<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission file number
COMFORCE Corporation: 1-6081
COMFORCE Operating, Inc.: 333-43341
COMFORCE Corporation
and
COMFORCE Operating, Inc.
(Exact name of registrant as specified in its charter)
COMFORCE Corporation: 36-23262248
Delaware COMFORCE Operating, Inc.: 11-3407855
- ------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2001 Marcus Avenue Lake Success, New York 11042
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 328-7300
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
---------------------------- -------------------
COMFORCE Corporation: Common stock, $.01 par value American Stock
Exchange
COMFORCE Operating, Inc.: None
Securities registered pursuant to Section 12(g) of the Act:
COMFORCE Corporation: None
COMFORCE Operating, Inc.: None
(Cover page continued next page)
<PAGE>
(Cover page continued)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 27, 1998:
COMFORCE Corporation: $84,057,069
COMFORCE Operating, Inc.: Not Applicable
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMFORCE Corporation:
Class Outstanding at March 27, 1998
------------------ -----------------------------
Common stock, $.01 par value 15,637,947
COMFORCE Operating, Inc.: COMFORCE Corporation owns all of the 100 issued
and outstanding shares of Common Stock of COMFORCE
Operating, Inc.
Documents Incorporated by Reference: None
2
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PART I
ITEM 1. BUSINESS
General
COMFORCE Corporation ("COMFORCE") is a leading provider of staffing,
outsourcing and consulting solutions, primarily to Fortune 500 companies, in the
growing information technology ("IT"), telecommunications, technical,
professional and financial market sectors. COMFORCE also provides such services,
as well as funding and administrative support services, to many smaller
companies, including other outsourcing providers. COMFORCE Operating, Inc.
("COI"), a wholly-owned subsidiary of COMFORCE, was formed for the purpose of
facilitating certain of the Company's financing transactions in November 1997.
Unless the context otherwise requires, the term the "Company" refers to
COMFORCE, COI and all of their direct and indirect subsidiaries.
Through its network of 88 offices (57 Company-owned and 31 licensed)
located throughout the United States, the Company recruits and places highly
skilled contingent personnel and outsources payrolling and other financial
services for a broad customer base of over 2,300 companies. The Company's labor
force includes approximately 8,000 billable employees, consisting primarily of
computer programmers, systems consultants and analysts, telecommunications and
other engineers and technicians, scientists and researchers, as well as skilled
office support personnel. The Company also maintains a database of over 175,000
highly skilled employees.
The Company's senior management team of Christopher P. Franco, James L.
Paterek and Michael Ferrentino established the Company in 1995 to capitalize on
the consolidation opportunities in the specialty staffing and consulting
industry. Including the initial acquisition of COMFORCE Telecom, Inc. in October
1995, the Company, under this management team, has acquired nine specialty
staffing companies, including the November 1997 acquisition of Uniforce
Services, Inc. ("Uniforce"). Uniforce is a leading provider of staffing and
consulting solutions for the IT, professional and office support markets and
funding services to independent staffing and consulting firms, with net sales
for the 12 months ended December 31, 1997 of $182.5 million. Management believes
that the Uniforce acquisition positions the Company with the critical mass,
breadth of services and geographic penetration to continue to increase sales
through internal and external growth and improve profitability through economies
of scale and integration efficiencies. See "Acquisitions" in this Item 1.
Services
The Company provides a wide range of staffing, consulting and outsourcing
services, as well as financial and other support services. The Company's
extensive proprietary database and national presence enable it to draw from a
wealth of resources to link highly-trained computer, telecommunications and
other professionals, as well as clerical personnel, 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 operates through four divisions -- Information Technology,
Telecom, Staffing Services and Financial Services. A description of the types of
services provided by each division follows.
The Information Technology Division
The Company's IT division recruits and trains employees who 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.
In addition, in the IT sector, the Company provides
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non-recruited payrolling services to certain customers. These services consist
of acting as the employer for workers identified by the customer, preparing
payrolls, withholding taxes and tracking hours and vacation and sick days. In
addition, these employees participate in the Company's benefit programs rather
than those of the customer. In many cases, when employees for whom the Company
provides non-recruited payrolling services terminate their employment, the
Company's customers seek its assistance in recruiting the replacements for these
workers.
The Company's principal IT customers include Microsoft Corporation,
BellSouth Telecommunications, Inc., Boeing Information Services, Inc., Eastman
Kodak Company, Tyson Foods, Inc., First Union Corporation, NationsBanc Services,
Inc. and MCI Telecommunications Corporation. Management believes that, through
Uniforce's Brannon & Tully(R) and Montare International(TM) divisions, the
Uniforce acquisition significantly enhances the Company's presence in this
high-growth sector of the staffing industry. The Company expects this division
to grow principally through increased sales to existing IT customers and through
opportunities to cross-sell the Company's IT staffing solutions to its Telecom
and other division customers. Based on 1997 pro forma net sales, the IT division
represents approximately 31% of the Company's business. The Company expects that
revenues contributed by the IT division will continue to increase as a
percentage of its total revenues.
The Telecom Division
The Company's Telecom division recruits and trains employees who provide
services ranging from basic equipment installation to sophisticated engineering
skills, typically in support of telecommunications network expansion or
modernization programs. The Company provides skilled personnel who are involved
in planning, designing, engineering, installation and maintenance of wireline
and wireless communication systems development, satellite and earth station
deployment, network management and plant modernization. The Company's staffing
and consulting business originated with this specialty sector, and the Company
and several of the companies it has acquired have long-standing relationships
with leading telecommunications companies.
The Telecom division's principal customers include AT&T Corporation,
Northern Telecom, Inc., Harris Corporation, Lucent Technologies, Inc., Reltec
Corporation, ALCATEL Network Systems, Inc., Motorola, Inc., Sprint Corporation
and Omnipoint Corporation. The Company expects this division to continue to grow
through increased sales to existing Telecom customers as well as through
cross-selling opportunities with the telecommunications customers served by the
Company's IT division. Based on 1997 pro forma net sales, the Telecom division
represents approximately 14% of the Company's business.
The Staffing Services Division
The Company's Staffing Services division operates in two areas --
Technical Services and Professional Services:
Technical Services. The Technical Services portion of the Company's
Staffing Services division recruits employees who offer both manufacturing and
engineering support on research and development and product design projects. The
Company also provides non-recruited payrolling services to certain Technical
Services customers. 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 Staffing Services division's principal Technical Services customers
include The Boeing Company, Westinghouse Electric Corporation, McDonnell Douglas
Corporation and the National Department of Energy National Research Laboratories
at Los Alamos, Sandia and Lawrence Livermore. Based on 1997 pro forma net sales,
Technical Staffing Services sales represent approximately 27% of the Company's
business.
Professional Services. The Company provides highly specialized
professional chemists, biologists, engineers, laboratory instrumentation
operators, technicians and others to companies involved in pharmaceutical,
environmental,
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biotech and processing businesses. The Company also recruits and trains skilled
clerical personnel who provide various more traditional services for medical,
legal and accounting professionals. The Company provides experienced, highly
skilled medical office support staffers, such as billers/accounting clerks,
claims processors and coding specialists, medical secretaries, transcriptionists
and medical records personnel for today's highly sophisticated health care
industry. Legal staffers serve as legal secretaries/ typists, paralegals, law
clerks, librarians and in other law-related areas. In addition, the Company
provides contingent staffers for general accounting services and other
finance-related tasks, such as bookkeeping, recordkeeping and credit and
collection, as well as for general and automated office services.
The Staffing Services division's Professional Services customers include
R.R. Donnelley & Sons Co., Estee Lauder Companies, Inc. and Dial Corporation, as
well as many smaller companies such as independent medical providers and
accounting firms. Based on 1997 pro forma net sales, Professional Services sales
represent approximately 15% of the Company's business. Of current Professional
Services sales, approximately 79% are attributable to Licensees. See "Licensed
Offices" in this Item 1. The Company believes it has a significant opportunity
to cross-sell its Professional Services to its Technical Services customers as
well as to its IT and Telecom customers.
The Financial Services Division
The Company offers contingent staff payroll financing and/or total back
office administrative services for agreed-upon fees to approximately 100
independent staffing and consulting firms. The Company's back office services
include preparation of various management reports and analyses, payment of all
federal, state and local payroll taxes and preparation and filing of quarterly
and annual payroll tax returns for the contingent personnel placed by
independently owned and operated staffing and consulting firms. Contingent
personnel placed by such independent staffing and consulting firms remain
employees of such firms. Customized paychecks and invoices are provided to the
clients of such firms in the name of such firms. Clients of such firms remit
payment directly to the Company, which is the owner of the receivables from such
clients. Each independent staffing and consulting firm that uses the Company's
financial services is responsible for collection of the accounts receivable
generated by it. The amount of any account receivable which is not collected
within a specified period after billing is charged back by the Company to such
firm.
Through the Company's PrO Unlimited division, the Company also provides
confidential consulting and conversion services to companies that require
assistance in complying with regulations regarding the use of independent
contractors, returning retirees and consultants. The Company offers client
companies consulting services incorporating a proprietary liability and risk
scoring system to assess the likelihood of a client's independent contractor
being reclassified as an employee by a governmental authority. If appropriate,
the Company may become the employer of some or all of the workers of these
clients and, in such cases, will provide various services for these employees,
including preparing payrolls, withholding taxes and tracking hours and vacation
and sick days.
Management believes that the Financial Services division significantly
benefits from the Company's sophisticated back office operations, as well as its
substantial investment in the PeopleSoft(R) software package, which the Company
believes will become the industry standard. Based on 1997 pro forma net sales,
the Financial Services division represents approximately 16% of the Company's
business.
Business Strategy
Management's growth strategy includes the following principal elements:
Emphasize Internal Growth
The Company intends to seek to continue to expand its existing businesses
by pursuing the following objectives:
Emphasize Specialty Sectors. Since the Company entered the contingent
staffing and consulting business, specialty, high technology-related sectors
have provided a significant portion of the Company's growth. These sectors
5
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of the specialty staffing and consulting industry as a whole have also grown
substantially in recent years. As a result, management is pursuing a focused
sales and marketing effort in these areas to capitalize on their higher growth
in demand for services and resulting profit potential.
Capitalize on Cross-selling Opportunities. The Company provides a wide
variety of contingent employees, as well as a variety of value-added services,
to a broad, high-quality and geographically diverse customer base. Management
believes significant opportunities exist to cross-sell services of each of its
divisions to clients of its other divisions. In particular, the Company intends
to market its IT division's services to its Telecom division's customers and
vice versa.
Expand Recruiting and Retention Initiatives
Expand Employee Training. Management believes that the Company will be
better positioned to attract recruits by making extensive training opportunities
available to its employees. Consequently, the Company has focused on expanding
its training capabilities. The Company recently introduced the COMFORCE On-Line
Training ("COLT") program, which management believes to be unique in the
industry, to train employees in the latest developments in IT,
telecommunications and other technologies. Over 500 standard courses are
currently offered through COLT, and the Company intends to offer custom courses
to meet the specific needs of its customers, many of which custom courses have
already been designed. The Company also maintains a software training center, a
hot line to address software questions raised by its billable employees and an
on-line library of instructional materials (in addition to those offered through
COLT). The Company intends to continue to use the Internet in its training
efforts and further develop the use of its technology-based training
capabilities.
Expand Employee Recruiting. In order to meet the increasing demand for a
limited supply of high-quality contingent personnel, the Company intends to
continue to expand its recruiting efforts. The Company's state-of-the-art back
office and MIS systems (using EZAccess(R) recruiting and database software)
permit the Company to search its database by qualifications and skills. The
systems also allow for the addition of new information as acquired companies and
databases are integrated. The Company will continue to augment and update its
proprietary database to add new contingent personnel and to reflect changes in
the skills and availability of its billable employees in order to ensure a
proper fit between personnel and the assignment being staffed. The Company
currently uses the Internet in its recruiting efforts and intends to further
develop the use of its technology-based recruiting capabilities.
Pursue External Growth through Strategic Acquisitions
The Company intends to continue to make acquisitions of established,
profitable businesses in new and existing markets that provide the Company with
opportunities to expand its geographic service base and diversify and strengthen
its service mix, particularly in the specialty staffing and consulting sectors.
The Company evaluates acquisition opportunities using an acquisition profile
that includes such factors as market location, market share, services
complementary to the Company's existing service offerings, strength of
management and cultural fit of management with the Company's decentralized,
entrepreneurial environment. Management believes that, if the Company continues
to grow through acquisitions, it will improve its ability to secure larger
contracts.
Increase Operating Efficiency
In connection with its strategies for internal and external growth, the
Company believes that its efficient back office operations will allow it to
increase its profitability by adding offices, employees and acquired businesses
without proportionately increasing its overhead expenses, enabling it to spread
fixed costs over an increasingly larger revenue base. In addition, the Company
believes that centralization of its back office functions should result in
additional operating efficiencies through the elimination of redundancies and
through the development of economies of scale in administering the Company's
payrolling services.
