Taxes
The Companies have elected under applicable sections of the Internal Revenue
Code to be treated as "S" corporations for income tax purposes. Therefore,
any income, loss and tax credits are reportable by the shareholders on their
individual income tax returns. Certain states in which the Companies do
business do not recognize the "S" corporation status or they impose minimum
taxes which are included in administrative expenses in the accompanying
combined statement of income.
Management's 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 dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. While management believes that these estimates
are adequate as of May 10, 1996, it is reasonably possible that actual
results could differ from those estimates.
Employee Benefit Plan
The Companies maintain 401(k) plans and Section 125 cafeteria plans for the
benefit of their employees. Employees elect to withhold specified amounts
from their wages to contribute to the plans. The Companies have a fiduciary
responsibility with respect to the plans.
Estimated Health Self-Insurance Claims
The Companies maintain a self-insurance plan for those employees who elect to
participate. Under this plan, the Companies are responsible for paying claims
up to $40,000 annually per individual. There are provisions for reinsurance
in the plan. The financial statements include an estimate for claims to be
paid under this policy.
2. Notes Receivable:
<TABLE>
<CAPTION>
Notes receivable consists of the following:
<S> <C>
Note receivable - shareholder, due on demand
with interest at 8% $ 217,332
Note receivable - shareholder, due on demand
with interest at 8% 11,819
Promissory note - shareholder, due on demand
with interest at 8% 214,650
Promissory note from one employee; payable
weekly with interest at 9.5%;
note matures in June 2000; secured by automobile 10,124
------------
Total notes receivable ($443,801 current portion) $ 453,925
============
</TABLE>
F-89
<PAGE>
Notes to Combined Financial Statements, Continued
3. Property and Equipment:
Property and equipment consists of the following:
Property and equipment $ 486,350
Leasehold improvements 132,803
-----------
619,153
Less accumulated depreciation (359,374)
-----------
$ 259,779
===========
Depreciation expense for the period ended May 10, 1996 was $29,485.
4. Note Payable - Bank:
Note payable-bank, consists of a revolving line of credit agreement which
provides for borrowings up to the lesser of $4,000,000 or 80% of acceptable
receivables as defined, with interest at prime plus .5%. The interest rate
as of May 10, 1996 was 8.75%. The note is collateralized by accounts
receivable, property and fixtures and inventory, and is personally
guaranteed by the shareholders. The line of credit agreement contains
certain restrictive covenants regarding the financial position of the
Companies. On May 13, 1996, the revolving line of credit was paid in full.
5. Note Payable - Related Party:
Notes payable-related party, consists of the following:
Uncollateralizeded note payable to an individual, due
on demand with interest payable monthly at 11% $ 22,966
===========
F-90
<PAGE>
Notes to Combined Financial Statements, Continued
6. Commitments:
The following is a schedule by years of approximate future minimum rental
payments on operating leases:
Period ended
May 12
1997 $ 77,193
1998 64,801
1999 62,521
2000 22,500
2001 -
----------
$ 227,015
==========
Total rent expense was $45,616 for the period ended May 10, 1996.
The Companies are responsible for property taxes, insurance and maintenance
on certain leases.
The Companies currently lease their office facilities in Tempe, Arizona from
one of the shareholders. The lease contains a five-year renewal option. The
rent on this office was $19,710 in the period ended May 10, 1996.
7. Concentration of Credit Risk:
The Companies' trade accounts receivable as of May 10, 1996 consist
primarily of amounts due from major companies requiring the use of technical
specialists in the electronics, avionics, telecommunications and information
technology business sectors. At May 10, 1996, the Companies had six
customers with trade accounts receivable balances that aggregated 74% of the
Companies' total accounts receivable. Percentages of total revenues from
significant customers for the period from January 1, 1996 to May 10, 1996
are as follows:
Customer 1 26%
Customer 2 22%
Customer 3 11%
The Companies maintain cash in bank accounts which at times may exceed
federally insured limits. The Companies have not experienced any losses in
such accounts and believe they are not exposed to any significant credit
risk on their cash balances. The Companies believe they mitigate such risk
by investing cash through major financial institutions.
F-91
<PAGE>
Notes to Combined Financial Statements, Continued
8. Common Stock:
Common stock consists of the following:
Common stock, RRA, no par; authorized 200 shares;
issued and outstanding 100 shares $ 19,558
Common stock, DTS, $.01 par; authorized 100 shares;
issued and outstanding 100 shares 1
Common stock, PSST, $.01 par; authorized 100 shares;
issued and outstanding 100 shares (see below) 1
----------
$ 19,560
==========
9. Money Purchase Pension Plan:
On June 1, 1993, the Company adopted a pension plan that contributes 10% to
covered employees. This covered initially the Phoenix based administrative
group. In December 1993, the plan was amended to include employees at
Lawrence Livermore National Laboratory effective January 1, 1994. The
administrative group was removed from the plan on January 1, 1995 and
employees at Los Alamos were included as of May 1, 1995. The accrual as of
May 10, 1996 was $1,149,648. Expense for the period ended May 10, 1996 was
$429,648.
10. Litigation, Claims and Assessments:
DTS complied with a client request to place a former client employee on the
DTS payroll for the purpose of providing payrolling services. The individual
was involved in an accident during his employment which resulted in the
death of the individual, reported injuries to another individual, and damage
to the client's property. A claim has been made against DTS on the theory
that DTS is liable for the individual's alleged negligence in the accident.
On September 30, 1996, DTS entered into a settlement agreement with its
client whereby DTS has no further exposure in connection with the accident
and will not be required to incur any additional costs. The settlement
agreement provides that DTS shall pay the sum of $200,000 to its client in
monthly installments of $30,000. The Company has recorded a liability of
$200,000 as of May 10, 1996.
11. Subsequent Event:
On May 10, 1996, the stock of PSST and substantially all of the assets of
RRA and DTS were sold to Comforce Corporation for an aggregate purchase
price of approximately $5,100,000 plus contingent payments payable over
three years in an aggregate amount not to exceed $650,000.
F-92
<PAGE>
Notes to Combined Financial Statements, Continued
In September 1996, the Company received notice of litigation from a
competitor who charged that the Company obtained and benefitted from a list
of confidential data provided by a former employee of the competitor. The
Company has denied such charges. Management and its legal counsel believe
that the resolution of this matter will not result in a material adverse
effect to the financial position of the Company or its operations.
F-93
<PAGE>
RRA, INC.
DATATECH TECHNICAL SERVICES, INC. AND
PROJECT STAFFING SUPPORT TEAM, INC.
Combined Financial Statements
as of December 31, 1995 and 1994
Together With Auditor's Report
F-94
<PAGE>
To The Shareholders
RRA, Inc., Datatech Technical Services, Inc.
and Project Staffing Support Team, Inc.
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying combined balance sheets of RRA, Inc., Datatech
Technical Services, Inc., and Project Staffing Support Team, Inc. as of December
31, 1995 and 1994, and the related combined statements of income, changes in
shareholder's equity, and cash flows for each of the three years in the period
ended December 31, 1995. These combined financial statements are the
responsibility of the Companies' 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 RRA, Inc., Datatech Technical
Services, Inc., and Project Staffing Support Team, Inc. as of December 31, 1995
and 1994, and the results of their operations and cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic combined
financial statements taken as a whole. The information included in the
accompanying schedules is presented for purposes of additional analysis and is
not a required part of the basic financial statements. Such information has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/ Alexander & Devoley P.C.