Acquisitions
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The Company has acquired nine staffing services businesses from October
1995 through March 1998. Following an acquisition, the Company seeks to
integrate the operations of the acquired company into those of the Company, in
some cases into more than one of the Company's divisions. As a result, certain
of the acquired companies are no longer operated on a stand-alone basis
following acquisition. Each of the acquired companies, their markets, and the
principal customers they serve, is described briefly in the table below.
<TABLE>
<CAPTION>
Revenue for
Fiscal Year
Prior to
Acquired Year Acquisition Acquisition Market Principal
Company Founded Date (millions) Offices Served Customers
------- ------ ---- ---------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
COMFORCE Telecom, 1987 October $8.2 NY, VA, TX, GA, NC Telecom Motorola; AT&T; Northern
Inc. (formerly 1995 (5 offices) Telecom
Yield Techni-
Global)
Williams Com- 1991 March $4.2 FL (1 office) Telecom Reltec; Fujitsu
munications 1996
Services, Inc.
RRA, Inc., Project 1964 May 1996 $52.0 AZ, NY, NM, MO, SC, Technical Gulfstream; McDonnell
Staffing Support WA, CA, FLA Services Douglas; National
Team, Inc. and (10 offices) Laboratories; Westinghouse
DataTech Technical
Services, Inc.
Force Five, Inc. 1993 August $7.1 TX, TN, WA, CA, MO IT American Airlines; Tyson
1996 (5 offices) Foods
AZATAR Computer 1980 November $7.1 NY (2 offices) IT Xerox; Kodak
Systems, Inc 1996
Continental Field 1965 November $9.9 NY, VA (2 offices) Telecom Nynex; BellSouth
Services Corp- 1996
oration and
Progressive
Telecom, Inc.
RHO Company, 1971 February $85.7 WA, NC, CA, OR Technical Boeing; Microsoft; First
Incorporated 1997 (9 offices) Services and IT Union Corporation
Uniforce Services, Inc. 1961 November $142.2 NY, AL, CA, CO, FL, IT, BellSouth; Sun
1997 GA, IL, KS, MA, MD, Professional Microsystems; Texas
MI, NH, NJ, NM, NV, Services and Instruments; State of
NC, OK, OR, PA, TN, Financial Georgia; Pfizer; Owens
TX, VA, WA (21 Services Illinois
company-owned and 31
licensed offices)
Camelot Consulting 1987 January $12.0 NY, NJ (2 offices) Telecom Chase Manhattan, Merrill
Group, Inc., Camelot 1998 Lynch, Northern Telecom
Communications Group,
Inc., Camelot Control
Group, Inc., and
Camelot Group, Inc.
</TABLE>
Management believes thacquired businesses will be integrated into the
Company at low incremental costs, enabling it to spread fixed costs over an
increasingly larger revenue base. 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. In the past, following an
acquisition, the Company has generally marketed the services of the acquired
company under the "COMFORCE" name, but has sometimes retained the former
marketing identities of its acquired companies during a transition period.
However, the Company contemplates that the Uniforce name will continue to be
used.
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Staffing Solutions
The Company offers its customers various staffing alternatives to meet its
clients' diverse needs, including Project Support, Vendor-on-Premises,
RightSourcing(sm) and Needs Analysis, as well as the services provided by the
Company's Financial Services division. In addition, the Company is currently
developing a telecommuting service, COMFORCE Homework(sm), to offer its
customers even greater flexibility.
Project Support
The Company contracts with its Project Support 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 programs, 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
contingent 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) programs, the Company evaluates the
performance level of a particular department, function, or project and
recommends ways to increase cost-effectiveness and workforce efficiency through
specific staffing strategies. The Company then tailors a program to meet
specific staffing needs and established performance standards. Through the use
of RightSourcing(sm)software, the customer can access information and data
regarding the cost, management and productivity of its contract and permanent
personnel. The RightSourcing(sm) program provides the customer with the option
to transfer its workers from its payroll to the Company's payroll.
Needs Analysis
Through its Needs Analysis service, the Company evaluates the specific
objectives and requirements of a project or function and identifies needed staff
positions and responsibilities. This is accomplished by the development of a
work breakdown structure and other needs analysis techniques that define tasks,
outputs, and interdependencies, establish task durations and milestones, and
identify elements critical to the successful implementation of the function or
completion of the project. The resulting staffing plan defines an organizational
structure, identifies specific staff positions, numbers, responsibilities, and
qualifications, defines the start and end date of each position, and indicates
the employment category for each position (permanent full-time, temporary
short-term, or contract). The staffing requirements can then be matched to the
Company's proprietary database of more than 175,000 prospective employees.
Telecommuting Initiative
The Company's COMFORCE Homework(sm) program is designed to provide a
telecommuting alternative for highly-skilled professionals, thereby eliminating
geographic barriers and allowing the Company to provide the most
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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 provides staffing, consulting and outsourcing solutions to
over 2,300 customers including telecommunication equipment manufacturers,
telecommunication service providers (wireline and wireless), computer software
and hardware manufacturers, aerospace and avionics firms, utilities, national
laboratories engaged in such areas as environmental safety research and
development of alternative energy sources and laser technology, pharmaceuticals
companies, cosmetics companies, health care facilities, educational institutions
and accounting firms. Many of the Company's customers are Fortune 500 companies
and other large organizations.
The Company believes that its large customer base provides it with
attractive opportunities for further marketing and cross-selling of its 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.
In certain cases, 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
then offered the opportunity to supply personnel only if the Company is unable
to meet the customer's requirements.
Customers of the Company's IT division generally obtain the Company's
services on a contract and purchase order basis and are invoiced weekly or
bi-weekly. Customers of the Telecom division typically operate on a purchase
order basis and are invoiced weekly. Technical Services' customers generally
obtain the Company's services on a long-term contract basis and typically are
invoiced weekly. Professional Services' customers typically operate on a
purchase order basis and typically are invoiced weekly. Customers of Financial
Services generally obtain the Company's services on a long-term contract basis
and typically are invoiced weekly.
Two customers accounted for 14.5% and 11.6%, respectively, of the
Company's 1997 historical net sales. In 1996, one customer accounted for 19% of
the Company's historical net sales. No customer presently accounts for more than
10% of the Company's current net sales.
Sales and Marketing
The Company services its customers through a network of 57 company-owned
and 31 licensed branch offices located in 26 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.
The national 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.
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Although the Company has no offices outside the United States, its
domestic sales and marketing personnel have served customers whose staffing
needs extend to countries on six of the seven continents. 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 and consulting services, management
believes that the Company's ability to provide a full range of services to such
customers will be a competitive advantage.
In certain markets, the Company intends to cross-sell contingent staffing
and consulting services. The Company has established long-term relationships
with many of its customers. Most of these customers are currently serviced by
only one of the Company's divisions. 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 and offers additional compensation, in the form of cash
and stock options, to certain of its employees.
Recruiting and Training of Billable Employees
The Company's success is dependent upon its ability to effectively and
efficiently match skilled personnel with specific customer assignments. As a
result of continuous recruiting efforts, the Company has established an
extensive national resume database of over 175,000 prospective employees with
expertise in the disciplines served by the Company. The Company continuously
updates its proprietary database to reflect changes in personnel skill levels
and availability. Upon receipt of assignment specifications, the Company
searches the database to identify suitable personnel. Once an employee's 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 state-of-the-art back office and MIS systems (using
EZAccess(R) recruiting and database software) permit the Company to search its
resume database by a number of different criteria, including specific skills or
qualifications. The database is protected by multilevel security systems and by
limiting access so that only Company employees having a need to do so can access
the database and then can only access the particular portions of the database
appropriate to their needs. The systems also allow for the addition of new
information as acquired companies and databases are integrated.
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 personnel with certain "specialty" skills intensifies, the Company
intends to enhance its recruiting practices to attract personnel in areas of
high demand.
Management believes that the Company will be better positioned to
attract recruits by making extensive training opportunities available to its
employees. The Company also frequently agrees to bear a portion of the
training costs for training contingent personnel in a particular IT
discipline needed by a client. To meet those demands, the Company recently
introduced its COLT (COMFORCE On-Line Training) program, which management
believes to be unique in the industry, to train employees in the latest
developments in IT, telecommunications and other technologies. Over 500
standard courses are currently offered through COLT, and the Company intends
to offer custom courses to meet the specific needs of the customers, many of
which custom courses have already been designed. The Company also has on
staff a software engineer who trains the Company's billable and staff
personnel in various software languages and techniques and maintains a
training facility in Dallas, Texas, where Telecom staffers are trained to
install and test telecommunications equipment. In addition, the Company
provides a telephone hot line to assist its clerical employees with software
problems or questions.
The Company intends to continue to develop the use of its technology-based
training capabilities. The Company believes it has a competitive advantage in
attracting and retaining specialty staffing and consulting personnel as it
provides
10
<PAGE>
assignments with high-profile customers that make use of advanced technology and
offer the employees the opportunity to obtain additional experience that can
enhance their skills and overall marketability. The Company also offers flexible
schedules, wages and, depending on the contract or assignment, paid holidays,
vacation, and certain benefit plan opportunities to attract and retain qualified
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.
Competition
The contingent staffing and consulting industry is very competitive and
fragmented. There are relatively limited barriers to entry, particularly in the
more traditional sectors of the industry, 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 and consulting services include AccuStaff
Incorporated, Corestaff, Inc., Butler International, Inc., CDI Corporation and
Adecco, S.A. The Professional Services portion of the Company's Staffing
Services division also competes with such national supplemental staffing firms
as Kelly Services, Inc., Olsten Corporation, Manpower, Inc. and Adecco, S.A.
Local firms are typically operator-owned, and each market generally has one or
more significant competitors. The Company believes that as it grows and expands
geographically, it may compete with additional national, regional and local
service providers.
Management believes that the availability and quality of candidates, the
effective monitoring of job performance, scope of geographic service and the
price of service are the principal elements of competition. The availability of
quality contingent personnel is an especially important facet of competition. In
order to attract staffing candidates, the Company places emphasis upon its
ability to provide long-term placement opportunities, competitive compensation,
quality and varied assignments, and scheduling flexibility. The Company believes
its ability to compete also depends in part on a number of competitive factors
outside its control, including the ability of its competitors to hire, retain
and motivate skilled technical and management personnel and the extent of its
competitors' responsiveness to customer needs. Additionally, in certain markets
the Company has experienced significant pricing pressure from some of its
competitors. Although the Company believes it competes favorably with respect to
these factors, it expects competition to increase, and there can be no assurance
that the Company will remain competitive.
Employees
The Company currently employs approximately 500 full-time staff employees
and has approximately 8,000 billable employees on assignment. In addition to
employees on assignment, the Company maintains a proprietary database of over
175,000 prospective employees with expertise in the 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
11
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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. Uniforce
holds United States service mark registrations for the name "Uniforce(R)" (with
logo design), for the names of certain of Uniforce's business units and for
various marketing slogans. Uniforce also holds, or has applied for, United
States trademark registrations for the names of various programs and systems it
has developed. It also has certain service mark registrations in New York, the
United Kingdom, Brazil and Mexico.
Licensed Offices
Uniforce has granted licenses to operate Uniforce offices. The most recent
license for a new office was granted in July 1992. It is contemplated that
licensees will continue to operate their businesses following the Uniforce
Acquisition under the terms of the licensing agreements entered into with
Uniforce. Licensees have the exclusive right to open and maintain one or more
offices within a designated territory, using the Uniforce(R) name and service
marks, and the "Uniforce System," consisting of marketing programs, operating
methods, forms, advertising and promotional materials. Uniforce-owned branch
offices and licensed offices are generally not operated in the same territory,
although certain existing Company offices, which operate in the same territory
as Uniforce licensees, operate under the COMFORCE name.
Licensees recruit contingent personnel and promote their services to both
existing and new clients obtained through the licensees' marketing efforts.
Performance of the contingent personnel and overall service quality is the
direct responsibility of licensees. As licensees are ultimately responsible for
the collection of accounts receivable, they must conform to strict credit and
collection practices structured by Uniforce.
The Company and the licensees share the gross profits from each licensed
office. While licensing agreements have a perpetual term, the Company may
terminate a license for material breach by a licensee or for other significant
good cause as prescribed in the licensing agreements. In addition, at any time
after a period specified in the licensing agreement (generally 18 months, but
five to ten years in certain cases), a licensee may surrender its license and
withdraw from the contingent staffing business in the territory or, upon payment
to the Company of an amount based on a predetermined formula, assume and
continue the operation of the business independently of the Company, Uniforce,
the Uniforce name and the Uniforce System. If a licensee exercises this option,
Uniforce may then license a new office or operate a Company-owned office under
the Uniforce name in the territory.
Regulations
Contingent staffing and consulting 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 operations. Contingent
staffing and consulting firms 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. In addition, the sale
of franchises or licenses is subject to regulation, both by the Federal Trade
Commission and a number of states. See "Licensed Offices" in this Item 1.
Discontinued Operations
From 1985 until September 1995, the Company, under the name The Lori
Corporation, was engaged in the business of designing and distributing fashion
jewelry (referred to as "Lori" as the context may require). Prior thereto, the
Company engaged in various business and manufacturing activities. The Company's
current management was not involved in the operation of any of these
discontinued businesses.
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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. In conjunction with the COMFORCE Telecom acquisition, the Company
and ARTRA GROUP Incorporated ("ARTRA"), then the Company's majority stockholder,
entered into an agreement as of October 17, 1995 under which ARTRA agreed to pay
and discharge substantially all of the then existing liabilities and obligations
of the Company, including indebtedness, corporate guarantees, accounts payable
and environmental liabilities. ARTRA also agreed to assume responsibility for
all liabilities of the jewelry business from and after October 17, 1995. In
April 1996, ARTRA sold the remaining assets associated with the discontinued
jewelry operations.
Forward Looking Statements
Various statements made in this Item 1 and elsewhere in this Report
suggest that the Company will or expects to increase revenues and become
profitable, achieve significant growth through strategic acquisitions or other
means, realize operating efficiencies, and like statements as to the Company's
objectives and management's beliefs. Such statements constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company's actual results could differ materially from those
projected or suggested in any forward-looking statement. Factors that could
cause or contribute to such differences include, but are not limited to, the
important factors set forth below. Additional important factors that could cause
or contribute to such differences include certain of the factors described under
"Risk Factors" in Amendment No. 1 to the Registration Statement on Form S-3 of
the Company filed with the Securities and Exchange Commission on February 22,
1998 (Registration No. 333-44321). The disclosure under "Risk Factors" in the
Registration Statement may be accessed through the Web site maintained by the
Securities and Exchange Commission at "http://www.sec.gov." In addition, the
Company will provide, without charge, a copy of such "Risk Factor" disclosure to
each stockholder of the Company who requests such information. Requests for
copies should be directed to COMFORCE Corporation, 2001 Marcus Road, Lake
Success, New York 11042 to the attention of Linda Connolly, telephone (516)
328-7300.
The Company is highly leveraged. This degree of leverage could have
important consequences, including the following: (i) the ability of the Company
to obtain additional financing for working capital, capital expenditures, debt
service requirements or other purposes may be impaired (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" in Item 7); (ii) a substantial
portion of the Company's cash flow from operations will be required to pay the
Company's debt service; (iii) the Company may be more highly leveraged than
companies with which it competes, which may place it at a competitive
disadvantage; and (iv) the Company may be particularly vulnerable in the event
of a downturn in its business or in the economy generally.
The Company intends to improve its financial results through the
implementation of operating efficiencies. Particularly in connection with the
recent Uniforce acquisition, the Company expects to reduce operating expenses
through the consolidation of back office activities, personnel-related cost
savings and elimination of costs relating to Uniforce's obligations as a
public company. Although the Company believes that its strategies are
reasonable, there can be no assurance that it will be able to implement its
plans without delay or that it will not encounter unanticipated problems in
connection therewith or that, when implemented, its efforts will result in
the reduction of operating expenses that is currently anticipated.
As of December 31, 1997, approximately 57% 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 generally amortized over a five to 40 year period, resulting in
significant annual charges. Various factors could impact the Company's ability
to generate the earnings necessary to support this amortization schedule,
including fluctuations in the economy, the degree and nature of competition,
demand for the Company's services, and
13
<PAGE>
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. Although management
does not believe any impairment has occurred through the date of this Report,
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.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters as well as its 56 branch
offices. These leases are for office space ranging in size from approximately
150 square feet to approximately 23,500 square feet, in the case of the
Company's Woodbury, New York office, and have remaining lease terms of from less
than one year to five years with the exception of the lease for Uniforce's
headquarters office which extends to 2006. The Company owns no real estate,
except for an approximately 700 square foot condominium. Licensees are
responsible for securing their own facilities, which are not included in this
discussion.
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.
ITEM 3. LEGAL PROCEEDINGS
In January 1997, Austin A. Iodice, who served as the Company's Chief
Executive Officer, President and Vice Chairman while the Company was engaged in
the jewelry business, and Anthony Giglio, who performed the functions of the
Company's Chief Operating Officer while the Company was engaged in the jewelry
business, filed separate suits against the Company in the Connecticut Superior
Court alleging that the Company had breached the terms of management agreements
entered into with them by failing to honor options to purchase Common Stock
awarded to them in connection with the management of the jewelry business under
the terms of such management agreements and the Company's Long-Term Stock
Investment Plan (the "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 in accordance with the terms of the Plan. Messrs. Giglio
and Iodice maintain that they were agents and not employees of the Company and
that the options continue to be exercisable under the terms of the Plan.
Management believes that these suits are without substantial merit and intends
to vigorously defend them.
In a case filed in U.S. District Court, Central District of California,
against Rhotech and Technical Staff Associates, Inc. ("TSA"), which was acquired
by Rhotech in 1992, TSA's former insurance carrier has alleged that TSA and
Rhotech are obligated to repay to it approximately $1.6 million that it was
required to pay in connection with an injury and death that occurred in November
1992 to a temporary employee of TSA. Rhotech has been granted summary judgment
with respect to all claims made in the action, which judgment is the subject of
an appeal by the plaintiff. The action has been referred to Rhotech's insurance
carrier, which is defending it with a reservation of rights. Management believes
that the case is without substantial merit and intends to vigorously defend it.
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 $25 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 $5 million per claim and directors' and
officers' liability insurance in the amount of $10 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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During the fourth quarter of 1997, the Company did not submit any matters
to its security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMFORCE's Common Stock, $.01 par value, is traded on the American Stock
Exchange (AMEX:CFS). The high and low sales prices for COMFORCE's Common Stock,
as reported by the American Stock Exchange in the Monthly Market Statistics for
the periods indicated, were as follows:
Fiscal Year 1996 Low High
First Quarter ............ $6 $10-3/8
Second Quarter ........... $9-3/8 $34-1/8
Third Quarter ............ $15-1/2 $28-1/2
Fourth Quarter ........... $11-1/2 $18-3/8
Fiscal Year 1997
First Quarter ............ $6-1/8 $14
Second Quarter ........... $4 $7-1/2
Third Quarter ............ $5-7/8 $9-5/16
Fourth Quarter ........... $6 $9-3/8
The last reported sale price of the COMFORCE Common Stock on the American
Stock Exchange on March 27, 1998 was $7-15/16. As of December 31, 1997, there
were approximately 5,400 shareholders of record.
COMFORCE anticipates that it will not pay cash dividends on the COMFORCE
Common Stock for the foreseeable future and that it will retain its earnings to
finance future growth. The declaration and payment of dividends by COMFORCE 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 COMFORCE's financial condition and other factors COMFORCE's
Board of Directors may in the future consider relevant. Under the credit
facility entered into with Heller Financial, Inc. (described below under "Recent
Transactions--New Credit Facility" in Item 7), the Company is prohibited from
paying cash dividends on its Common Stock, and the terms of the indenture
governing its 15% Senior Secured PIK Debentures (described below under "Recent
Transactions--Senior Debentures" in Item 7) also restricts the payment of cash
dividends. In addition, the terms of the indenture governing COI's 12% Senior
Notes (described under "Recent Transactions--The Notes" in Item 7) also restrict
COI's payment of dividends to COMFORCE, which is expected to be the only source
of funds from which COMFORCE can pay dividends. No dividends have been declared
or paid on the Company's Common Stock during 1996 or 1997.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company as
of and for each of the five years in the period ended December 31, 1997. The
statement of operations and balance sheet data as of and for each of the five
years in the period ended December 31, 1997 are derived from the Company's
audited historical consolidated financial statements included elsewhere in this
Report. The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 and the Company's financial statements and notes thereto
included in Item 8 of this Report.
COMFORCE Corporation (1)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
(in thousands, except per share data)
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ............................ $216,521 $55,867 $2,387 -- --
Cost of sales ........................ 186,455 47,574 1,818 -- --
--------- --------- --------- --------- ---------
Gross profit ......................... 30,066 8,293 569 -- --
Selling, general and administrative
expense .......................... 19,718 5,266 461 $966 $701
Restructuring charge ................. 1,600 -- -- -- --
Depreciation and amortization ........ 1,883 614 362 -- --
Stock compensation charge (2) ........ -- -- 3,425 -- --
--------- --------- --------- --------- ---------
Operating income (loss) .............. 6,865 2,413 (3,679) (966) (701)
Interest expense, net (3) ............ 12,260 201 585 1,316 754
Other expense (income) ............... (344) (40) 33 -- 1
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes
and extraordinary credit ......... (5,051) 2,252 (4,297) (2,282) (1,456)
Provision (credit) for income taxes .. (1,351) 900 35 -- --
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations ....................... (3,700) 1,352 (4,332) (2,282) (1,456)
Loss from discontinued operations
(4) .............................. -- -- (17,211) (16,220) (216)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
credit ........................... -- 1,352 (21,543) (18,502) (1,672)
Extraordinary credit, net discharge
or indebtedness (5) .............. -- -- 6,657 8,965 22,057
--------- --------- --------- --------- ---------
Net income (loss) ............ (3,700) 1,352 (14,886) (9,537) 20,385
Preferred stock dividends ............ 737 325 -- -- --
Accretive dividend on Series F
preferred stock .................. -- 665 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) attributable
to common shares .......... (4,437) $362 $(14,886) $(9,537) $20,385
========= ========= ========= ========= =========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
(in thousands, except per share data)
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
Net income (loss) per share:
Continuing operations before
accretive dividend ........ $(0.33) $0.12 $(0.95) $(0.72) $(0.39)
Discontinued operations ....... -- -- (3.74) (5.08) (0.06)
--------- --------- --------- ------ ---------
Income (loss) before
extraordinary credit and
accretive dividend ........ $(0.33) $0.12 $(4.69) $(5.80) $(0.45)
Extraordinary credit .......... -- -- 1.45 2.81 6.03
Accretive dividend on Series F
preferred stock ........... -- (0.09) -- -- --
--------- --------- --------- ------ ---------
Net income (loss) per share $(0.33) $0.03 $(3.24) $(2.99) $5.58
========= ========= ========= ====== =========
Basic Weighted average shares
shares ........................ 13,493 11,049 4,596 3,195 --(6)
Plus dilutive effort of
options, warrants
and convertible securities..... -- 1,984 -- -- --
--------- --------- --------- ------ ---------
Diluted weighted average shares.... 13,493 13,033 4,596 3,195 3,656
========= ========= ========= ====== =========
Balance Sheet Data:
Working capital (deficit) ......... $23,283 $8,012 $(1,697) - (8) - (8)
Accounts receivable ............... 73,116 12,042 1,698 - (8) - (8)
Intangible assets, net ............ 134,687 24,756 4,801 - (8) - (8)
Total assets (7) .................. 236,185 43,366 8,536 - (8) - (8)
Total debt, including current
maturities .................... 171,038 3,850 500 - (8) - (8)
Preferred stock ................... 1 2 -- - (8) - (8)
Stockholders' equity .............. 39,402 34,744 2,238 - (8) - (8)
</TABLE>
- ----------
(1) Results for the year ended December 31, 1995 represent results of COMFORCE
Telecom from the date of its acquisition, October 17, 1995. Results for
the year ended December 31, 1996 represent results of COMFORCE Telecom for
the entire year, results of Williams from the acquisition date of March 3,
1996 through December 31, 1996, results of RRA from the acquisition date
of May 10, 1996 through December 31, 1996, results of Force Five from the
effective date of acquisition of July 31, 1996 through December 31, 1996,
results of AZATAR from the effective date of acquisition of November 1,
1996 through December 31, 1996, and results of Continental from the
effective date of acquisition of November 8, 1996 through December 31,
1996. Results for the year ended December 31, 1997 represent results of
Rhotech from the acquisition date of February 28, 1997 through December
31, 1997 and results of Uniforce from the acquisition date of November 26,
1997 through December 31, 1997. The Company's jewelry operations were
discontinued effective as of September 30, 1995. Accordingly, selected
financial data of the Company's jewelry operations for each of the two
years in the period ended December 31, 1994 have been reclassified to
discontinued operations.
(2) Represents a non-recurring compensation charge related to the issuance of
a 35% common stock interest in the Company to certain individuals to
manage the Company's entry into the technical staffing services business.
(3) Includes $7.7 million of bridge and financing charges for the year ended
December 31, 1997.
(4) The loss from discontinued operations for the year ended December 31, 1995
includes a charge to operations of $12.9 million to write-off the
remaining goodwill of the Company's discontinued jewelry operations
effective June 30, 1995 and a provision of $1.6 million for loss on
disposal of these discontinued operations. The loss
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<PAGE>
from discontinued operations for the year ended December 31, 1994 includes
a charge to operations of $10.8 million representing a write-off of
goodwill of the Company's former New Dimensions subsidiary.
(5) The 1995 and 1994 extraordinary credits represent gains from net discharge
of indebtedness under terms of the Company's debt settlement agreement
with its bank related to the discontinued jewelry operations. The 1993
extraordinary credit represents a gain from a net discharge of
indebtedness due to the reorganization of the Company's former New
Dimensions subsidiary.