Phoenix, Arizona
February 1, 1996
F-95
<PAGE>
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED BALANCE SHEET
For the Years Ended December 31, 1995 and 1994
ASSETS
------
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 53,662 $ 426,312
Accounts receivable - trade 5,292,779 3,434,704
Other accounts receivable 4,810 10,411
Note receivable - employee, current portion (Note 2) 9,440 1,810
Note receivable - related parties, current portion (Note 2) 237,114 148,050
Prepaid expenses 49,616 27,284
Investments 4,925 --
---------- ----------
Total current assets 5,652,346 4,048,571
---------- ----------
PROPERTY AND EQUIPMENT (NOTE 1):
Office furniture and equipment 438,607 346,395
Leasehold improvements 131,325 114,435
Vehicles 23,912 215,330
---------- ----------
593,844 676,160
Less accumulated depreciation and amortization 329,890 321,003
---------- ----------
263,954 355,157
---------- ----------
OTHER ASSETS:
Refundable deposits 9,666 50,396
Note receivable - employee, long-term portion (Note 2) 8,829 7,412
Note receivable - related parties, long-term portion (Note 2) 216,000 216,000
Deferred loan fee, less amortization of $3,333 in 1995 and
$5,312 in 1994 1,667 2,188
Organizational costs, less accumulated amortization of
$13,121 in 1995 and $9,841 in 1994 (Note 1) 3,280 6,560
Client lists, less amortization of $14,625 in 1995 and
$8,125 in 1994 (Note 1) 4,875 11,375
---------- ----------
244,317 293,931
---------- ----------
$6,160,617 $4,697,659
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-96
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Bank overdraft $ 496,879 $ 148,474
Accounts payable 49,058 42,572
Notes payable (Note 4) 38,183 59,823
Note payable - bank (Note 3) 1,220,000 1,200,000
Note payable - shareholder; due on demand at 9.5% 100,000 --
Current portion of long-term debt 6,657 62,978
Accrued expenses:
Wages, vacation, and holiday 756,096 817,041
Payroll taxes and withholdings 182,469 170,283
Gross receipts tax 78,141 64,565
Self insurance claims (Note 1) 140,000 120,000
Interest 9,483 10,999
Pension plan contributions (Note 8) 720,000 285,287
---------- ----------
Total current liabilities 3,796,966 2,982,022
---------- ----------
LONG-TERM DEBT (NOTE 5): -- 73,185
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock (Note 7) 19,560 19,560
Additional paid-in capital 415,631 387,863
Retained earnings 1,928,460 1,235,029
---------- ----------
2,363,651 1,642,452
---------- ----------
$6,160,617 $4,697,659
========== ==========
</TABLE>
F-97
<PAGE>
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENT OF INCOME
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE (Note 1) $52,011,107 $38,559,163 $25,016,730
COST OF REVENUE 47,830,459 35,601,360 23,313,171
----------- ----------- -----------
GROSS PROFIT 4,180,648 2,957,803 1,703,559
GENERAL AND ADMINISTRATIVE EXPENSES 2,991,540 2,289,461 1,487,757
----------- ----------- -----------
INCOME FROM OPERATIONS 1,189,108 668,342 215,802
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (175,338) (167,780) (133,311)
Interest income 37,044 24,993 23,540
Gain on sale of fixed assets 5,385 -- --
----------- ----------- -----------
(132,909) (142,787) (109,771)
----------- ----------- -----------
NET INCOME $ 1,056,199 $ 525,555 $ 106,031
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-98
<PAGE>
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 $19,559 $240,264 $ 662,843 $ 922,666
CONTRIBUTION TO CAPITAL (NOTE 7) -- 85,000 -- 85,000
DISTRIBUTION TO SHAREHOLDER -- -- (7,500) (7,500)
NET INCOME - 1993 -- -- 106,031 106,031
------- -------- ---------- ----------
BALANCE, DECEMBER 31, 1993 19,559 325,264 761,374 1,106,197
ISSUANCE OF 100 SHARES OF
COMMON STOCK (NOTE 7) 1 -- -- 1
CONTRIBUTIONS TO CAPITAL (NOTE 7) -- 62,599 -- 62,599
DISTRIBUTIONS TO SHAREHOLDERS -- -- (51,900) (51,900)
NET INCOME - 1994 -- -- 525,555 525,555
------- -------- ---------- ----------
BALANCE, DECEMBER 31, 1994 19,560 387,863 1,235,029 1,642,452
REDEMPTION OF STOCK AND CAPITAL
(NOTE 7) -- (25,000) -- (25,000)
CONTRIBUTIONS TO CAPITAL (NOTE 7) -- 52,768 -- 52,768
DISTRIBUTIONS TO SHAREHOLDERS -- -- (362,768) (362,768)
NET INCOME - 1995 1,056,199 1,056,199
---------- ----------
BALANCE, DECEMBER 31, 1995 $19,560 $415,631 $1,928,460 $2,363,651
======= ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-99
<PAGE>
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 50,152,358 $ 37,544,620 $ 25,179,069
Cash paid to suppliers and employees (50,220,197) (36,842,673) (24,664,840)
Interest paid (176,854) (98,437) (137,683)
Interest received 674 3,544 51
------------ ------------ ------------
NET CASH (USED IN) PROVIDED FROM OPERATING
ACTIVITIES (244,019) 607,054 376,597
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (109,101) (321,652) (55,553)
Net receipts (advances) on related party loans 17,765 (17,845) (115,820)
Net receipts (advances) on employee loans 2,953 (9,222) --
Purchase of investment stock (4,925) -- --
Business list purchase -- -- (19,500)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (93,308) (348,719) (190,873)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft 348,405 148,474 --
Borrowings under line of credit agreements 32,330,000 8,433,040 6,500,000
Payments under line of credit agreements (32,310,000) (8,474,700) (6,669,856)
Principal payments on notes payable - other (21,640) (117,649) (69,251)
Proceeds from stock issuance or capital contributions 27,768 62,600 85,000
Distributions to shareholders (362,768) (51,900) (7,500)
Proceeds from long-term debt -- 190,285 --
Proceeds from sale of fixed assets 87,418 -- --
Payments on long-term debt (129,506) (54,122) --
Payment of deferred loan fee (5,000) (7,500) --
------------ ------------ ------------
NET CASH (USED IN) PROVIDED FROM FINANCING
ACTIVITIES (35,323) 128,528 (161,607)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (372,650) 386,863 24,117
CASH AT BEGINNING OF YEAR 426,312 39,449 15,332
------------ ------------ ------------
CASH AT END OF YEAR $ 53,662 $ 426,312 $ 39,449
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-100
<PAGE>
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1994, and 1995
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ----------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
(USED BY) PROVIDED FROM OPERATING
ACTIVITIES:
NET INCOME $ 1,056,199 $ 525,555 $106,031
----------- ----------- --------
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH (USED BY) PROVIDED FROM
OPERATING ACTIVITIES:
Depreciation and amortization 114,743 133,454 57,819
(Gain) Loss on abandonment and sale of fixed
assets (5,385) 2,067 --
Increase in accounts receivable (1,858,075) (1,010,999) 162,339
Decrease in other receivables 5,601 6,883 7,220
Decrease (Increase) in prepaid expenses and
deposits 18,398 (19,887) 72
(Decrease) Increase in accounts payable (3,014) 23,764 (5,801)
Increase in accrued expenses 427,514 946,217 48,917
-------- ----------- --------
Total adjustments (1,300,218) 81,499 270,566
----------- ----------- --------
NET CASH (USED BY) PROVIDED FROM
OPERATING ACTIVITIES $ (244,019) $ 607,054 $376,597
=========== =========== ========
</TABLE>
See accompanying notes to financial statements.
F-101
<PAGE>
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1995 and 1994
(1) SIGNIFICANT ACCOUNTING POLICIES:
Business organization
---------------------
RRA, Inc. (RRA) was incorporated in 1964 under the laws of the State of
New York. Datatech Technical Services, Inc. (DTS) was incorporated in 1991
under the laws of the State of Arizona and commenced operations in 1992.
Effective January 1, 1992, certain customer accounts and property and
equipment of RRA were transferred to DTS in exchange for a down payment of
$25,000 and a note for $150,000. The terms of the note call for 10 equal
annual payments to RRA from DTS of $22,354, which includes principal and
interest at 8%. The note receivable and note payable have been eliminated
in combination. DTS charged RRA $225,350 in 1994 and $150,000 in 1993 for a
management fee. Any income or expense related to these transactions have
been eliminated in combination. The Companies remain under common
management and control. Ray Rashkin owns 100% of RRA. Stanley Rashkin owns
100% of DTS.
Project Staffing support Team, Inc. (PSST) was incorporated under the
laws of the State of Arizona and commenced operations in 1994. At
inception, PSST was owned in equal shares by Ray Rashkin and Stanley
Rashkin. PSST had no revenue in 1994, and absorbed $41,327 in costs.
In 1995, RRA charged PSST $208,607 for a management fee. Ray Rashkin
redeemed his shares during the year, leaving Stanley Rashkin as the sole
shareholder of PSST (see note 7).
Principles of combination
-------------------------
These combined financial statements include the accounts of RRA, DTS,
and PSST. All significant intercompany transactions and balances have been
eliminated in combination.
Nature of business
------------------
The Companies provide highly trained individuals primarily to large
corporate customers that contract with various governmental entities
throughout the United States. The employees are provided on a temporary or
semi-permanent basis. The individuals are employees of the Companies. The
Companies maintain offices in Arizona, New York, Connecticut, New Mexico,
Missouri, Washington, South Carolina, and California.
The companies have two major contracts that are renewable. One of the
contracts started early in 1994. Management is confident these contracts
will continue. The largest of the two renewed for five years, and the other
contract was extended for the second option year to January 1997.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from these estimates.
Property and equipment
----------------------
Property and equipment are stated at cost. Depreciation is provided
using accelerated methods over the estimated useful lives of the assets.
Amortization of leasehold improvements is provided using the straight-line
method over the lesser of the lease term or the estimated useful lives of
the assets. Depreciation expense was $99,442, $118,362 and $52,914 in 1995
1994, and 1993 respectively.
F-102
<PAGE>
Organizational costs, client lists and deferred loan fees
---------------------------------------------------------
Organizational costs for DTS are being amortized on a straight-line
basis over five years. Client lists purchased for $19,500 are being
amortized over three years. Deferred loan fees are being amortized over the
term of the revolving line of credit agreement.
Concentration of risks
----------------------
Periodically during the year, the Companies maintain cash in financial
institutions in excess of the amounts insured by the Federal government.
Income taxes
------------
The Companies have elected under applicable sections of the Internal
Revenue Code to be treated as "S" Corporations for income tax purposes.
Therefore, any income, loss and tax credits are reportable by the
shareholders on their individual income tax returns. In 1995, the owners
drew approximately $335,000 to pay estimated taxes on the earnings from
these entities, with an additional $70,000 drawn in January 1996. Certain
states in which the Companies do business do not recognize the "S"
Corporation status or they impose minimum taxes. State income taxes are
more of a license cost. They are included in administrative expenses in the
accompanying combined statement of income. DTS reports to the Internal
Revenue Service using the cash basis of accounting.
Employee benefit plan
---------------------
The Companies maintain 401(k) plans and Section 125 cafeteria plans for
the benefit of their employees. Employees elect to withhold specified
amounts from their wages to contribute to the plans. The Companies have a
fiduciary responsibility with respect to the plans.
Estimated health self-insurance claims
--------------------------------------
The Companies maintain a self-insurance plan for those employees who
elect to participate. Under this plan, the Company is responsible for
paying claims up to $40,000 annually per individual. The financial
statements include an estimate for claims to be paid under this policy. See
the accompanying supplementary schedule of Combined Cost of Revenue for the
cost of healthcare benefits.
There are provisions for reinsurance in the plan. Amounts for claims
greater than $40,000 annually per individual are fully insured.