(6) The Company does not have the records necessary to report this information
for 1993.
(7) As partial consideration for a debt settlement agreement, in December
1994, the Company's bank lender received all of the assets of the
Company's former New Dimensions subsidiary.
(8) Data not presented as information is not meaningful since the Company was
not in the staffing business during such periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth below supplements the information found in the
consolidated financial statements and related notes. The matters discussed below
and elsewhere in this Report contain forward looking statements that involve
risks and uncertainties, many of which may be beyond the Company's control. See
"Forward Looking Statements" in Item 1 of this Report for a discussion of
certain of such risks and uncertainties.
Overview
Set forth below are discussions and analyses of financial condition and
results of operations of the Company. The Company believes that its future
operating results may not be directly comparable to historical operating because
of the Company's increased size, related cost savings and marketing synergies.
From October 1995 through December 31, 1997, the Company had completed
eight acquisitions. See "Acquisitions" in Item 1 of this Report. Each of these
acquisitions has been accounted for on a purchase basis and the results of
operations of each of the businesses acquired have been included in the
Company's historical financial statements from the date of acquisition. Certain
of these acquisitions provide for contingent payments by the Company as a part
of the purchase consideration based upon the operating results of the acquired
businesses for specified future periods. The acquisitions were financed by the
Company principally through its issuance of debt and equity securities and
borrowings under bank credit facilities. As a result, the Company's historical
results of operations include bridge financing costs which are not expected to
be incurred in future periods and preferred stock dividends. In addition, as a
result of its rapid growth through acquisitions, the discussion and comparison
of the Company's historical results of operations set forth below may not be
meaningful.
Gross margins on staffing services can vary significantly depending on
factors such as the specific services being performed, the overall contract size
and the amount of recruiting required. Margins on the Company's sales in the
technical services sector are typically significantly lower than those in the
telecommunications and information technology sectors. Additionally, in certain
markets the Company has experienced pricing pressure from some of its
competitors. Consequently, changes in the Company's sales mix can be expected to
impact the overall gross margins generated by the Company.
Staffing personnel placed by the Company are employees of the Company. The
Company is responsible for employee related expenses for its employees,
including workers' compensation, unemployment compensation insurance, Medicare
and Social Security taxes and general payroll expenses. The Company offers
health, dental, disability and life insurance to its billable employees.
Staffing and consulting companies, including the Company, typically pay their
billable employees weekly for their services before receiving payment from their
customers, often resulting in significant outstanding receivables. To the extent
the Company increases revenues through acquisitions and/or internal growth,
these receivables will grow and there will be greater requirements for borrowing
availability under its credit facilities to fund current operations.
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Recent Transactions
The Uniforce Acquisition
On August 13, 1997, COMFORCE , Uniforce and COMFORCE Columbus, Inc., a
wholly owned subsidiary of COMFORCE ("Subsidiary"), executed an Agreement and
Plan of Merger (the "Merger Agreement") which provided for the acquisition of
Uniforce. Pursuant to the Merger Agreement, COMFORCE caused Subsidiary to
commence a tender offer (the "Tender Offer") to acquire all of the outstanding
Uniforce common stock for a per share price of $28 in cash and 0.5217 shares of
COMFORCE Common Stock.
On November 26, 1997, the Company accepted all 2,931,741 shares of
Uniforce common stock (representing approximately 96.5% of the issued and
outstanding shares of Uniforce common stock) that had been tendered in the
Tender Offer. On December 3, 1997, the Company completed the merger of Uniforce
and the Subsidiary (the "Merger"), and made available cash and stock for payment
to the holders of the remaining 106,802 shares of Uniforce common stock (who did
not tender their stock). In addition, as required under the Merger Agreement,
the Company made available for payment to the holders of options to purchase an
additional 370,010 shares of Uniforce common stock, cash in an amount equal to
the difference between (i) $32.00 per share and (ii) the per share exercise
price of each such option.
Accordingly, the total consideration paid by the Company to acquire
Uniforce was $93.6 million in cash and 1,585,000 shares of its Common Stock. The
Company incurred an additional $8.5 million in fees, commissions and expenses in
connection with the Tender Offer and Merger and related financing and other
transactions in connection therewith.
The Notes
The cash portion of the costs of acquiring Uniforce, including the payment
of certain of the fees and expenses payable upon the closing of the Tender
Offer, was financed through the private placement by COI of $110.0 million
original principal amount of 12% Senior Notes due 2007, Series A (the "Series A
Notes"). The Series A Notes were issued on November 26, 1997. As required under
the indenture governing the Series A Notes, in March 1998, COI exchanged the
Series A Notes, which are unregistered, for its 12% Senior Notes due 2007,
Series B, which are identical to the Series A Notes except they are registered
for resale (collectively with the Series A Notes, the "Notes"). The Notes are
senior unsecured obligations of COI and rank pari passu in right of payment with
all existing and future senior indebtedness of COI and senior in right of
payment to all existing and future subordinated indebtedness of COI. The Notes
provide for the payment of interest semi-annually at the rate of 12% per annum
and mature on December 1, 2007.
COI may redeem the Notes, in whole or in part, at any time on or after
December 1, 2002 at redemption prices of 106% for the 12 months commencing
December 1, 2002, 104% for the 12 months commencing December 1, 2003, 102% for
the 12 months commencing December 1, 2004 and 100% at any time on or after
December 1, 2005, together with accrued and unpaid interest to the date of
redemption. In addition, at any time prior to December 1, 2000, COI may, subject
to certain requirements, redeem up to 35% of the aggregate principal amount of
the Notes with the cash proceeds received from one or more equity offerings at a
redemption price equal to 112% of the principal amount to be redeemed, together
with accrued and unpaid interest to the date of redemption, provided that at
least 65% of the aggregate principal amount of the Notes issued through the date
of redemption remains outstanding immediately after each such redemption.
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<PAGE>
Upon the occurrence of certain specified events deemed to result in a
change of control of COI, it will be required to make an offer to repurchase the
Notes at a price equal to 101% of the principal amount thereof, together with
accrued and unpaid interest to the date of repurchase.
Subject to certain qualifications and exceptions, the indenture governing
the Notes limits, inter alia, (i) the incurrence of additional indebtedness by
COI and its subsidiaries, (ii) the payment of dividends on, and redemption of,
capital stock of COI and the redemption of certain subordinated obligations of
COI, (iii) investments, (iv) sales of assets and subsidiary stock, (v)
transactions with affiliates, (vi) consolidations, mergers and transfers of all
or substantially all the assets of COI and (vii) restrictions on distributions
from subsidiaries.
The Senior Debentures and Warrants
On November 26, 1997, in connection with the completion of the Tender
Offer and the acquisition of Uniforce, the Company repaid (i) its then existing
credit facility with Fleet National Bank, as lender and agent, and U.S. Bank,
Washington, as lender, in the outstanding principal amount of $38.1 million (the
"Fleet Credit Facility"), and (ii) Uniforce's then existing credit facility with
Heller Financial, Inc. in the outstanding principal amount of $36.1 million (the
"Uniforce Credit Facility"). These obligations were repaid from proceeds
available from (i) the Company's private placement of 20,000 Units ("Units")
each consisting of $1,000 principal amount of 15% Senior Secured PIK Debentures,
Series A (the "Series A Senior Debentures") and 8.45 Warrants ("Warrants"), each
to purchase one share of Common Stock, representing, in the aggregate, $20.0
million principal amount of Series A Senior Debentures and Warrants to purchase
169,000 shares of the Company's Common Stock, and (ii) proceeds from a new
credit facility entered into in November 1997 (described below under "--New
Credit Facility"). As required under the indenture governing the Series A Senior
Debentures, in March 1998, the Company exchanged the Series A Senior Debentures,
which are unregistered, for its 15% Senior Secured PIK Debentures, Series B,
which are identical to the Series A Senior Debentures except they are registered
for resale (collectively with the Series B Senior Debentures, the "Senior
Debentures").
The Senior Debentures constitute direct and unconditional senior secured
obligations of the Company and are collateralized by a pledge by the Company of
all of the issued and outstanding common stock of COI. The payment obligations
of the Company under the Senior Debentures must at all times rank at least equal
in priority of payment with all existing and future indebtedness of the Company.
The Senior Debentures are structurally subordinated to all indebtedness of the
Company's direct and indirect subsidiaries (including the Notes and a new credit
facility entered into by the Company in November 1997 (described below under
"--New Credit Facility") and effectively subordinated to all future secured
indebtedness of the Company.
The Senior Debentures bear interest at the rate of 15% per annum, subject
to increase in certain circumstances, payable semi-annually, and mature on
December 1, 2009. Prior to December 1, 2002, interest is payable in cash or in
additional Senior Debentures on each interest payment date, at the option of the
Company. Thereafter, interest is payable only in cash. To the extent that the
Company is prohibited pursuant to the terms of any credit facility or the
indenture governing the Notes from paying interest in cash subsequent to
December 1, 2002, the Company is required to pay interest equal to the interest
rate then applicable to the Senior Debentures plus 2%.
Subject to certain requirements, the Company may at any time redeem up to
100% of the aggregate principal amount of the Senior Debentures at the
redemption prices of 103% for the 12 months commencing December 1, 1997 and
107.5% at any time on or after December 1, 1998, together with accrued and
unpaid interest to the date of redemption.
Upon the occurrence of certain specified events deemed to result in a
change of control of the Company, it will be required to make an offer to
repurchase the Notes at a price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of repurchase.
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Subject to certain qualifications and exceptions, the indenture governing
the Senior Debentures limits, inter alia, (i) the incurrence of additional
indebtedness by the Company and its subsidiaries, (ii) the payment of dividends
on, and redemption of, capital stock of the Company and the redemption of
certain subordinated obligations of the Company, (iii) investments, (iv) sales
of assets and subsidiary stock, (v) transactions with affiliates, (vi)
consolidations, mergers and transfers of all or substantially all the assets of
the Company and (vii) restrictions on distributions from subsidiaries.
Each Warrant entitles the holder to acquire, at any time prior to December
1, 2009, one share of Common Stock at a price per share equal to $7.55 (based on
a 10% premium above the average closing price for the Company's Common Stock the
five trading days ended November 18, 1997), subject to adjustment from time to
time upon the occurrence of certain events which are deemed dilutive to the
holders of the Warrants.
The New Credit Facility
On November 26, 1997, the Company entered into a Loan and Security
Agreement with Heller Financial, Inc., as lender and agent for other
participating lenders (collectively, "Heller"), to provide to the Company a
secured revolving credit facility (the "New Credit Facility") providing for
borrowings of up to $75.0 million based on a specified percentage of the
Company's eligible accounts receivable. At closing, the Company borrowed $37.3
million under the New Credit Facility.
From the date of the closing until Heller receives the Company's audited
financial statements for the year ended December 31, 1998 (the "Margin Date"),
borrowings under the New Credit Facility bear interest, at the Company's option,
at a per annum rate equal to either (i) the base rate as announced from time to
time by the Board of Governors of the Federal Reserve System as the "Bank Prime
Loan" rate (the "Base Rate") plus 0.50% or (ii) LIBOR plus 2.25%. Following the
Margin Date, the interest rate is subject to adjustment quarterly by a
percentage equal to or in excess of the Base Rate (ranging from 0% to 0.75%) or
LIBOR (ranging from 1.75% to 2.50%) based upon specified leverage ratios.
The obligations evidenced by the New Credit Facility are collateralized
by a pledge of the capital stock of the subsidiaries of the Company and by
security interests in substantially all of the assets of the Company. In
addition, John Fanning, a former shareholder of Uniforce and the current
holder of approximately 5.9% of the issued and outstanding Common Stock of
the Company, provided cash collateral to Heller in the amount of $5.0 million
at closing, which collateral was fully released in February 1998.
The agreements evidencing the New Credit Facility contain various
financial and other covenants and conditions, including, but not limited to,
limitations on paying dividends, engaging in affiliate transactions, making
acquisitions and incurring additional indebtedness. The scheduled maturity date
of the New Credit Facility is November 26, 2002.
Results of Operations
Historical financial information for the Company for 1995 (and prior
years) relates principally to operations discontinued by the Company effective
September 30, 1995. Only limited results of the Company's contingent staffing
operations (following the Company's acquisition of COMFORCE Telecom in October
1995) are reflected in 1995. See "Business--Discontinued Operations" in Item 1
of this Report.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues of $216.5 million for the year ended December 31, 1997 were
$160.6 million, or approximately 287% higher than revenues for the year ended
December 31, 1996. The increase in 1997 revenues is attributable principally to
the Company's completion of six acquisitions since the end of the first quarter
of 1996.
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Cost of revenues for the year ended December 31, 1997 was 86.1% of
revenues compared to cost of revenues of 85.2% for the year ended December 31,
1996. The 1997 cost of revenues increase of 0.9% is a result of the Company's
business mix in 1997, which reflected the full year impact of acquisitions
completed during 1996 as well as expansion in 1997 into more mature technical
staffing sectors. These more mature technical staffing sectors historically
generate gross margins substantially lower than telecommunications and
information technology sectors, principally due to the nature of the related
contracts and competition in this sector.