Revenue
-------
Revenues are earned based upon negotiated contracts with large corporate
customers. The negotiated wages are charged to the customers based on an
employee's salary or the hours worked and the labor category that the
employee holds. Revenue is recognized when earned, and billings are
submitted weekly to encompass the proceeding week's income producing
employee payroll.
F-103
<PAGE>
(2) NOTES RECEIVABLE:
Notes receivable - related parties consists of the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Note receivable - shareholder, is an informal, unsecured
agreement due on demand with interest at 8% $ 6,830 $ 57,604
Note receivable - shareholder, is an informal, unsecured
agreement due on demand with interest at 8% 213,737 81,705
Accrued interest on the above 16,547 8,741
-------- --------
Total shown as a current asset $237,114 $148,050
======== ========
Note receivable - shareholder, is an unsecured note
which requires monthly interest only payments at prime
plus 1.5% through 2005 when all principal and interest
is due; 1995 and 1994 include $16,000 in accrued
interest receivable $216,000 $216,000
======== ========
Note receivable - employee consists of the following:
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Promissory note from one employee; payable weekly
with interest at 8%; note matures in July 1999; Upon
termination, the note is immediately due and payable. $ 7,374 $ 9,222
Promissory note from one employee; payable weekly
with interest at 9.5%; note matures in June 2000; secured
by automobile. 10,895 --
-------- --------
Less current portion 18,269 9,222
9,440 1,810
-------- --------
$ 8,829 $ 7,412
======== ========
</TABLE>
(3) NOTE PAYABLE - BANK:
Note payable - bank, consists of a revolving line of credit agreement
which provides for borrowings up to the lesser of $4,000,000 or 80% of
acceptable receivables as defined, payable in full May 1, 1996 with
interest at prime plus .5%. The interest rate as of December 31, 1995 was
8.75%. The note is collateralized by accounts receivable, property and
fixtures, and inventory, and is personally guaranteed by the
shareholders. The line of credit agreement contains certain restrictive
covenants regarding the financial position of the Companies. The
Companies were in compliance with respect to the restrictive covenants as
of December 31, 1995 and 1994.
F-104
<PAGE>
(4) NOTES PAYABLE - OTHER:
Notes payable - other consists of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Unsecured note payable to an individual, due on demand
with interest payable monthly at prime plus 1.5%. $ -- $ 3,346
Unsecured note payable to an individual, due on demand
with interest payable monthly at prime plus 1.5%. -- 56,477
-------- --------
$ -- $ 59,823
======== ========
</TABLE>
A new agreement was entered at the end of 1995 with the party of the
first note mentioned above. The note is due on demand with interest
payable monthly at 11%. The balance on December 31, 1995 was $38,183.
(5) LONG-TERM DEBT:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
6.75% notes payable to Toyota Motor Credit Corp;
aggregate monthly payments of $5,854, including
interest; original amount of $190,285 beginning in
January 1994; matures in January 1997; secured by
vehicles. $ 6,657 $136,163
Less current portion 6,657 62,978
-------- --------
$ -- $ 73,185
======== ========
</TABLE>
Eleven 1994 Toyota trucks were purchased in 1994 and were leased
individually to a large customer for $550 per month. In 1995, ten of the
vehicles were sold and the notes were paid off. The remaining note was
paid off in January 1996.
(6) COMMITMENTS:
As of December 31, 1995, the Companies have the following commitments
for operating facilities, which are accounted for as operating leases:
<TABLE>
<CAPTION>
Approximate
Expiration base monthly
of lease rent
---------------------- -----------------
<S> <C> <C>
Plainview, New York Month-to-month $ 1,000
Tempe, Arizona January, 2000 4,380
Albuquerque, New Mexico October, 1996 1,185
Stamford, Connecticut Month-to-month 145
Greenville, S. Carolina June, 1996 419
Kennewick, Washington October, 1996 705
St. Louis, Missouri December, 1996 554
Carlsbad, New Mexico December, 1996 450
</TABLE>
The Companies are responsible for property taxes, insurance and
maintenance on certain leases.
F-105
<PAGE>
The Companies currently lease their office facilities in Tempe,
Arizona from one of the shareholders. The lease contains a five-year
renewal option. The rent on this office totalled $54,932 in 1995, $47,938
in 1994 and $42,864 in 1993.
The following is a schedule by years of approximate future minimum
rental payments on operating leases. The leases in New York, Connecticut,
and Arizona are included through 2000:
Year ended
December 31,
------------
1996 $ 99,762
1997 66,300
1998 66,300
1999 66,300
2000 66,300
--------
$364,962
========
Total rent expense was $98,822 for the year ended December 31, 1995,
$94,653 for 1994 and $89,059 for 1993.
(7) COMMON STOCK AND CONTRIBUTIONS TO CAPITAL:
Common stock consists of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Common stock, RRA, no par;
authorized 200 shares;
issued and outstanding 100 shares $19,558 $19,588
Common stock, DTS, $.01 par;
authorized 100 shares;
issued and outstanding 100 shares 1 1
Common stock, PSST, $.01 par;
authorized 100 shares;
issued and outstanding 100 shares (see below) 1 1
------- -------
$19,560 $19,560
======= =======
</TABLE>
A contribution to capital for $85,000 was made for the year ended
December 31, 1993 as part of "S" Corporation tax planning.
Contributions to capital for the year ended December 31, 1994 were
used in part as equity for the new corporation (PSST) and totaled
$49,999. An additional $12,600 was contributed to capital at the owner's
discretion.
In July 1995, PSST redeemed Ray Rashkin's fifty shares upon his
resignation as president of the corporation. The shares were retired by
the corporation at fifty-percent of the net equity of the corporation as
of June 30, 1995.
This transaction had the effect of lowering the issued and outstanding
shares to fifty. Paid in capital of PSST was reduced by $25,000. Ray
Rashkin used the proceeds from the redemption as additional paid in
capital of RRA, Inc.
F-106
<PAGE>
(8) MONEY PURCHASE PENSION PLAN:
On June 1, 1993, the Company adopted a pension plan that contributes
10% to covered employees. This covered initially the Phoenix based
administrative group. In December, 1993, the plan was amended to include
employees at Lawrence Livermore National Laboratory effective January 1,
1994. In 1995, the administrative group was removed from the plan on
January 1, and employees at Los Alamos were included as of May 1. The
accrual as of December 31, 1995 and 1994 was $720,000 and $285,287,
respectively. Expense for 1995, 1994 and 1993 was $911,339, $269,913, and
$9,089, respectively.
(9) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For purposes of the Statement of Cash Flows, management considers all
highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
Bank overdrafts are included as a financing activity because of their
direct relation to line of credit funding.
Cash paid during the years ended December 31, 1995, and 1994 and
1993 was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest $176,854 $ 98,437 $137,683
======== ======== ========
</TABLE>
Noncash investing and financing activities
------------------------------------------
During 1994, the Washington and Texas offices were closed. Assets with
a book value of $2,067 were written off.
A financing arrangement for the purchase of trucks was entered in
1994. Assets were capitalized and loans were obtained totalling $190,285
in connection with this transaction.
Common stock and paid in capital for PSST were made in 1994 through
adjustments to retained earnings and notes receivable from related
parties. In relation to this, the redemption of stock in 1995 for $25,000
was an adjustment to paid in capital and notes receivable (see note 7).
In 1995, a truck owned by the company was purchased by an employee for
a note for $12,000. A truck was purchased by a shareholder as a note
receivable for $6829.
(10) LITIGATION, CLAIMS, AND ASSESSMENTS:
DTS complied with a client request to place a former client employee
on the DTS payroll for the purpose of providing payrolling services. The
individual was involved in an accident during his employment which
resulted in the death of the individual, reported injuries to another
individual, and damage to the client's property. A claim has been made
against DTS on the theory that the company is vicariously liable for the
individual's alleged negligence in the accident.
The injured individual has filed a personal injury lawsuit against DTS
and the client. A recent settlement demand was made for $1.2 million. In
addition, the client has informally requested that DTS settle with it for
the property damage that they approximate to be $1.58 million.
DTS will vigorously defend the current lawsuit and any other legal
action that is taken against it in relation to this occurrence.
Due to the facts described above, the amount of possible loss to DTS
cannot be reasonably estimated, although it is possible that a loss may
occur as a result of this legal action. Any potential loss has not been
recorded on the accompanying financial statements.
F-107
<PAGE>
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED COST OF REVENUE
For the Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Salaries $38,288,202 $28,451,365 $18,864,072
Payroll Taxes 3,335,931 2,493,840 1,642,875
Per Diem 1,524,415 714,387 878,097
Healthcare Benefits 1,173,836 986,378 348,047
Other 57,894 199,329 197,129
Subcontractors -- 19,975 2,275
Vacation and Holiday Pay 2,276,145 2,231,270 1,216,704
Workman's Compensation Insurance 262,697 234,903 154,883
Pension Plan 911,339 269,913 9,089
----------- ----------- -----------
$47,830,459 $35,601,360 $23,313,171
=========== =========== ===========
</TABLE>
F-108
<PAGE>
RRA, INC., DATATECH TECHNICAL SERVICES, INC.
AND PROJECT STAFFING SUPPORT TEAM, INC.