Selling, general and administrative expenses as a percentage of revenue
was 9.1% for the year ended December 31, 1997, compared to 9.4% for the year
ended December 31, 1996. The decrease is principally attributable to the
acquisitions completed during 1996 and 1997 which contributed increased revenues
with lower incremental selling, general and administrative costs.
During 1997, the Company recorded merger, integration and other
non-recurring charges totaling $1.6 million. These non-recurring charges before
taxes consist of merger and integration charges resulting from the acquisition
of Uniforce, and include severance costs of $690,000, asset write-downs of
$210,000 and integration costs of $700,000.
Operating income for the year ended December 31, 1997 was $6.9 million,
compared to operating income of $2.4 million for the year ended December 31,
1996. This increase was principally attributable to the Company's completion of
six acquisitions following the end of the first quarter of 1996 and prior to
December 31, 1997.
Bridge and financing charges for the year ended December 31, 1997 are
attributable principally to the amortization of bridge finance costs payable on
the $25.2 million principal amount of the Subordinated Convertible Debentures
(the "Old Subordinated Debentures") issued by the Company in February and March
1997, the proceeds of which were used to partially fund the acquisition of
Rhotech and for working capital purposes, and the write-off of deferred
financing fees on the Fleet Credit Facility, which was repaid in November 1997.
The Company's interest expense for the year ended December 31, 1997 is
attributable to the interest on the Company's credit facilities outstanding
during the year and the Notes and Senior Debentures issued in November 1997.
Income tax reflects a credit for the year ended December 31, 1997 for $1.4
million on a loss before income taxes of $5.1 million, compared to a tax
provision of $900,000 on pretax income of $2.3 million for the year ended
December 31, 1996. Such credit assumes that the Company will have taxable income
in future periods. The difference between the Federal statutory income tax rate
and the Company's effective tax rate relates primarily to state income taxes and
the nondeductibility of certain intangible assets.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues of $55.9 million for the year ended December 31, 1996 were $53.5
million higher than revenues for the year ended December 31, 1995. Approximately
30% of this increase in revenues is attributable to full year operations for
COMFORCE Telecom in 1996, and approximately 70% is attributable to the
acquisition of five additional staffing business by the Company during 1996.
Cost of revenues for the year ended December 31, 1996 was 85.2% of
revenues compared to cost of revenues of 76.2% for the year ended December 31,
1995. The 1996 cost of revenues increase of 9.0% is a result of the Company's
expansion into more mature technical staffing sectors, which historically
generate gross margins substantially lower than telecommunications and IT
sectors, principally due to the nature of the related contracts and competition
in this sector.
Selling, general and administrative expenses for the year ended December
31, 1996 increased $4.8 million from the selling, general and administrative
expenses for the year ended December 31, 1995. The increase in selling, general
and administrative expense is principally due to the Company's limited
operations in 1995. The stock compensation charge incurred by the Company in
1995 of $3.4 million relates to stock awarded to certain individuals to direct
the Company's entry into the technical staffing business.
Historical operating income for the year ended December 31, 1996 was $2.4
million compared to an operating loss of $3.7 million for the year ended
December 31, 1995. The improvement of $6.1 million was principally attributable
to the discontinuance in the 1996 period of the non-recurring stock compensation
charge of $3.4 million recorded in 1995. The 1996 operating income was also
impacted by the acquisitions completed during the year and increased margins on
revenue growth in the Company's telecommunications and information technology
sectors.
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<PAGE>
The income tax provision for the year ended December 31, 1996 was $900,000
on pretax income of $2.3 million compared with an income tax provision of
$35,000 on a loss before income taxes and extraordinary credit of $4.3 million
for the year ended December 31, 1995.
Financial Condition, Liquidity and Capital Resources
The Company has historically paid its billable employees weekly for their
services before receiving payment from its customers. Additionally, certain
statutory payroll and related taxes, as well as other fringe benefits, are
generally paid by the Company before the Company receives payment from its
customers. Consequently, a significant portion of the Company's cost of revenues
is normally paid by the Company prior to receiving payment from its customers.
Increases in the Company's revenues, resulting from expansion of existing
offices or establishment of new offices, will require additional cash resources
necessary to support such growth. The debt service costs associated with the
borrowings under the Notes, the Senior Debentures and the New Credit Facility
will significantly increase liquidity requirements. Management of the Company
believes that, based on pro forma results of operations and anticipated growth,
including growth through acquisitions, cash flow from operations and funds
anticipated to be available under the New Credit Facility will be sufficient to
service the Company's indebtedness, to fund growth at anticipated levels and to
meet anticipated working capital requirements for the foreseeable future.
However, various factors, including those described under "Forward Looking
Statements" in Item 1 of this Report, could prevent the Company from realizing
these objectives.
As of December 31, 1997, the Company had outstanding $20 million in
principal amount of Senior Debentures bearing interest at a rate of 15%, $110
million in principal amount of Notes issued by COI bearing interest at a rate of
12%, $34 million outstanding under the New Credit Facility bearing interest at a
rate of 7.875% and $7.2 million outstanding under the New Credit Facility
bearing interest at a rate of 9.0%.
As of December 31, 1997, approximately $134.7 million, or 57% of the
Company's total assets were intangible assets. These intangible assets
substantially represent amounts attributable to goodwill recorded in connection
with the Company's acquisitions and will be amortized over a five to 40 year
period, resulting in an annual charge of approximately $3.5 million. Various
factors could impact the Company's ability to generate the earnings necessary to
support this amortization schedule, including those described under "Forward
Looking Statements" in Item 1 of this Report.
The Company is obligated under various acquisition agreements to make
earn-out payments to the sellers of acquired companies, subject to the acquired
companies' meeting certain contractual requirements. For 1997, sellers became
entitled to receive earn-out payments of $1.6 million payable in cash and
400,000 shares of the Company's Common Stock, of which $950,000 in cash has been
paid and all such shares of stock issued. The maximum amount of
23
<PAGE>
the remaining potential earn-out payments is $5.0 million in cash and $4.5
million in stock payable in the three-year period from 1998 to 2000. The Company
cannot currently estimate whether it will be obligated to pay the maximum
amount; however, the Company anticipates that the cash generated by the
operations of the acquired companies will provide all or a substantial part of
the capital required to fund the cash portion of the earn-out payments.
During 1997, the Company's primary sources of funds to meet working
capital needs were:
(i) cash from operations;
(ii) net proceeds from the Company's $25.2 million offering of its Old
Subordinated Debentures in February and March 1997, which was repaid
in June 1997 principally from the proceeds of the Fleet Credit
Facility;
(iii) the Company's borrowings under a short-term credit facility with
U.S. Bank, Washington, entered into in February 1997, which provided
for borrowing availability of up to $7.5 million (the "U. S. Bank
Credit Facility"), the outstanding balance of which was repaid in
June 1997, principally from the proceeds of the Fleet Credit
Facility;
(iv) the Company's borrowings under the Fleet Credit Facility entered
into in June 1997, which provided for borrowing availability of up
to $40.0 million, the outstanding balance of which was repaid in
November 1997 principally from the proceeds of the New Credit
Facility;
(v) the proceeds of the offering by the Company and COI of $130.0
million original principal amount of the Notes and Senior Debentures
in November 1997 (see "Recent Transactions--the Notes" and "--the
Senior Debentures and Warrants" in this Item 7); and
(vi) the Company's borrowings under the New Credit Facility, which
provides for borrowing availability of up to $75.0 million based on
a specified percentage of the Company's eligible accounts receivable
(see "Recent Transactions--the New Credit Facility" in this Item 7).
Cash and cash equivalents increased $2.9 million during the year ended
December 31, 1997. Cash flows provided by financing activities of $113.8 million
were in excess of cash flows used in operating activities of $11.4 million, and
cash flows used in investing activities of $99.5 million. Cash flows used by
operating activities were principally attributable to the need to fund growth in
accounts receivable and their carrying costs. Cash flows used in investing
activities are principally related to the purchase of Uniforce and Rhotech. Cash
flows from financing activities were principally attributable to net proceeds
available to the Company in connection with its sale of the Old Subordinated
Debentures (which were redeemed in June 1997), net borrowings under the U. S.
Bank Credit Facility (which was repaid in June 1997), net borrowings under the
Fleet Credit Facility (which was repaid in November 1997), and net borrowings
under the New Credit Facility and proceeds from the sale of the Notes and Senior
Debentures, as described above.
Seasonality
The Company's quarterly operating results are affected primarily by the
number of billing days in the quarter and the seasonality of its customers'
businesses. Demand for services in the technical services sector has
historically been lower during the year-end holidays through January of the
following year, showing gradual improvement over the remainder of the year.
Although less pronounced than in technical services, the demand for services of
the telecommunications and 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 if revenues
contributed by the information technology and telecommunications sectors
continue to increase as a percentage of the Company's consolidated revenues.
24
<PAGE>
Other Matters
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 becomes effective in fiscal 1999. Management
believes that any additional disclosure required by this statement will not
materially differ from that currently presented.
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), which changes the way public companies report
information about segments. SFAS 131, which is based on the management approach
to segment reporting, includes requirements to report selected segment
information quarterly and entity-wide disclosures about products and services,
major customers, and the material countries in which the entity holds and
reports revenues. SFAS 131 becomes effective in fiscal 1999. Management has not
evaluated the effect of this change on the Company's financial statements.
The Company does not anticipate that its systems will be negatively
impacted by Year 2000 requirements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Schedules as listed on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers, Key Employees and Directors
The following table sets forth certain information concerning each
individual who currently serves as an executive officer, key employee or
director of the Company, including such person's business experience during at
least the past five years, positions held with each of COI and the Company and
certain directorships held by such person. Each director holds office until the
next annual meeting of the stockholders and until his successor has been duly
elected and qualified.
Name Age Position
- ---- --- --------
Executive Officers/Employee Directors
James L. Paterek........................... 36 Chairman of the Board
Christopher P. Franco...................... 38 Chief Executive Officer and
Director
Michael Ferrentino......................... 35 President and Director
Paul J. Grillo............................. 45 Senior Vice President and
Chief Financial Officer
Andrew Reiben.............................. 33 Vice President of Finance
and Chief Accounting
Officer
Malcolm High............................... 46 Corporate Controller
Other Key Employees
John Fanning............................... 66 President of COMFORCE
Financial Services
Division
Rosemary Maniscalco........................ 56 President of COMFORCE
Professional Staffing
Services; Acting
President of COMFORCE
Information Technologies
Stanley Rashkin............................ 44 President of COMFORCE
Technical Staffing
Services
Bruce Astrom............................... 47 President of COMFORCE
Telecom
Non-Employee Directors
Michael D. Madden.......................... 49 Vice Chairman
Richard Barber............................. 38 Director
Keith Goldberg............................. 35 Director
Dr. Glen Miller............................ 62 Director
Marc Werner................................ 40 Director
Executive Officers
James L. Paterek has served as Chairman of the Board of COI since its
formation in October 1997 and of the Company since February 1997, having
previously served as consultant to the Company since December 1995. Mr. Paterek
was a founder of Yield TechniGlobal which was purchased by Spectrum Global
Services, Inc. (following its acquisition by the Company, renamed COMFORCE
Telecom Inc.) and he served as COMFORCE Telecom's President from 1987 to 1995.
Christopher P. Franco has served as the Chief Executive Officer and a
Director of COI since its formation in October 1997 and of the Company since
February 1997, having previously served as Executive Vice President of the
Company since December 1995. In addition, Mr. Franco has served as Secretary of
the Company since December 1995. From 1993 to 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).
26
<PAGE>
Michael Ferrentino has served as the President and a Director of COI since
its formation in October 1997 and of the Company since December 1995. Mr.
Ferrentino was a founder of COMFORCE Telecom, and he served as COMFORCE
Telecom's Vice President from 1987 to 1993 and as its Executive Vice President
from 1993 to 1995. From 1984 through 1987, he was employed by Dun & Bradstreet.
Paul J. Grillo has served as Senior Vice President of the Company and COI
since January 1998 and as Chief Financial Officer of COI since its formation in
October 1997 and of the Company since July 1996. In addition, from July 1996
until January 1998, he served as Vice President of Finance of the Company. 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 Vice President of Finance of the Company and
COI since January 1998 and as Chief Accounting Officer of COI since its
formation in October 1997 and of the Company since February 1996. From 1993 to
February 1996, Mr. Reiben served as Controller of Daystar Robinson, a C.H.
Robinson company (New York). From 1989 to 1993, Mr. Reiben was a Senior
Accountant with Coopers & Lybrand LLP (New York), a certified public accounting
firm. Mr. Reiben is a certified public accountant.
Malcolm High has served as the Corporate Controller of COI since its
formation in October 1997 and of the Company since April 1997. Prior thereto,
from 1985 to April 1997, Mr. High held various positions with TAD Resources
International, Inc. (staffing services), including Vice President (1991 to April
1997), Corporate Controller (1989 to April 1997) and Assistant Corporate
Controller (1985 to 1989). He is an associate member of the Chartered Institute
of Management Accountants (ACMA) of the United Kingdom.
Other Key Employees
John Fanning, founder of Uniforce, served as President and a director of
Uniforce from 1961, the year in which Uniforce's first office was opened, until
November 1997. Mr. Fanning entered the employment field in 1954, when he founded
the Fanning Personnel Agency, Inc., his interest in which he sold in 1967 to
devote his efforts solely to Uniforce's operations. He also founded and served
as the first president of the Association of Personnel Agencies of New York. In
November 1997, Mr. Fanning became President of COMFORCE Financial Services
Division.
Rosemary Maniscalco joined Uniforce as Sales and Marketing Coordinator in
December 1981. In June 1982, her duties were expanded to include direction of
Uniforce's license marketing efforts, as well as the development of marketing
concepts. In 1983, she was appointed the Uniforce's Director of Corporate
Development, in May 1984, she was elected Executive Vice President and in June
1992, she was designated Chief Operating Officer. She served in that position
until November 1997. In November 1997, she became President of COMFORCE
Professional Staffing Services Division and Acting President of COMFORCE
Information Technologies Division.
Stanley Rashkin has served as President of the Company's subsidiary,
COMFORCE Technical Services, since May 1996, following the Company's acquisition
of DataTech, RRA, and Project Staffing Support Team. During the four years prior
to May 1996, Mr. Rashkin served as President of DataTech, and Project Staffing
Support Team, a technical staffing and consulting services business.
Bruce Astrom has served as President, and prior thereto, Senior Vice
President, of the Company's COMFORCE Telecom subsidiary since May 1996. From
1982 to 1996, Mr. Astrom was employed by Butler International, most recently as
Vice President of Butler Telecom, an international telecommunications staffing
and specialty services provider.
Non-Employee Directors
27
<PAGE>
Michael D. Madden has served as Vice Chairman of COI since its
formation in October 1997 and of the Company since September 15, 1997 and is
a member of the Finance Committee of the Board. He has served as Chairman of
Hanover Capital L.L.C. (merchant banking) since July 1996 and as a Director
of FM Properties, Inc. (real estate investments) since 1991. From 1994 to
1995, Mr. Madden served as a Vice Chairman and member of the Executive
Committee of the Board of Directors of PaineWebber Incorporated (investment
banking), having previously headed the transition team to integrate Kidder
Peabody & Co. (investment banking) into PaineWebber Incorporated following
their 1994 merger. Mr. Madden held various positions with Kidder Peabody &
Co. from 1973 to 1989 and from 1993 to 1994, most recently as Executive Vice
President responsible for Global Origination. He previously served as Senior
Managing Director and co-head of Worldwide Investment Banking (1989 to 1993)
and a Director (1990 to 1993) of Lehman Brothers (investment banking).
Richard Barber has served as a Director of COI since its formation in
October 1997 and of the Company since December 1995 and is a member of the Audit
Committee of the Board. He is a partner at L.H. Frishkoff & Company, a certified
public accounting firm. Mr. Barber is a member of the American Institute of
Certified Public Accountants and the New York State Society of Certified Public
Accountants and has served as a committee member of the New York State Real
Estate Accounting Committee.
Keith Goldberg has served as a Director of COI since its formation in
October 1997 and of the Company since December 1995 and is a member of the
Compensation and Stock Option Committees of the Board. He is senior partner at
J. Walter Thompson Advertising. Previously, he worked for BBDO Advertising as an
Associate Creative Director from 1994 to 1995. From 1990 through 1994, he served
as a Vice President at Young & Rubicam (advertising).
Dr. Glen Miller has served as a Director of COI since its formation in
October 1997 and of the Company since December 1995 and is a member of the
Audit, Compensation and Stock Option Committees of the Board. He is a Vice
President of Pacer International, a telecommunications construction company.
Prior thereto, he had served as Vice President of Cybertel Network Systems and
as Vice President of TeleData, both telecommunications service companies. From
1990 to 1994, Dr. Miller was responsible for strategic planning for the Harris
Corporation (electronics and communications). 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.
Marc Werner has served as a Director of COI since its formation in October
1997 and of the Company since May 1997 and is a member of the Finance Committee
of the Board. He is the President and Chief Executive Officer of Cornucopia
Capital Advisors, Inc. (financial and strategic advisory services). In addition,
Mr. Werner has served as the Vice Chairman of Ameriquest Technologies, Inc.
(computer products) since 1993. Prior thereto, Mr. Werner served as the
President and Chief Executive Officer of Werner Financial Inc. (investment,
insurance, real estate and claims management) (1995 to 1997); as the Chief
Financial Officer of Werner Holdings (PA) Inc. (climbing products, extruded
industrial products and financial services) (1986 to 1996); as the President and
Chief Executive Officer of B-E Industries (industrial holding company) (1982 to
1986); and as Vice President and Chief Financial Officer of Borg-Erickson
(bathroom scale manufacturer) (1981 to 1986). Mr. Werner is a certified public
accountant.
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 director or officer and another person pursuant to which he was
selected as a director or officer except as may be hereinafter described.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation and Arrangements
28
<PAGE>
During 1997, non-employee directors received fees of $1,000 per quarter
(which has been increased to $2,500 per quarter for 1998). In addition, under
the Company's Long-Term Stock Investment Plan, each non-employee director is
entitled to receive options to purchase 10,000 shares of Common Stock upon his
initial election to the Board and, annually thereafter, options to purchase
10,000 shares upon his reelection to the Board, at an exercise price equal to
the market price on the date of grant. All options granted to non-employee
directors under these non-discretionary provisions of the Plan provide that the
options become exercisable one year from the date of grant and terminate 10
years from the date of grant.
Executive Officer Compensation
The following table shows all compensation paid by the Company and its
subsidiaries for the fiscal years ended December 31, 1997, 1996 and 1995 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 $100,000 in 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------ -----------------
Name and Position Year Salary ($) Bonus ($) Options/SAR's (#)
- ----------------- ---- ---------- --------- -----------------
<S> <C> <C> <C> <C>
Christopher P. Franco, 1997 150,000 222,777 --
Chief Executive Officer 1996 150,000 -- 112,500(2)
1995 28,846 739,264(1) --
Michael Ferrentino, 1997 150,000 223,088 --
President 1996 150,000 -- 281,250(2)
1995 79,703 739,264(1) --
James L. Paterek, 1997 208,000 271,849 --
Chairman of the Board(3) 1996 157,000 -- 281,250(2)
1995 39,250 1,232,106 --
Paul J. Grillo, 1997 135,000 60,000 --
Senior Vice President and 1996 59,500 5,000 5,000(4)
Chief Financial Officer 1995 -- -- --
Andrew C. Reiben, 1997 100,000 42,000 --
Vice President of Finance 1996 83,333 -- 20,000(5)
and Chief Accounting Officer 1995 -- -- --
</TABLE>
- ----------
(1) This amount represents the value of shares of Common Stock which the
Company issued or agreed to issue in 1995 to Messrs. Franco and Ferrentino
for agreeing to direct the Company's entry into the technical staffing
business.
(2) Currently exercisable options to purchase the Company's Common Stock at an
exercise price of $6.75 per share.
29
<PAGE>
(3) Includes compensation payable to Mr. Paterek during the period he served
as a consultant to the Company (October 1995 to February 1997).
(4) Options to purchase the Company's Common Stock at $18.00 per share, 12,500
of which are current exercisable.
(5) Currently exercisable options to purchase 20,000 shares of the Company's
Common Stock at an exercise price of $7.25 per share.
Option Awards and Values. No options or stock appreciation rights were
awarded to any of the Named Executive Officers in 1997. The following table sets
forth information concerning the aggregate number and values of options held by
Named Executive Officers as of December 31, 1997. None of the Named Executive
Officers holds stock appreciation rights and none of such persons exercised any
options in 1997.
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Fiscal Year End (#) Fiscal Year End ($)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
---- ------------- -------------
Christopher P. Franco ... 112,500/0 $140,625/$0
Michael Ferrentino ...... 281,250/0 $351,563/$0
James L. Paterek ........ 281,250/0 $351,563/$0
Paul J. Grillo .......... 12,500/37,500 $0/$0
Andrew C. Reiben ........ 10,000/10,000 $7,500/$7,500
- ----------
(1) This information is presented as of December 31, 1997. See the notes to
the "Summary Compensation Table" for a description of the terms of the
options listed in this table.
Employment Agreements
Effective as of December 1, 1997, the Company entered into employment
agreements with James L. Paterek, the Chairman of the Company, Christopher P.
Franco, the Chief Executive Officer of the Company, and Michael Ferrentino, the
Chief Operating Officer of the Company. Each agreement is for a term of two
years and provides for payment of (i) a salary of $200,000 per year, subject to
annual increases of the higher of 7% or the percentage increase in the Consumer
Price Index, (ii) an annual bonus, payable in cash or Common Stock of the
Company, (iii) a car allowance, and (iv) participation in the Company's
benefits. Each agreement is terminable by the Company only for "just cause," and
imposes customary non-competition and confidentiality restrictions on each
executive. In addition, each agreement provides that, if any such executive
resigns within one year, or is terminated within three years (other than for
just cause), following a change of control, such executive shall be entitled to
receive three times the amount of his annual salary, bonus, benefits and the
Company's pension contributions on his behalf. In addition, in such event, the
executive is entitled to receive an amount equal to the sum of the aggregate
exercise price of options to purchase Common Stock held by him, plus a "gross
up" payment based on projected federal income taxes payable by the executive,
health care benefits for three years and, in certain circumstances, a payment
intended to compensate the executive for any federal excise tax which may become
payable by him due to his receipt of such compensation.
30
<PAGE>
Prior thereto, the Company had entered into employment agreements with
Messrs. Franco and Ferrentino in December 1995 for two year terms which expired
in November 1997, and with Mr. Paterek in February 1997, which agreement was
terminated upon execution of a new agreement with him in December 1997, as
described above. The Company has also entered into employment agreements with
Messrs. Grillo and Reiben which include customary non-competition and
confidentiality restrictions. Each of these agreements is terminable by the
Company upon 30 days notice.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 March 19, 1998 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, and (iii) all
directors and executive officers of the Company as a group. Unless stated
otherwise, each person so named exercises sole voting and investment power as to
the shares of Common Stock so indicated. There were 15,637,947 shares of Common
Stock issued and outstanding as of March 19, 1998. None of the officers or
directors owns any shares of the Company's outstanding Series F Preferred Stock.
All of the shares of common stock of COI and the PIK Preferred Stock of COI
(issued in connection with the recent financing transactions) is owned
beneficially and of record by the Company.
Name and Address of Number(1) Percentage(1)
Beneficial Owner --------- -------------
----------------
Management:
James L. Paterek(2) .......................... 1,947,572 12.2%
2001 Marcus Avenue
Lake Success, New York 11042
Christopher P. Franco(3) ..................... 1,002,294 6.4%
2001 Marcus Avenue
Lake Success, New York 11042
Michael Ferrentino(4) ........................ 2,381,012 15.0%
2001 Marcus Avenue
Lake Success, New York 11042
Andrew Reiben(5) ............................. 20,000 *
Paul Grillo(6) ............................... 12,500 *
Malcolm High(7) .............................. 2,500 *
Dr. Glen Miller(8) ........................... 20,000 *
Richard Barber(8) ............................ 20,000 *
Keith Goldberg(8) ............................ 20,000 *
Marc Werner(9) ............................... 195,000 1.2%
Michael Madden(10) ........................... 50,000 *
Directors and officers as a group
(11 persons)(11) ............................. 4,793,084 28.9%
Other Significant Stockholders:
ARTRA GROUP Incorporated(12)(13) ............. 1,525,500 9.8%
500 Central Avenue
Northfield, Illinois 60093
John Fanning(14) ............................. 914,996 5.9%
COMFORCE-Woodbury
415 Crossways Park Drive
P.O. Box 9006
Woodbury, NY 11797
31
<PAGE>
Name and Address of Number(1) Percentage(1)
Beneficial Owner --------- -------------
----------------
Alberta, Canada (15) ......................... 1,400,000 9.0%
Alberta Treasury, Room 530
Terrace Building
9515 107th Street
Edmonton, Alberta T5K 2C3
- ----------
* Less than 1%
(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. Paterek, the Chairman of the Company,
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.
(3) The shares beneficially owned by Mr. Franco, the Chief Executive Officer
and a Director of the Company, include (i) 877,794 shares currently held
of record by him, (ii) 112,500 shares issuable to him upon exercise of an
option at an exercise price of $6.75 per share and (iii) 12,000 held in a
trust of which he is the sole trustee.
(4) 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) 877,794 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.
(5) The shares beneficially owned by Mr. Reiben, the Chief Accounting Officer
and Director of Finance of the Company, are shares issuable upon the
exercise of an option at an exercise price of $7.25 per share.
(6) The shares beneficially owned by Mr. Grillo, the Chief Financial Officer
of the Company, are issuable upon the exercise of an option at an exercise
price of $18.00.