COMBINED GENERAL AND ADMINISTRATIVE EXPENSES
For the Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Salaries:
Officers $ 462,217 $ 326,333 $ 179,148
Office 897,526 619,640 468,159
Payroll Taxes 97,141 72,113 54,095
Accounting 23,221 10,850 26,991
Advertising 85,984 37,844 19,738
Business Developments 66,241 5,587 6,608
Commissions 85,279 42,150 27,763
Depreciation and Amortization 114,743 133,454 57,819
Insurance 129,973 105,860 65,248
Legal Fees 82,644 89,082 45,291
Licenses and Fees 12,873 3,150 5,182
Miscellaneous 59,997 124,164 57,037
Office Expense 165,433 117,798 73,279
Outside Services 159,348 147,220 81,054
Property Taxes 11,221 2,430 1,855
Rent 104,968 96,010 89,059
Repairs and Maintenance 25,242 9,821 9,321
Telephone 104,230 90,802 82,997
Travel and Subsistence 287,473 237,242 124,032
Utilities 15,786 15,844 13,081
---------- ---------- ----------
$2,991,540 $2,287,394 $1,487,757
========== ========== ==========
</TABLE>
F-109
<PAGE>
FORCE FIVE, INC.
--------
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1995
F-110
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Force Five, Inc.:
We have audited the accompanying balance sheets of Force Five, Inc. as of July
31, 1996 and December 31, 1995, and the related statements of operations,
stockholders' equity, and cash flows for the seven-month period ended July 31,
1996 and for the year ended December 31, 1995. 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 Force Five, Inc. as of July
31, 1996 and December 31, 1995, and the results of its operations and its cash
flows for the seven-month period ended July 31, 1996 and for the year ended
December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Dallas, Texas
October 23, 1996
F-111
<PAGE>
FORCE FIVE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1996 1995
ASSETS ---------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 38,809 $ 400
Trade accounts receivable (net of allowance for doubtful
accounts of
$44,630 at July 31, 1996)............................... 966,760 988,326
Advances receivable from employees....................... 23,359 26,487
Prepaid expenses and other assets........................ 27,947 4,120
---------- ----------
Total current assets................................... 1,056,875 1,019,333
Property and equipment, net................................ 91,559 52,406
Deferred income taxes...................................... 7,478 3,354
Other assets............................................... 387 387
---------- ----------
Total assets........................................... $1,156,299 $1,075,480
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................... $ 34,127 $ 32,526
Accrued liabilities...................................... 380,850 362,322
Deferred income taxes.................................... 126,796 171,925
Line of credit........................................... 400,000 100,000
Note payable............................................. 92,130
---------- ----------
Total current liabilities.............................. 941,773 758,903
---------- ----------
Stockholders' equity:
Common stock, 100,000 shares authorized, 10,000 shares,
$1.00 par value......................................... 10,000 10,000
Retained earnings........................................ 241,526 343,577
Treasury stock, at cost.................................. (37,000) (37,000)
---------- ----------
Total stockholders' equity............................. 214,526 316,577
---------- ----------
Total liabilities and stockholders' equity........... $1,156,299 $1,075,480
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-112
<PAGE>
FORCE FIVE, INC.
STATEMENTS OF OPERATIONS
FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Sales................................................ $ 4,598,183 $ 7,066,900
----------- -----------
Direct costs and expenses:
Cost of sales...................................... (3,454,072) (5,287,437)
General and administrative expenses................ (1,288,273) (1,391,784)
----------- -----------
Total direct costs and expenses.................. (4,742,345) (6,679,221)
----------- -----------
(144,162) 387,679
Other income......................................... 36,000
Interest expense..................................... (7,142) (47,627)
----------- -----------
Income (loss) before provision for income taxes...... (151,304) 376,052
Income tax benefit (provision)....................... 49,253 (120,092)
----------- -----------
Net income (loss)................................ $ (102,051) $ 255,960
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-113
<PAGE>
FORCE FIVE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK RETAINED TREASURY
-------------- --------- ---------------- ---------
SHARES AMOUNT EARNINGS SHARES AMOUNT TOTAL
------ ------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... 10,000 $10,000 $ 87,617 $ 97,617
Net income.............. 255,960 255,960
Purchase of common stock
for treasury........... (1,000) $(37,000) (37,000)
------ ------- --------- ------ -------- ---------
Balance at December 31,
1995................... 10,000 10,000 343,577 (1,000) (37,000) 316,577
Net loss................ (102,051) (102,051)
------ ------- --------- ------ -------- ---------
Balance at July 31,
1996................... 10,000 $10,000 $ 241,526 (1,000) $(37,000) $ 214,526
====== ======= ========= ====== ======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-114
<PAGE>
FORCE FIVE, INC.
STATEMENTS OF CASH FLOWS
FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $(102,051) $ 255,960
Adjustments to reconcile net income (loss) to cash
flows provided by operating activities:
Provision for bad debt............................. 44,630
Depreciation....................................... 13,978 18,593
Gain on sale of intangible assets.................. (36,000)
Deferred income taxes.............................. (49,253) 120,092
Changes in operating assets and liabilities:
Increase in trade accounts receivable............ (23,064) (423,297)
Decrease (increase) in advances receivable from
employees....................................... 3,128 (17,400)
Increase in prepaid expenses and other assets.... (23,827) (3,162)
Increase in trade accounts payable............... 1,601 23,002
Increase in accrued liabilities.................. 18,528 221,053
--------- ---------
Net cash (used in) provided by operating
activities.................................... (116,330) 158,841
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment................... (53,131) (55,769)
--------- ---------
Net cash used in investing activities.......... (53,131) (55,769)
--------- ---------
Cash flows from financing activities:
Payments on line of credit, net...................... (75,000)
Proceeds from new line of credit, net................ 300,000 100,000
Proceeds from note payable........................... 100,000
Payments on note payable............................. (92,130) (7,870)
Payments on loans from directors and their
associates.......................................... (262,583)
Purchase of treasury stock........................... (1,000)
--------- ---------
Net cash provided by (used in) financing
activities.................................... 207,870 (146,453)
--------- ---------
Net increase (decrease) in cash and cash equivalents... 38,409 (43,381)
Cash and cash equivalents, beginning of period......... 400 43,781
--------- ---------
Cash and cash equivalents, end of period............... $ 38,809 $ 400
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................... $ 7,142 $ 63,593
Taxes.............................................. $ 17,000 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-115
<PAGE>
FORCE FIVE, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Force Five, Inc., a Texas corporation, provides contract data processing
services to the information technology industry primarily in Arkansas,
California and Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION: Revenue for providing staffing services is recognized
at the time such services are rendered.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include highly liquid,
short-term investments with an original maturity date of three months or less.
Trade accounts payable includes a book overdraft of $2,863 as of December
31, 1995.
TRADE ACCOUNTS RECEIVABLE: Trade accounts receivable consist of those
amounts due to the Company for staffing services rendered to various
customers.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Expenditures for maintenance and repairs are charged to operations as
incurred. Expenditures for betterments and major renewals are capitalized. The
cost of assets sold or retired and the related amount of accumulated
depreciation are eliminated from the accounts in the year of disposal, with
any profit or loss included in income.
Depreciation and amortization of assets are provided using the straight-line
method over the estimated useful life of the asset.
INCOME TAXES: The Company recognizes deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
A valuation allowance is recorded when necessary to reduce deferred tax assets
to their expected realizable value.
USE OF ESTIMATES: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
LIFE OF JULY 31, DECEMBER 31,
EQUIPMENT 1996 1995
--------- -------- ------------
<S> <C> <C> <C>
Office equipment.............................. 4 years $ 61,245 $41,694
Furniture and fixtures........................ 10 years 14,566 10,071
Automobiles................................... 4 years 53,085 24,000
-------- -------
128,896 75,765
Less accumulated depreciation................. 37,337 23,359
-------- -------
$ 91,559 $52,406
======== =======
</TABLE>
F-116
<PAGE>
FORCE FIVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. INCOME TAXES:
The difference between the statutory federal income tax rate and the
effective income tax rate is reconciled as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF EARNINGS
BEFORE INCOME TAXES
--------------------------
SEVEN-MONTH YEAR ENDED
PERIOD ENDED DECEMBER 31,
JULY 31, 1996 1995
------------- ------------
<S> <C> <C>
Statutory federal tax rate........................ (34.0) 34.0
Nontaxable gain on sale of intangible assets...... (3.4)
Nondeductible expenses and life insurance
premiums......................................... 1.5 1.3
----- ----
(32.5) 31.9
===== ====
</TABLE>
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 July 31, 1996 and December 31, 1995 and
their approximate tax effects are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- ----------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCE DIFFERENCE DIFFERENCE DIFFERENCE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Property and equipment........... $ 21,994 $ 7,478 $ 9,866 $ 3,354
Accrued other.................... 403,338 137,135 388,202 131,988
Net operating loss............... 190,495 64,768 94,459 32,117
Provision for bad debt........... 44,630 15,174
----------- --------- --------- ---------
Total deferred tax asset..... $ 660,457 224,555 $ 492,527 167,459
=========== --------- ========= ---------
Trade accounts receivable........ $(1,011,390) (343,873) $(988,326) (336,030)
----------- --------- --------- ---------
Total deferred tax liability. $(1,011,390) (343,873) $(988,326) (336,030)
=========== --------- ========= ---------
Net deferred tax liability. $(119,318) $(168,571)
========= =========
</TABLE>
At July 31, 1996 and December 31, 1995, the Company had a federal income tax
loss carryforward of approximately $190,000 and $94,000, respectively,
available to be applied against future taxable income, if any, expiring
principally in 2008 - 2010. Section 382 of the Internal Revenue Code of 1986
limits a corporation's utilization of its federal income tax loss
carryforwards when certain changes in the ownership of a corporation's common
stock occurs.
F-117
<PAGE>
FORCE FIVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. CONCENTRATION OF CREDIT RISK:
The Company's trade accounts receivable as of July 31, 1996 and December 31,
1995 consist primarily of amounts due from major companies requiring the use
of Information Technology contract consultants. As a result, the
collectibility is spread across various industries and is not dependent on any
particular industry sector. At July 31, 1996 and December 31, 1995, the
Company had six and five customers, respectively, with trade accounts
receivable balances that aggregated 50% and 60%, respectively, of the
Company's total accounts receivable. Percentages of total revenues from
significant customers for the seven-month period ended July 31, 1996 and the
year ended December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Customer 1.............................................. 13.8% 20.0%
Customer 2.............................................. 10.4% 17.3%
Customer 3.............................................. 7.1% 7.7%
</TABLE>
In August 1996, a customer of the Company filed for Chapter 11 bankruptcy
protection. The Company has recorded a reserve which management believes is
adequate to reduce the pre-petition receivables to their net realizable
amount.
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 believe 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.
6. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Payroll and payroll expenses............................ $ 10,035 $125,000
Bonuses, primarily to related parties................... 313,683 227,879
Other................................................... 57,132 9,443
-------- --------
$380,850 $362,322
======== ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
At December 31, 1995, future maximum annual rental commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
1996................................................................. $ 75,752
1997................................................................. 75,746
1998................................................................. 90,912
1999................................................................. 6,235
2000................................................................. 6,235
Thereafter........................................................... 1,559
--------
$256,439
========
</TABLE>
Total rent expense for the seven-month period ended July 31, 1996 and the
year ended December 31, 1995 was $47,233 and $73,769, respectively.
F-118
<PAGE>
FORCE FIVE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. DEBT:
Effective June 30, 1995, the Company entered into a credit agreement with a
bank that provides a revolving line of credit and a note payable. The credit
agreement is collateralized by substantially all of the Company's assets and
is personally guaranteed by the two stockholders.
As of July 31, 1996 and December 31, 1995, the revolving line of credit
allowed borrowings up to $500,000 and $300,000, respectively. The Company does
not pay a commitment fee on the unused portion. The line of credit bears
interest on the outstanding balance at the bank's prime rate plus 1.5% (9.75%
and 10% at July 31, 1996 and December 31, 1995, respectively). The commitment
expired and the outstanding balance was paid in full in August 1996.
The note payable bears interest at 10.5% and was paid in full in 1996.
The fair value of the credit agreement approximates the carrying amount.
During 1995, the Company paid in full a revolving line of credit with a bank
that had an outstanding balance of $75,000 at the beginning of the year.
9. SUBSEQUENT EVENT:
Effective July 31, 1996, Comforce Information Technologies, Inc. acquired
all of the issued and outstanding common stock of the Company for a purchase
price of $2,000,000, with a three-year contingent payout based on the future
earnings of the Company. The value of the payout will not exceed $2,000,000.
10. RELATED PARTY TRANSACTIONS:
During 1995, the Company paid in full loans to directors of the Company and
their associates that had an outstanding balance of $262,583 at the beginning
of the year. The Company paid $53,546 of interest related to these loans
during the year.
Bonuses of $304,350 and $190,000 accrued at July 31, 1996 and December 31,
1995, respectively, are payable to officers/stockholders of the Company.
Effective June 1, 1995, the Company acquired 1,000 shares of its common
stock for treasury for a purchase price of $1,000 and the assignment of
certain contracts to the selling stockholder. The Company recorded this
transaction at fair value and recognized a gain of $36,000, which is included
in other income for the year ended December 31, 1995.
F-119
<PAGE>
[COOPERS & LYBRAND LOGO]
AZATAR COMPUTER SYSTEMS, INC.
--------
FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED AUGUST 31, 1996
AND FOR THE YEAR ENDED NOVEMBER 30, 1995
F-120
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Azatar Computer Systems, Inc.
We have audited the accompanying balance sheets of Azatar Computer Systems,
Inc. as of August 31, 1996 and November 30, 1995, and the related statements
of operations and retained earnings, and cash flows for the nine-month period
ended August 31, 1996 and for the year ended November 30, 1995. 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 audit.
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 Azatar Computer Systems, Inc.
as of August 31, 1996 and November 30, 1995, and the results of its operations
and its cash flows for the nine-month period ended August 31, 1996 and for the
year ended November 30, 1995, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand LLP
Rochester, New York
November 6, 1996
F-121
<PAGE>
AZATAR COMPUTER SYSTEMS, INC.
BALANCE SHEETS
AUGUST 31, 1996 AND NOVEMBER 30, 1995
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1996 1995
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 738,837 $ 880,100
Accounts receivable................................... 1,501,948 1,166,339
Due from related party................................ 321,941 369,205
Prepaid expenses...................................... 8,399 16,520
---------- ----------
2,571,125 2,432,164
Equipment and leasehold improvements, net............... 232,653 215,038
Other assets............................................ 31,856 33,841
---------- ----------
$2,835,634 $2,681,043
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 34,788 $ 8,424
Accrued payroll and payroll taxes..................... 118,993 178,067
Other accrued expenses................................ 22,771 39,021
Due to related party.................................. 24,000
Accrued federal and state income taxes................ 601,263 755,867
Interest payable...................................... 112,000 83,000
---------- ----------
Total current liabilities........................... 889,815 1,088,379
---------- ----------
Stockholder's equity:
Common stock, No par value, 200 Shares authorized
and 100 Shares issued and outstanding................ 500 500
Retained earnings..................................... 1,945,319 1,592,164
---------- ----------
Total stockholder's equity.......................... 1,945,819 1,592,664
---------- ----------
$2,835,634 $2,681,043
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-122
<PAGE>
AZATAR COMPUTER SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE NINE-MONTH PERIOD ENDED AUGUST 31, 1996
AND FOR THE YEAR ENDED NOVEMBER 30, 1995
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1996 1995
---------- ------------
<S> <C> <C>
Revenue:
Contract Income...................................... $5,562,451 $6,833,671
Placement Income..................................... 218,703 237,804
---------- ----------
Total revenue...................................... 5,781,154 7,071,475
---------- ----------
Direct costs and expenses:
Employee payroll and benefits........................ 3,954,973 4,947,219
Outside services..................................... 663,633 631,237
General and administrative........................... 556,141 569,933
Depreciation and amortization........................ 24,537 28,229
---------- ----------
Total direct costs and expenses.................... 5,199,284 6,176,618
---------- ----------
581,870 894,857
---------- ----------
Other income (expense)................................. 10,216 (3,732)
Interest income........................................ 44,150 48,246
Interest expense....................................... (29,098) (40,504)
---------- ----------
Income before provision for income taxes............... 607,138 898,867
---------- ----------
Income tax provision................................... 253,983 363,251
---------- ----------
Net Income........................................... 353,155 535,616
Retained earnings--beginning of period................. 1,592,164 1,056,548
---------- ----------
Retained earnings--end of period....................... $1,945,319 $1,592,164
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-123
<PAGE>
AZATAR COMPUTER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIOD ENDED AUGUST 31, 1996
AND FOR THE YEAR ENDED NOVEMBER 30, 1995
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1996 1995
---------- ------------
<S> <C> <C>
Reconciliation of net income to net cash provided by
(used in) operating activities:
Net income.......................................... $353,155 $535,616
-------- --------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 24,537 28,229
Increase in accounts receivable................... (335,609) (330,305)
Decrease (increase) in prepaid expenses........... 8,121 (10,276)
Decrease (increase) in other assets............... 1,985 (5,002)
Increase in accounts payable...................... 26,364 339
Increase (decrease) in accrued payroll and payroll
taxes............................................ (59,074) 59,319
Increase (decrease) in other accrued expenses..... (16,250) 6,747
Increase (decrease) in due to related party....... (24,000) 24,000
Increase (decrease) in federal and state income
taxes............................................ (154,604) 323,738
Increase in interest payable...................... 29,000 38,000
-------- --------
Total adjustments............................... (499,530) 134,789
-------- --------
Net cash provided by (used in) operating
activities..................................... (146,375) 670,405
-------- --------
Cash flows provided by (used in) investing activities:
Capital expenditures................................ (42,152) (35,468)
Net receipts (advances) on related party loans...... 47,264 (23,233)
-------- --------
Net cash provided by (used in) investing
activities..................................... 5,112 (58,701)
-------- --------
Cash flows used in financing activities:
Repayment of line-of-credit......................... (150,000)
-------- --------
Net cash used in financing activities......... (150,000)
-------- --------
Net increase (decrease) in cash....................... (141,263) 461,704
Cash--beginning of period............................. 880,100 418,396
-------- --------
Cash--end of period................................... $738,837 $880,100
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for taxes................. $350,600 $ 31,500
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-124
<PAGE>
AZATAR COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED AUGUST 31, 1996 AND FOR THE YEAR ENDED
NOVEMBER 30, 1995
1. DESCRIPTION OF BUSINESS
Azatar Computer Systems, Inc. (Azatar) provides computer programming
services, programmers/operators and analysts, to businesses primarily located
in Central/Western New York State. The employees are provided on a temporary
or semi-permanent basis. Azatar maintains offices in Rochester and Syracuse,
New York.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION: Revenue for providing programming services is
recognized at the time such services are rendered.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment and leasehold improvements
are stated at cost less accumulated depreciation and amortization.
Expenditures for maintenance and repairs are charged to operations as
incurred. Expenses for betterments and major renewals are capitalized.
Depreciation and amortization of assets are provided using the straight-line
method over the estimated useful life of the asset.
RESTATEMENT: The financial statements as of November 30, 1996 and December
1, 1994, have been restated to reflect the Federal and State income taxes and
certain other items applicable to those time periods.
RECLASSIFICATION: Certain amounts in the financial statements have been
reclassified to conform to the presentation format for the nine-months ended
August 31, 1996.