(7) The shares beneficially owned by Mr. High are issuable upon the exercise
of an option at an exercise price of $8.00.
(8) The shares beneficially owned by this individual include 10,000 shares
issuable to him upon exercise of an option at an exercise price of $6.75
per share and 10,000 shares issuable to him upon exercise of an option at
an exercise price of $17.00.
(9) The shares shown to be beneficially owned by Mr. Werner include (i) 85,000
shares held in street name for his account, (ii) 100,000 shares issuable
upon the exercise of a warrant at an exercise price of $7.625 and (iii)
options to purchase 10,000 shares at an exercise price of $5.875 per
share.
(10) The shares beneficially owned by Mr. Madden, a Director of the Company,
are issuable to him upon the exercise of an option at an exercise price of
$7.375 per share.
32
<PAGE>
(11) The shares shown to be beneficially owned by the directors and officers as
a group include (i) 3,628,910 shares held of record by them, (ii) 222,174
shares held of record by Mr. Kiernan (under which Mr. Ferrentino has
voting power), (iii) 12,000 held in a trust of which Christopher P. Franco
is the sole trustee, (iv) 20,000 shares issuable upon the exercise of an
option at an exercise price of $7.25 per share, (v) 705,000 shares
issuable upon the exercise of an option at an exercise price of $6.75 per
share, (vi) 12,500 shares issuable upon the exercise of an option at an
exercise price of $18.00, (vii) 100,000 shares issuable upon the exercise
of a warrant at an exercise price of $7.625, (viii) 30,000 shares issuable
upon the exercise of an option at $17.00 per share, (ix) 50,000 shares
issuable upon the exercise of an option at an exercise price of $7.375,
(x) 10,000 shares issuable upon the exercise of an option at an exercise
price of $5.875 and (xi) 2,500 shares issuable upon the exercise of an
option at an exercise price of $8.00.
(12) 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 11.3% 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 case by ARTRA, Peter R. Harvey owns 1,772,833
shares, or 11.6%, of the Company's Common Stock and John Harvey owns
1,803,333 shares, or 11.8%, of the Company's Common Stock. Each such
person maintains a business address at 500 Central Avenue, Northfield,
Illinois 60093.
(13) ARTRA, a Delaware corporation, presently owns 233,036 shares of record in
its name and 1,511,667 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).
(14) Includes 188,601 shares held by a limited partnership of which Mr. Fanning
is the general partner. Mr. Fanning disclaims beneficial ownership of the
shares owned by such limited partnership in excess of his proportional
interest in the partnership.
(15) The shares beneficially owned by the stockholder are owned of record.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, certain of its officers and persons who own more than 10%
of the Company's common stock to file reports of ownership and changes in
ownership with the SEC. Such persons are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Company, the Company believes that all Section 16(a) filing requirements
applicable to persons who are officers or directors of the Company or holders of
10% of the Company's common stock were complied with in 1997, except for the
following: Form 3s were not timely filed reporting the elections as directors of
the Company of Marc L. Werner or Michael D. Madden. Each failure to timely file
was inadvertent, neither of the persons required to file reports traded any of
the securities beneficially owned by him during the brief period of
noncompliance and such reports have since been filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company made loans in 1995 and 1996 to James L. Paterek, the Chairman
of the Company, Christopher P. Franco, the Chief Executive Officer of the
Company, and Michael Ferrentino, the President of the Company, of $152,000,
$91,000 and $91,000, respectively, to cover their tax liabilities resulting from
their acquisition of common stock of the Company in order to direct the
Company's entry into the technical staffing business. The obligations were
evidenced by notes and bore interest at the rate of 6% per annum. As more fully
described below, these obligations were discharged in August 1997.
33
<PAGE>
As a condition to the funding of the Fleet Credit Facility, the lenders
required Messrs. Paterek, Franco and Ferrentino to each pledge as additional
collateral to secure the Company's obligations under the Fleet Credit
Facility 500,000 shares of the Company's common stock owned by them and all
of the options to purchase common stock held by them (281,250 shares in the
case of Messrs. Paterek and Ferrentino and 112,500 shares in the case of Mr.
Franco), which shares had a current market value in excess of $12 million as
of the date the Fleet Credit Facility was funded. In recognition of both the
substantial benefit afforded to the Company by the pledges and the cost to
the principals of making the pledges, in August 1997, the board of directors
of the Company authorized the issuance of an aggregate consideration of
approximately $650,000 to Messrs. Paterek, Franco and Ferrentino. Of this
amount, $152,000, $91,000 and $91,000 was utilized to repay outstanding loans
of Messrs. Paterek, Franco and Ferrentino, respectively, due to the Company.
The balance of this amount was treated as bonuses payable to these officers
and is included in the "Summary Compensation Table" in Item 11 of this
Report. The board of directors of the Company determined this consideration
to be reasonable based on the valuation of the pledges as determined by the
appraisal performed by the independent valuation firm. The pledges were
released when the Fleet Credit Facility was repaid in November 1997.
See "Employment Agreements" in Item 11 of this Report for a description of
the employment agreements entered into between the Company and each of Messrs.
Paterek, Ferrentino, Franco, Grillo and Reiben.
The Company paid L.H. Frishkoff & Company, a certified public accounting
firm at which Richard Barber, a Director of the Company, is a partner,
approximately $208,000 in fees during 1997.
Michael D. Madden, a Director of the Company, received options under the
Company's Stock Option Plan to purchase 90,000 Shares of the Company's Common
Stock at an exercise price of $7.375 for agreeing to provide consulting services
to the Company.
In connection with the closing of the New Credit Facility in November
1997, Heller required that John Fanning, the former controlling stockholder of
Uniforce and the current holder of approximately 5.9% of the issued and
outstanding Common Stock of the Company, provide cash collateral to it in the
amount of $5.0 million. This collateral was fully released in February 1998. As
consideration for agreeing to make this collateral available, the Company paid
to Mr. Fanning $85,342, representing a 12% per annum yield on his cash
collateral, less the actual return thereon as invested.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements as listed on page F-1.
2. Financial Statement Schedules as listed on page F-1.
3. Exhibits as listed on page E-1.
(b) Reports on Form 8-K.
On October 28, 1997, the Company filed a Current Report on Form 8-K to
report the commencement of its tender offer for the shares of Uniforce and its
proposal for a subsidiary of the Company to merge with Uniforce if the tender
offer proved successful.
On December 9, 1997, the Company filed a Current Report on Form 8-K to (i)
report the successful completion of the Uniforce tender offer and the merger of
a subsidiary of the Company into Uniforce, (ii) describe the terms of the Notes,
(iii) describe the terms of the Senior Debentures, (iv) describe the terms of
the New Credit Facility, and (v) file the financial statements for Uniforce, as
required in accordance with Item 7(a)(4) of Form 8-K and the related pro forma
financial information as required in accordance with Item 7(b) of Form 8-K.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COMFORCE Corporation
By: /s/ Christopher P. Franco
----------------------------------------------
Christopher P. Franco, Chief Executive Officer
Date: March 31, 1998
COMFORCE Operating, Inc.
By: /s/ Christopher P. Franco
----------------------------------------------
Christopher P. Franco, Chief Executive Officer
Date: March 31, 1998
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of each
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ---------------------------- ---------------------------- -------------------
/s/ James L. Paterek Chairman March 31, 1998
- ---------------------------
James L. Paterek
/s/ Christopher P. Franco Chief Executive Officer,
- --------------------------- Secretary and Director March 31, 1998
Christopher P. Franco
/s/ Michael Ferrentino President and
- --------------------------- Director March 31, 1998
Michael Ferrentino
/s/ Paul Grillo Chief Financial Officer
- --------------------------- (Principal Financial
Paul Grillo Officer) March 31, 1998
/s/ Andrew Reiben Vice President of Finance and March 31, 1998
- --------------------------- Chief Accounting Officer
Andrew Reiben Principal Accounting Officer)
/s/ Keith Goldberg Director March 31, 1998
- ---------------------------
Keith Goldberg
/s/ Glen Miller Director March 31, 1998
- ---------------------------
Glen Miller
/s/ Marc Werner Director March 31, 1998
- ---------------------------
Marc Werner
37
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
Comforce Corporation and Subsidiaries
Index to Financial Statements
Page(s)
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 F-5-F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-8-F-9
Notes to Financial Statements F-10-F-31
Schedule II Valuation and Qualifying Accounts F-32
F-1
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of Comforce Corporation, Inc.:
We have audited the accompanying consolidated financial statements and the
financial statement schedule of Comforce Corporation and Subsidiaries (the
"Company") as listed in the index on page F-1 of this registration statement.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Comforce Corporation and Subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. In addition in our opinion the
financial statement schedule referred to above when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 23, 1998.
F-2
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Balance Sheets
as of December 31, 1997 and 1996 (in thousands except share data)
<TABLE>
<CAPTION>
ASSETS: 1997 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,512 $ 3,608
Restricted cash 1,036
Accounts receivable, net 73,116 12,042
Prepaid expenses 793 243
Other assets 5,755 373
Deferred income tax 1,710 278
--------- ---------
Total current assets 88,922 16,544
Property and equipment, net 4,271 744
Intangible assets, net 134,687 24,756
Deferred financing costs 5,790
Deferred income tax 2,119
Other assets 396 1,322
--------- ---------
Total assets $ 236,185 $ 43,366
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Borrowings under revolving line of credit $ 5,038 $ 3,850
Accounts payable 4,954 1,398
Accrued expenses 19,647 2,930
Income taxes 354
--------- ---------
Total current liabilities 29,639 8,532
--------- ---------
Long-term debt 166,000
Deferred income tax 90
Other liabilities 1,144
--------- ---------
Total liabilities 196,783 8,622
--------- ---------
Commitments and contingencies (Note 18)
Stockholders' Equity:
Series D senior convertible preferred stock, $.01 par
value; 15,000 shares authorized, 7,002 shares issued
and outstanding in 1996, liquidation value of $1,000
per share ($7,002) 1
Series F convertible preferred stock, $.01 par value;
10,000 shares authorized, 500 shares issued and
outstanding in 1997 and 3,250 shares issued and
outstanding in 1996, liquidation value of $1,000
per share ($500) in 1997 and ($3,250) in 1996 1 1
Common stock, $.01 par value; 100,000,000 shares
authorized, 15,344,247 shares issued and outstanding
in 1997 and 12,701,934 shares issued and outstanding
in 1996 153 127
Additional paid-in capital 43,323 34,253
Retained earnings (deficit), since January 1, 1996 (4,075) 362
--------- ---------
Total stockholders' equity 39,402 34,744
--------- ---------
Total liabilities and stockholders' equity $ 236,185 $ 43,366
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
1997 1996 1995
Revenue:
Net sales of services $ 216,521 $ 55,867 $ 2,387
--------- --------- ---------
<S> <C> <C> <C>
Costs and expenses:
Cost of services 186,455 47,574 1,818
Stock compensation 3,425
Selling, general and administrative expenses 19,718 5,266 461
Restructuring charge 1,600
Depreciation and amortization 1,883 614 362
--------- --------- ---------
Total costs and expenses 209,656 53,454 6,066
--------- --------- ---------
Operating income (loss) 6,865 2,413 (3,679)
--------- --------- ---------
Other income (expense):
Bridge and financing charges (7,672)
Interest expense (4,588) (201) (585)
Other income (expense), net 344 40 (33)
--------- --------- ---------
(11,916) (161) (618)
Income (loss) from continuing operations before
income taxes and extraordinary credit (5,051) 2,252 (4,297)
Provision (credit) for income taxes (1,351) 900 35
--------- --------- ---------
Income (loss) from continuing operations (3,700) 1,352 (4,332)
Loss from discontinued operations (17,211)
--------- --------- ---------
Income (loss) before extraordinary credit (3,700) 1,352 (21,543)
Extraordinary credit, net discharge of indebtedness 6,657
--------- --------- ---------
Net income (loss) (3,700) 1,352 (14,886)
Dividends on preferred stock 737 325
Accretive dividend on Series F preferred stock 665
--------- --------- ---------
Income (loss) available to common stockholders $ (4,437) $ 362 $ (14,886)
========= ========= =========
Basic income (loss) per common share (Note 1):
Continuing operations before accretive dividend $ (0.33) $ .12 $ (.95)
Discontinued operations (3.74)
--------- --------- ---------
Income (loss) before extraordinary credit and
accretive dividend (0.33) .12 (4.69)
Extraordinary credit 1.45
Accretive dividend on Series F preferred stock (.09)
--------- --------- ---------
Basic net income (loss) per common share $ (0.33) $ .03 $ (3.24)
========= ========= =========
Diluted income (loss) per common share:
Continuing operations before accretive dividend $ (.33) $ .10 $ (.95)
Discontinued operations (3.74)
--------- --------- ---------
Income (loss) before extraordinary credit and
accretive dividend (.33) .10 (4.69)