INCOME TAXES: Azatar recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
A valuation allowance is recorded when necessary to reduce tax assets to their
expected realizable value. At August 31, 1996 and November 30, 1995, there
were deferred tax assets of approximately $4,700 and $6,600, respectively,
included in other assets.
USE OF ESTIMATES: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
LIFE OF AUGUST 31, NOVEMBER 30,
EQUIPMENT 1996 1995
----------- ---------- ------------
<S> <C> <C> <C>
Furniture and fixtures................... 7 years $199,980 $190,505
Equipment................................ 5 years 126,440 115,405
Vehicles................................. 5 years 34,411 34,411
Leasehold improvements................... 31-39 years 190,045 168,403
----------- -------- --------
550,876 508,724
Less: Accumulated depreciation and
amortization............................ 318,223 293,686
-------- --------
$232,653 $215,038
======== ========
</TABLE>
F-125
<PAGE>
AZATAR COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT--CONTINUED
Depreciation and amortization charged to operations amounted to $24,537 and
$28,229 for the nine-months ended August 31, 1996 and for the year ended
November 30, 1995, respectively.
4. CONCENTRATION OF CREDIT RISK
Azatar's trade accounts receivable as of August 31, 1996 and November 30,
1995, consist primarily of amounts due from major companies requiring the use
of information technology contract consultants. As a result, the
collectibility is spread across various industries and is not dependent on any
particular industry sector. At August 31, 1996 and November 30, 1995, Azatar
had five customers with trade accounts receivable balances that aggregated 59%
and 65%, respectively, of Azatar's total accounts receivable.
Percentages of total revenues from significant customers for the nine-month
period ended August 31, 1996 and the year ended November 30, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1996 1995
---------- ------------
<S> <C> <C>
Customer 1............................................ 24.5% 10.5%
Customer 2............................................ 22.1% 11.4%
Customer 3............................................ 15.8% 8.0%
Customer 4............................................ .2% 20.1%
</TABLE>
Azatar maintains cash in bank accounts which at times may exceed federally
insured limits. Azatar has not experienced any losses in such accounts and
believes they are not exposed to any significant credit risk on their cash
balances. Azatar believes it mitigates such risk by investing its cash through
major financial institutions.
5. COMMITMENTS
At November 30, 1995, future maximum annual rental commitments for real
property under noncancelable leases, certain of which are with a related
party, for each of the years ended November 30, are as follows:
<TABLE>
<CAPTION>
RELATED PARTY OTHER
------------- -------
<S> <C> <C>
1996.................................................... $112,940 $17,512
1997.................................................... 85,440 12,624
1998.................................................... 85,440
1999.................................................... 85,440
2000.................................................... 85,440
Thereafter.............................................. 71,200
</TABLE>
Total rent expense for the nine-month period ended August 31, 1996 and the
year ended November 30, 1995 was approximately $99,400 and $132,200,
respectively, which included approximately $86,500 and $115,400 of payments to
a related party for the respective time periods.
6. INCOME TAXES
Income tax expense for the nine months ended August 31, 1996 and the year
ended November 30, 1995, is comprised of the following:
F-126
<PAGE>
AZATAR COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. INCOME TAXES--CONTINUED
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1996 1995
---------- ------------
<S> <C> <C>
Federal............................................... $189,984 $268,715
State................................................. 63,999 94,536
-------- --------
$253,983 $363,251
======== ========
</TABLE>
The provision for income taxes differs from the amount computed using the
United States Federal Income tax rate as follows:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1996 1995
---------- ------------
<S> <C> <C>
Expected tax at United States income tax rates........ $206,427 $305,615
State income tax effect............................... 47,556 57,636
-------- --------
Total provision for taxes........................... $253,983 $363,251
======== ========
</TABLE>
7. RELATED PARTY TRANSACTIONS
Azatar purchases computer equipment and computer programming services from a
related party. Equipment purchases from the related party totaled $9,575 and
$7,769, for the nine-month period ended August 31, 1996 and the year ended
November 30, 1995, respectively.
Computer programming services purchased from a related party were $92,650
and $81,000 for the nine-month period ended August 31, 1996 and for the year
ended November 30, 1995, respectively.
Azatar held various loans due from related parties that totaled $321,941 and
$369,205 at August 31, 1996 and November 30, 1995, respectively. The loans
were at interest rates ranging from 6% to 9% and were repaid during November
1996.
8. EMPLOYEE BENEFIT PLAN
Azatar maintains a retirement plan under Section 401(k) of the Internal
Revenue Code. Eligible employees may contribute up to six percent of their
earnings. Azatar will match employees' contributions at a rate of twenty
percent of the employee contribution. For the nine-month period ended August
31, 1996 and the year ended November 30, 1995, Azatar made contributions to
the plan of $20,745 and $22,227, respectively.
9. SUBSEQUENT EVENTS
Effective November 3, 1996, Azatar merged into a subsidiary of Comforce
Corporation.
F-127
<PAGE>
CONTINENTAL FIELD SERVICE CORPORATION AND
PROGRESSIVE TELECOM INC.
COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1995
F-128
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Continental Field Service Corporation and Progressive
Telecom Inc.:
We have audited the accompanying combined balance sheets of Continental Field
Service Corporation and Progressive Telecom Inc. (the "Companies") as of
September 30, 1996 and December 31, 1995, and the related combined statements of
income, changes in shareholders' equity, and cash flows for the nine-month
period ended September 30, 1996 and for the year ended December 31, 1995. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit 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 provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Continental
Field Service Corporation Inc. and Progressive Telecom Inc. as of September 30,
1996 and December 31, 1995, and the results of their operations and their cash
flows for the nine month period ended September 30, 1996 and year ended December
31, 1995, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Melville, New York
November 8, 1996.
F-129
<PAGE>
CONTINENTAL FIELD SERVICE CORPORATION AND
PROGRESSIVE TELECOM INC.
COMBINED BALANCE SHEETS
September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS: 1996 1995
<S> <C> <C>
Current assets:
Cash $ 476,312 $ 308,265
Accounts receivable trade 1,610,524 1,851,364
Prepaid expenses 59,748 51,821
Employee advances 45,190
Other current assets 3,243 2,909
------------- ------------
Total current assets 2,149,827 2,259,549
Fixed assets, net 63,051 61,624
Mortgage receivable 330,724 338,690
Other assets 39,380 38,838
------------- ------------
Total assets $ 2,582,982 $ 2,698,701
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 116,236 $ 86,438
Accrued payroll 143,168 179,157
Accrued expenses 171,394 213,798
Note payable - related party 12,571 67,571
------------- ------------
Total current liabilities 443,369 546,964
------------- ------------
Commitments
Shareholders' equity:
Common stock (Note 7) 36,700 36,700
Retained earnings 2,169,334 2,181,458
Treasury stock (Note 7) (66,421) (66,421)
------------- ------------
Total shareholders' equity 2,139,613 2,151,737
------------- ------------
Total liabilities and shareholders' equity $ 2,582,982 $ 2,698,701
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-130
<PAGE>
CONTINENTAL FIELD SERVICE CORPORATION AND
PROGRESSIVE TELECOM INC
COMBINED STATEMENTS OF INCOME
for the nine-month period ended September 30, 1996 and for the
year ended December 31, 1995
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
<S> <C> <C>
Net sales $ 7,377,404 $ 9,850,454
Costs and expenses:
Cost of goods sold 6,258,808 8,215,923
General and administrative expenses 802,395 1,125,855
Depreciation 13,011 39,035
------------- ------------
7,074,214 9,380,813
------------- ------------
Other income (expense):
Interest income 22,868 29,544
Interest expense (5,242) (60,339)
Settlements 50,000
Other 1,487
------------- ------------
Total other income 17,626 20,692
------------- ------------
Net income $ 320,816 $ 490,333
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-131
<PAGE>
CONTINENTAL FIELD SERVICE CORPORATION AND
PROGRESSIVE TELECOM INC.
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the nine-month period ended September 30, 1996 and for the
year ended December 31, 1995
<TABLE>
<CAPTION>
COMMON TREASURY RETAINED
STOCK STOCK EARNINGS TOTAL
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 36,700 $ (66,421) $ 1,859,252 $ 1,829,531
Distributions to shareholders (168,127) (168,127)
Net income 490,333 490,333
----------- -------------- --------------- -------------
Balance, December 31, 1995 36,700 (66,421) 2,181,458 2,151,737
-----------------------------------------------------------------------
Distributions to shareholders (332,940) (332,940)
Net income for the period
January 1, 1996
through September 30, 1996 320,816 320,816
----------- -------------- --------------- -------------
Balance, September 30, 1996 $ 36,700 $ (66,421) $ 2,169,334 $ 2,139,613
=========== ============== =============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-132
<PAGE>
CONTINENTAL FIELD SERVICE CORPORATION AND
PROGRESSIVE TELECOM INC.
COMBINED STATEMENTS OF CASH FLOWS
for the nine-month period ended September 30, 1996 and for the
year ended December 31, 1995
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 320,816 $ 490,333
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation 13,011 39,034
Decrease in cash surrender value 8,202
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 240,840 (95,509)
Decrease (increase) in other receivables 44,856 (20,033)
(Decrease) increase in prepaid expenses (7,927) 72,755
Increase (decrease) in accounts payable 29,798 45,818
(Decrease) increase in accrued payroll (35,989) 42,143
Increase in other long-term assets (542) (441)
(Decrease) increase in accrued expenses (42,404) 34,749
Gain on sale of fixed assets (2,300)
---------------- ----------------
Net cash provided by operating activities 562,459 614,751
---------------- ----------------
Cash flows from investing activities:
Capital expenditures (14,438) (21,604)
Decrease in mortgage receivable 7,966 7,318
Related party notes payable (55,000) (161,864)
---------------- ----------------
Net cash used in investing activities (61,472) (176,150)
---------------- ----------------
Cash flows from financing activities:
Net payments under line of credit agreements (70,000)
Distributions to shareholders (332,940) (168,127)
---------------- ----------------
Net cash used in financing activities (332,940) (238,127)
---------------- ----------------
Net increase in cash 168,047 200,474
Cash, beginning of period 308,265 107,791
---------------- ----------------
Cash, ending of period $ 476,312 $ 308,265
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 28,561 $ 26,301
================ ================
Taxes $ 8,879 $ 12,718
================ ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-133
<PAGE>
CONTINENTAL FIELD SERVICE CORPORATION AND
PROGRESSIVE TELECOM INC
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ORGANIZATION
Continental Field Service Corporation ("Continental") was incorporated in
1965 under the laws of the State of Delaware. Progressive Telecom
("Progressive") was incorporated in 1991 under the laws of the State of New
York. The Companies are under common management and control. Ray Hill owns
55% and Michael Hill owns 45% of Continental. Beth Wilson Hill owns 100% of
Progressive.
PRINCIPLES OF COMBINATION
These combined financial statements include the accounts of Continental and
Progressive (the "Companies"). All significant intercompany transactions and
balances have been eliminated in combination.
NATURE OF BUSINESS
The Companies are principally engaged in telecommunications engineering,
right of way acquisition and field services. The corporate headquarters are
located in Elmsford, New York, with additional business being conducted
throughout the United States.
CASH AND CASH EQUIVALENTS
The Company considers investments with a maturity of three months or less
when purchased to be cash equivalents.
The Company has cash in financial institutions which are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000 each. At
various times throughout the year, the Company may have cash in financial
institutions which exceeds the FDIC insurance limit.
REVENUE RECOGNITION
Revenue for providing staffing services is recognized at the time such
services are rendered.
ACCOUNTS RECEIVABLE AND UNBILLED ACCOUNTS RECEIVABLE
Accounts receivable consists of those amounts due to the Company for staffing
services rendered to various customers. Accrued revenue consists of revenues
earned and recoverable costs for which billings have not yet been presented
to the customers as of the balance sheet date. Unbilled revenue at September
30, 1996 and December 31, 1995, respectively, was $254,860 and $111,766.
F-134
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
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. 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.
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. Actual results could differ from those estimates.
INCOME TAXES
The Companies have elected under applicable sections of the Internal Revenue
Code to be treated as "S" corporations for income tax purposes. Therefore,
any income, loss and tax credits are reportable by the shareholders on their
individual income tax returns.
EMPLOYEE BENEFIT PLAN
The Companies maintains a 401(k) plan for the benefit of their employees.
Employees elect to withhold specified amounts from their wages to contribute
to the plans. The Companies have a fiduciary responsibility with respect to
the plans.
2. MORTGAGE RECEIVABLE:
On June 1, 1994, Continental sold its office building located at 37 East Main
Street, Elmsford, New York to Atlantic Enterprise for $350,000. The mortgage
is payable by Atlantic in monthly installments of $3,037 (including interest
at 8.5%) through June 3, 1999. The note is collateralized by the building.
3. LINE OF CREDIT:
The Companies have a revolving line of credit agreement which provides for
borrowings up to $1,000,000 at September 30, 1996 and $750,000 at December
31, 1995, with interest at prime plus
F-135
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
1/4% per annum. The interest rate as of September 30, 1996 and December 31,
1995 was 8.50%. The line is collateralized by a blanket lien on the
Companies' assets and a personal guaranty of an officer and principal
stockholder of the Company. At September 30, 1996 and December 31, 1995,
there were no outstanding balances due. In addition, the Company was
contingently liable at September 30, 1996 for $995,031 under a standby letter
of credit under this agreement ($300,031 at December 31, 1995).
4. NOTE PAYABLE - RELATED PARTY:
Notes payable-related party, consists of the following:
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
1996 1995
<S> <C> <C>
Uncollateralized note payable to an individual, due on demand
with interest payable monthly at 5% $ $ 35,000
n
p
Uncollateralized note payable to an individual, due on demand
with interest payable monthly at 8% 12,571 32,571
-----------------------
$ 12,571 $ 67,571
=======================
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
LIFE OF SEPT. 30, DEC. 31,
EQUIPMENT 1996 1995
<S> <C> <C> <C>
Equipment 5 $ 128,032 $ 116,756
Transportation Equipment 5 90,403 90,403
Furniture and fixtures 7 20,488 17,326
------------------------
$ 238,923 $ 224,485
Less: accumulated depreciation (175,872) (162,861)
------------------------
$ 63,051 $ 61,624
========================
</TABLE>
6. COMMITMENTS:
As of December 31, 1995, the Companies have lease commitments for operating
facilities, which are accounted for as operating leases. The Companies are
responsible for property taxes, insurance and maintenance on certain leases.
F-136
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
Future maximum annual rental commitments for real property under non-
cancelable leases are as follows:
PERIOD ENDED
DECEMBER 31,
1996 $ 46,304
1997 12,416
1998 -
1999 -
2000 -
---------
$ 58,720
=========
Total rent expense was $36,367 for the period ended September 30, 1996 and
$69,146 as of December 31, 1995.
7. COMMON STOCK:
Common stock consists of the following:
Common stock, Continental, no par; authorized 30,000 shares;
issued and outstanding 10,000 shares $ 33,700
Common stock, Progressive, no par; authorized 200 shares;
issued and outstanding 200 shares 3,000
---------
$ 36,700
=========
Treasury stock, Continental, 11,985 shares at
September 30, 1996 and December 31, 1995 $ 66,421
=========
8. PENSION PLAN:
On January 1, 1995, the Company adopted a pension plan that allows
participants to contribute up to 15% of their pretax salary. Expense for the
period ended September 30, 1996 and December 31, 1995 was $2,746 and $1,810,
respectively.
9. SUBSEQUENT EVENT:
On November 8, 1996, COMFORCE Telecom Inc., purchased substantially all of
the assets of Continental Field Services Corporation and its affiliate,
Progressive Telecom, Inc., for a price of $4.425 million in 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 $1.2
million.
F-137
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
10. CONCENTRATION OF CREDIT RISK
The companies trade accounts receivable as of September 30, 1996 and
December 31, 1995, consist primarily of amounts due from major companies
requiring the use of information technology contract consultants. At
September 30, 1996 and December 31, 1995, the companies had four customers
with trade accounts receivable balances that aggregated 29% and 35%,
respectively, of the companies total accounts receivable.
Percentages of total revenues from significant customers for the nine-month
period ended September 30, 1996 and the year ended December 31, 1995, are
summarized as follows:
SEPTEMBER 30, DECEMBER 31,
1996 1995
Customer 1 25% 23%
Customer 2 22% 19%
Customer 3 18% 21%
11. COMMITMENTS:
The Company is involved in outstanding litigation which management believes
will not result in a material adverse effect on the financial position of
the Company.
F-138
<PAGE>
RHO COMPANY INCORPORATED
-----------
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
TOGETHER WITH AUDITORS' REPORT
F-139
<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 September 30, 1996, and
the related statements of income and changes in shareholders' deficit and cash
flows for the year ended December 31, 1995 and the nine months ended September
30, 1996. 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 September 30, 1996, and the results of its
operations and its cash flows for the year ended December 31, 1995 and the
nine months ended September 30, 1996, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
October 29, 1996
F-140
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Rho Company Incorporated
Redmond, Washington
We have audited the accompanying statements of income and cash flows of Rho
Company Incorporated for the year ended December 31, 1994. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our report dated March 2, 1995 we expressed an opinion that the 1994
financial statements did not fairly present financial position, results of
operations, and cash flows in conformity with generally accepted accounting
principles resulting from a departure from such principles because the company
excluded its obligation for deferred compensation from liabilities in the
balance sheet. The Company terminated its obligation for deferred compensation
liability effective with restated employment agreements dated January 1, 1996.
Accordingly, a liability for deferred compensation is no longer appropriate at
December 31, 1994.
In addition, as described in Note 9, the Company has changed its method of
accounting for accruing vacation earned but unpaid to its permanent employees
and the portion of bonuses accrued but unpaid to its contract employees. The
Company has restated its 1994 financial statements to reflect the adjustment for
the correction of this error to conform with generally accepted accounting
principles. Certain items in the balance sheet as of December 31, 1994 have
also been reclassified to conform to the presentation used at December 31, 1995.
Accordingly, our present opinion on the 1994 financial statements, as presented
herein, is different from that expressed in our previous report.
In our opinion, the statements of income and cash flows referred to above
present fairly, in all material respects, the results of operations and cash
flows of Rho Company Incorporated for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
/s/ Benson & McLaughlin, P.S.
Seattle, Washington
March 2, 1995, except for Note 9 and termination of the deferred compensation
agreement, as to which the date is October 25, 1996.
F-141
<PAGE>
RHO COMPANY INCORPORATED
BALANCE SHEETS
--------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
------ -------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 69 $ 412
Restricted cash 394 705
Accounts receivable, less allowance
for doubtful 8,362 8,725
accounts of $180 and $200
Prepaid expenses 377 167
-------------- -------------
Total current assets 9,202 10,009
-------------- -------------
Furniture and equipment, less
accumulated 640 513
depreciation of $949 and $1,065
OTHER ASSETS
Goodwill and organization costs,
less accumulated 13 38
amortization of $36 and $12
Deposits and other 51 94
-------------- -------------
$ 9,906 $10,654
============== =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Note payable - bank $ 5,664 $ 6,253
Current portion of long-term debt 395 130
Accounts payable 168 329
Wages payable 1,224 844
Payroll taxes and withholdings 866 1,167
payable
Accrued interest 114 147
Accrued vacations, bonuses and other 553 605
-------------- -------------
Total current liabilities 8,984 9,475
-------------- -------------
LONG TERM DEBT 9,360 9,956
-------------- -------------
SHAREHOLDERS' DEFICIT:
Common stock; $1.00 par value;
authorized 1,000,000
and 500,000 shares, 50 50
respectively, issued and
outstanding
50,000 shares
Other capital 2,180 -
Deferred stock option charge (1,983) -
Retained deficit (8,685) (8,827)
-------------- -------------
Total shareholders' deficit (8,438) (8,777)
-------------- -------------
$ 9,906 $10,654
============== =============
</TABLE>
See accompanying notes to financial statements.
F-142
<PAGE>
RHO COMPANY INCORPORATED
INCOME STATEMENTS
-----------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
------------------------ ---------------------
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
(unaudited)
REVENUES $63,556 $62,833 $83,631 $76,170
COST OF OPERATIONS 56,656 56,481 74,978 69,157
------- ------- ------- -------
Gross profit 6,900 6,352 8,653 7,013
GENERAL AND ADMINISTRATIVE EXPENSES 5,547 4,643 6,510 5,266
------- ------- ------- -------
Income from operations 1,353 1,709 2,143 1,747
OTHER EXPENSES:
Stock option expense 197 - - -
Interest expense, net 984 1,249 1,643 1,435
------- ------- ------- -------
Total other expenses 1,181 1,249 1,643 1,435
------- ------- ------- -------
Net income $ 172 $ 460 $ 500 $ 312
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-143
<PAGE>
RHO COMPANY INCORPORATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
----------------------------------------------
(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, 1994 $50 $ - - ($9,222) ($9,172)
500
Net income - - - 500
Dividends paid - - - (105) (105)
--- ------- -------- -------- -------
BALANCE, December 31, 1995 50 - - (8,827) (8,777)
Net income - - - 172 172
Dividends paid - - - (30) (30)
Stock option granted - 2,180 (2,180) - -
Amortization of deferred stock
option charge - - 197 - 197
--- ------- -------- -------- -------
BALANCE, September 30, 1996 $50 $2,180 ($1,983) ($8,685) ($8,438)
=== ======= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-144
<PAGE>
RHO COMPANY INCORPORATED
STATEMENTS OF CASH FLOWS
------------------------
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
----------------------------- -----------------------
1996 1995 1995 1994
------- ------------------ -------- -------------
OPERATING ACTIVITIES: (unaudited)
<S> <C> <C> <C> <C>
Net income $ 172 $ 460 $ 500 $ 312
Depreciation 201 175 223 196
Amortization of intangible assets 25 3 4 4
Loss on retirement of furniture and - - 17 -
equipment
Deferred income taxes - - - (37)
Stock option expense 197 - - -
Net change in operating assets and
liabilities -
Accounts receivable and other 403 (2,086) (1,778) (1,559)
Prepaid expenses (210) (283) (70) 214
Accounts payable (161) 13 200 60
Wages payable 380 285 9 139
Payroll taxes and withholdings (301) 494 296 72
payable
Accrued interest (33) 3 15 40
Accrued vacations, bonuses and (52) 96 110 (56)
other ------ ------- ------- -------
Cash flows from operating 621 (840) (474) (615)
activities ------ ------- ------- -------
INVESTING ACTIVITIES:
Purchase of furniture and equipment (328) (303) (334) (136)
(Increase) decrease in other assets 3 (19) (24) (8)
------ ------- ------- -------
Cash flows from investing (325) (322) (358) (144)
activities ------ ------- ------- -------
FINANCING ACTIVITIES:
Increase (decrease) in bank (589) 424 1,302 1,482
borrowings
Borrowings of long-term debt - 168 168 114
Repayments of long-term debt (331) (162) (266) (270)
Dividends paid (30) (105) (105) -
------ ------- ------- -------
Cash flows from financing (950) 325 1,099 1,326
activities ------ ------- ------- -------
Increase (decrease) in cash (654) (837) 267 567
CASH, beginning of period 1,117 850 850 283
------ ------- ------- -------
CASH, end of period $ 463 $ 13 $ 1,117 $ 850
====== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for -
Interest $1,017 $ 1,246 $ 1,628 $ 1,395
Income taxes 43 6 8 8
</TABLE>
See accompanying notes to financial statements.
F-145
<PAGE>
RHO COMPANY INCORPORATED
Notes to Financial Statements
-----------------------------
(Dollar amounts in thousands)
NOTE 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.
Prepaid Expenses
At September 30, 1996, prepaid expenses includes $177 related to prepaid
payroll taxes. The Company recognizes payroll tax expenses based on an
estimated annual effective rate, in accordance with interim reporting rules.
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 Estimate
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.
Interim financial statements
The interim financial statements included herein for the nine months ended
September 30, 1995 are unaudited. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such financial statements have been included.
Reclassifications
Certain reclassifications have been made to the prior year statements to
conform to the current year format.
NOTE 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
September 30, 1996 was $705 and $394, respectively, shown as restricted cash in
the accompanying balance sheets. The remaining cash balance is unrestricted.
NOTE 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
September 30, 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 $5,664 at September 30, 1996. The loan
F-146
<PAGE>
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 assurances, the Company anticipates it will be able to renew its 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.
NOTE 4: LONG-TERM DEBT
- -----------------------
<TABLE>
<CAPTION>
Long-term debt consists of the following:
Sept. 30, Dec. 31,
1996 1995
--------- ---------
<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 the shareholders of Rho
Company Incorporated................... 6,617 6,882
Subordinated note payable to former
stockholder, 9.875%, collateralized by
accounts receivable, subordinate to
the bank line of credit. Due on
demand, but the noteholder has agreed
not to call the note before October 1,
1997................................... 1,548 1,548
Subordinated note payable to
stockholder, 9.875%, collateralized by
accounts receivable, subordinate to
the bank line of credit. Due on
demand, but the noteholder has agreed
not to call the note before October 1,
1997................................... 1,369 1,369
Subordinated note payable to
stockholder, 9.875%, collateralized by
accounts receivable, subordinate to
the bank line of credit. Due on
demand, but the noteholder has agreed
not to call the note before October 1,
1997................................... 178 178
Other.................................. 43 109
------ -------
9,755 10,086
Less: Current portion................. (395) (130)
------ -------
$9,360 $ 9,956
====== =======
</TABLE>
All of the note payable agreements are with related parties. Total
interest expense related to these notes was $987, $1,038 and $563 for the years
ended December 31, 1994 and 1995 and the nine months ended September 30, 1996.
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 net present value of the forgone interest payments under the
modified note agreement. This amount is being amortized using the effective
interest method over the life of the note payable.
F-147
<PAGE>
Debt maturities on these notes are as follows:
Year ending December 31,
1996 (Three months)....... $ 89
1997...................... 3,492
1998...................... 383
1999...................... 409
2000...................... 436
2001...................... 466
Thereafter................ 4,480
------
$9,755
======
NOTE 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,
1996 (Three months)....... $ 163
1997...................... 600
1998...................... 558
1999...................... 389
2000...................... 337
2001...................... 99
------
$2,146
======
Rental expense under operating leases totaled $316, $457 and $488 for the
years ended December 31, 1994 and 1995 and the nine months ended September 30,
1996, respectively.
NOTE 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 September 30, 1997.
The Company expensed $236, $167 and $90 under these agreements for the
years ended December 31, 1994 and 1995 and the nine months ended September 30,
1996.
NOTE 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 $35 were made
during the nine months ended September 30, 1996.
NOTE 8: MAJOR CUSTOMERS
- ------------------------
F-148
<PAGE>
During the nine months ended September 30, 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 $19,900, of the Company's sales for the years ended December 31,
1994 and 1995 and the nine months ended September 30, 1996, respectively. As of
December 31, 1995 and September 30, 1996, this customer's accounts receivable
balance was $1,540 and $1,048, respectively. Contracts with one customer in the
aerospace industry accounted for approximately $7,600 of the Company's sales for
the nine months ended September 30, 1996. As of September 30, 1996, this
customer's accounts receivable balance was $1,722. Contracts with these two
customers can be terminated at any time with 30 days' notice.
NOTE 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:
<TABLE>
<S> <C>
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, 1994 ($8,857)
Less: Adjustment for correction of error (365)
-----
Retained deficit, as restated for December 31, 1994 ($9,222)
========
</TABLE>
NOTE 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.
NOTE 11: LETTER OF INTENT
- --------------------------
The Company has entered into a letter of intent whereby COMFORCE
Corporation will acquire all of the outstanding stock of the Company. The
letter of intent is subject to the execution of a definitive agreement.
F-149
<PAGE>
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
______________
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................ 2
Risk Factors.............................................. 7
Selected Unaudited Pro Forma
Financial and Operating Data.......................... 12
Management's Discussion and Analysis
of Financial Condition and Results of Operations...... 19
Business.................................................. 23
Dividend Policy........................................... 33
Price Range of the Company's
Common Stock.......................................... 34
Description of the Company's Securities................... 35
Management................................................ 38
Certain Transactions...................................... 42
Discontinued Operations................................... 44
Principal Stockholders.................................... 48
Selling Stockholders...................................... 50
Plan of Distribution...................................... 57
Legal Matters............................................. 58
Experts................................................... 58
Additional Information.................................... 59
Index to Financial Statements............................. F-1
______________
================================================================================
11,096,157 SHARES
COMFORCE
CORPORATION
COMMON STOCK
____________________
PROSPECTUS
February 18, 1997
____________________
================================================================================