Extraordinary credit 1.45
Accretive dividend on Series F preferred stock (.07)
--------- --------- ---------
Diluted net income (loss) per common share $ (0.33) $ .03 $ (3.24)
========= ========= =========
Basic weighted average shares 13,493 11,049 4,596
Plus dilutive effect of options, warrants and
convertible securities 1,984
--------- --------- ---------
Diluted weighted average shares 13,493 13,033 4,596
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
Restricted
Preferred Stock Common Stock Common Stock
--------------------- ---------------------- -------------------
Shares Amount Shares Amount Shares Amount
--------------------- ---------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 9,701 $ 19,515 3,265,019 $ 32 100,000 $(700)
Common stock issued as consideration for debt restructuring 150,000 2
Common stock issued as additional consideration for
short-term borrowings 141,176 1
Common stock issued to pay liabilities 115,098 1
Common stock sold through private placements 1,946,667 19
Common stock issued under compensation agreements with
individuals to manage the Company's telecommunications
and computer technical staffing services business 3,091,304 31
Common stock issued as additional consideration for Telecom
purchase guarantee 350,000 3
Common stock issued as compensation for Telecom acquisition
fees 150,000 2
Common stock issued to ARTRA in exchange for the Company's
entire entire preferred stock issue (9,701) (19,515) 100,000 1
Restricted common stock issued as additional consideration
for short-term borrowings (100,000) 700
Liabilities assumed by ARTRA
Fractional shares purchased (66)
Net loss
---------- ---------- ---------- ---- -------- -----
Balance at December 31, 1995 9,309,198 92
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
---------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1994 $ 65,392 $ (78,961) $ 5,278
Common stock issued as consideration for debt restructuring 335 337
Common stock issued as additional consideration for
short-term borrowings 229 230
Common stock issued to pay liabilities 374 375
Common stock sold through private placements 5,820 5,839
Common stock issued under compensation agreements with
individuals to manage the Company's telecommunications
and computer technical staffing services business 2,844 2,875
Common stock issued as additional consideration for Telecom
purchase guarantee 587 590
Common stock issued as compensation for Telecom acquisition
fees 251 253
Common stock issued to ARTRA in exchange for the Company's
entire entire preferred stock issue 19,514
Restricted common stock issued as additional consideration
for short-term borrowings 700
Liabilities assumed by ARTRA 647 647
Fractional shares purchased
Net loss (14,886) (14,886)
---------- ---------- ----------
Balance at December 31, 1995 95,993 (93,847) 2,238
</TABLE>
Continued
F-5
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended December 31, 1997, 1996 and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
Series E Series D
Common Stock Preferred Stock Preferred Stock
------------------- ------------------------ ----------------------
Shares Amount Shares Amount Shares Amount
------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 9,309,198 $ 92
Quasi-Reorganization as of January 1, 1996
Exercise of stock options 4,500 1
Exercise of stock warrants 449,445 5
Issuance of Series E convertible preferred stock 8,871 $ 1
Conversion of Series E preferred to common stock 887,100 9 (8,871) (1)
Issuance of Series D senior convertible preferred stock 7,002 $ 1
Issuance of Series F preferred stock
Common stock sold through private placement 810,000 8
SEC registration fees
Common stock issued as consideration for the
purchase of Force Five 27,398 1
Common stock issued as consideration for the
purchase of AZATAR 243,211 2
Common stock issued as consideration for the purchase
of Continental 36,800 1
Common stock issued to pay liabilities assumed by ARTRA 137,500 1
Liabilities assumed by ARTRA
Common stock issued to management for anti-dilution
provision 796,782 7
Net income
Dividends:
Series E preferred stock
Series D preferred stock
Series F preferred stock
Accretive dividend on Series F preferred stock
---------- ------ ---------- ---------- ---------- ----------
Balance at December 31, 1996 12,701,934 127 -- -- 7,002 1
<CAPTION>
Series F
Preferred Stock Additional
---------------------- Paid-in Accumulated
Shares Amount Capital Deficit
----------------------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 95,993 $ (93,847)
Quasi-Reorganization as of January 1, 1996 (93,847) 93,847
Exercise of stock options 22
Exercise of stock warrants 2,041
Issuance of Series E convertible preferred stock 4,635
Conversion of Series E preferred to common stock (8)
Issuance of Series D senior convertible preferred stock 6,415
Issuance of Series F preferred stock 3,250 $ 1 2,957
Common stock sold through private placement 6,362
SEC registration fees (300)
Common stock issued as consideration for the
purchase of Force Five 499
Common stock issued as consideration for the
purchase of AZATAR 4,118
Common stock issued as consideration for the purchase
of Continental 574
Common stock issued to pay liabilities assumed by ARTRA 275
Liabilities assumed by ARTRA 3,318
Common stock issued to management for anti-dilution
provision 534
Net income
Dividends:
Series E preferred stock
Series D preferred stock
Series F preferred stock
Accretive dividend on Series F preferred stock 665
---------- ---------- ---------- ----------
Balance at December 31, 1996 3,250 1 34,253 --
<CAPTION>
Retained
Earnings
Since Total
January 1, Stockholders'
1996 Equity
---------- -------------
<S> <C> <C>
Balance at December 31, 1995 $ 2,238
Exercise of stock options 23
Exercise of stock warrants 2,046
Issuance of Series E convertible preferred stock 4,636
Conversion of Series E preferred to common stock
Issuance of Series D senior convertible preferred stock 6,416
Issuance of Series F preferred stock 2,958
Common stock sold through private placement 6,370
SEC registration fees (300)
Common stock issued as consideration for the
purchase of Force Five 500
Common stock issued as consideration for the
purchase of AZATAR 4,120
Common stock issued as consideration for the purchase
of Continental 575
Common stock issued to pay liabilities assumed by ARTRA 276
Liabilities assumed by ARTRA 3,318
Common stock issued to management for anti-dilution
provision 541
Net income $ 1,352 1,352
Dividends:
Series E preferred stock (18) (18)
Series D preferred stock (280) (280)
Series F preferred stock (27) (27)
Accretive dividend on Series F preferred stock (665)
---------- ----------
Balance at December 31, 1996 362 34,744
</TABLE>
Continued
F-6
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended December 31, 1997, 1996 and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
Series D Series F Additional
Common Stock Preferred Stock Preferred Stock Paid-in
-------------------- ----------------- -----------------
Shares Amount Shares Amount Shares Amount Capital
-------------------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 12,701,934 $ 127 7,002 $ 1 3,250 $ 1 $ 34,253
Exercise of stock options 124,000 1 141
Exercise of stock warrants 80,000 1 214
Redemption of Series F preferred stock (2,750) (3,162)
Conversion of Series D preferred stock 583,500 6 (7,002) (1) (5)
Issuance of common stock as inducement to effect
Series D conversion 87,750 1 492
SEC Registration fees (625)
Issuance of warrants in connection with debt placement 1,511
Issuance of common stock in connection with payment
right 385,591 4 (4)
Issuance of common stock as consideration for interest
owed on debt 118,145 1 632
Issuance of common shares in connection with the
acquisition of Uniforce Services, Inc. 1,585,208 16 12,143
Issuance of warrants in connection with the
acquisition of Uniforce Services, Inc. 150
Redemption of common stock (321,867) (4) (2,417)
Redemption of partial shares of common stock (14)
Net loss
Dividends:
Series D preferred stock
Series F preferred stock
----------- -------- -------- -------- -------- -------- -----------
Balance at December 31, 1997 15,344,247 $ 153 -- $ -- 500 $ 1 $ 43,323
=========== ======== ======== ======== ======== ======== ===========
<CAPTION>
Retained
Earnings
(Deficit)
Since Total
January 1, Stockholders'
1996 Equity
------------- -------------
<S> <C> <C>
Balance at December 31, 1996 $ 362 $ 34,744
Exercise of stock options 142
Exercise of stock warrants 215
Redemption of Series F preferred stock (3,162)
Conversion of Series D preferred stock
Issuance of common stock as inducement to effect
Series D conversion (493)
SEC Registration fees (625)
Issuance of warrants in connection with debt placement 1,511
Issuance of common stock in connection with payment
right
Issuance of common stock as consideration for interest
owed on debt 633
Issuance of common shares in connection with the
acquisition of Uniforce Services, Inc. 12,159
Issuance of warrants in connection with the
acquisition of Uniforce Services, Inc. 150
Redemption of common stock (2,421)
Redemption of partial shares of common stock
Net loss (3,700) (3,700)
Dividends:
Series D preferred stock (195) (195)
Series F preferred stock (49) (49)
------------- -------------
Balance at December 31, 1997 $ (4,075) $ 39,402
============= =============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 (in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,700) $ 1,352 $(14,886)
Adjustments to reconcile net income (loss) to net cash
(used in) operations:
Extraordinary gain from net discharge of indebtedness (6,657)
Provision for disposal of fashion costume jewelry business 1,600
Depreciation of property and equipment 482 139 101
Amortization of goodwill 1,401 475 261
Impairment of goodwill 12,930
Amortization of other assets 374
Common stock compensation 3,657
Allowance for doubtful accounts 106 212
Deferred income taxes (578) (189)
Changes in assets and liabilities, net of the effects of acquisitions of
businesses and the discontinued operations (in 1995 ):
(Increase) decrease in accounts receivables (1,177) (10,500) 913
Decrease in inventories 2,105
(Increase) decrease in prepaid expenses and other
current assets 714 341 (56)
Increase in income taxes receivable (1,218)
(Increase) decrease in other noncurrent assets 2,021 (1,183) 170
Increase (decrease) in accounts payable and
accrued expenses (8,162) 3,637 (2,127)
Decrease in other liabilities (1,322) (60) (408)
-------- -------- --------
Net cash (used in) operating activities (11,433) (5,776) (2,023)
-------- -------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (97,006) (15,834) (5,580)
Purchase of property and equipment (832) (329) (656)
Increase of receivable from officers (373)
Restricted cash (1,036) 550
Other (636)
-------- -------- --------
Net cash (used in) investing activities (99,510) (16,536) (5,686)
-------- -------- --------
</TABLE>
Continued
F-8
<PAGE>
Comforce Corporation and Subsidiaries
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1997, 1996 and 1995 (in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from financing activities:
Payment of note payable (500)
Net increase (decrease) in short-term debt (7,302) 2,486
Proceeds from line of credit 98,968 4,750
Repayment on line of credit (103,758) (900)
Proceeds from issuance of equity securities 983 22,149 5,839
Dividends paid (244) (228)
Proceeds from long-term borrowings 130,000
Reduction of long-term debt (750)
Debt financing costs (4,800)
--------- --------- ---------
Net cash provided by financing activities 113,847 25,271 7,575
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 2,904 2,959 (134)
Cash and cash equivalents, beginning of year 3,608 649 783
--------- --------- ---------
Cash and cash equivalents, end of year $ 6,512 $ 3,608 $ 649
========= ========= =========
Supplemental cash flow information: Cash paid during the year for:
Interest $ 2,575 $ 157 $ 273
Income taxes 347 934 7
Details of acquisition (Note 3):
Fair value of assets acquired 185,175 21,029 7,143
Liabilities assumed (70,700) (443)
Less stock issued (12,157) (5,195) (843)
--------- --------- ---------
Cash paid 102,318 15,834 5,857
Less cash acquired 5,116 -- 277
--------- --------- ---------
Net cash paid $ 97,006 $ 15,834 $ 5,580
========= ========= =========
Supplemental schedule of noncash investing and financing activities:
Quasi-reorganization $ (93,848)
Common stock issued in connection with acquisitions $ 12,159 5,195 $ 843
Accretive dividend on preferred stock 665
Common stock issued to restructure and settle liabilities 636 550 941
Amounts assumed by ARTRA 3,594
Accrued dividends 97
Issuance of short-term debt to redeem Series F Preferred Stock 3,162
Dividends paid through issuance of common stock 493
Warrants issued in connection with debt and acquisitions 1,931
Forgiveness of officer loans 352
Common stock issued in connection with conversion of
Series D Preferred Stock 6
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-9
<PAGE>
Comforce Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except share data)
1. Basis of Presentation:
COMFORCE Corporation ("COMFORCE") is a leading provider of staffing,
outsourcing and consulting solutions, primarily to Fortune 500 companies,
in the growing information technology ("IT"), telecommunications,
technical, professional and financial market sectors. COMFORCE Operating,
Inc. ("COI"), a wholly-owned subsidiary of COMFORCE was incorporated as
a Delaware corporation in October 1997 for the purpose of facilitating
certain of the Company's financing transactions in November 1997 (see
Note 9). Unless the context otherwise requires, the term the "Company"
refers to COMFORCE, COI and all of their direct and indirect
subsidiaries. As discussed in Note 11, in September 1995, the Company
(then known as The Lori Corporation ("Lori")) 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 of its $95,993 additional paid-in
capital account to eliminate its accumulated deficit. The Company's Board
decided to effect a quasi-reorganization given that the Company achieved
profitability following its entry into the technical staffing business and
discontinuation of its unprofitable Jewelry Business. The Company's
accumulated deficit at December 31, 1995 is primarily related to the
discontinued operations and is not, in management's view, reflective of
the Company's current financial condition.
ARTRA Group Incorporated ("ARTRA"), a public company whose shares are
traded on the New York Stock Exchange, was formerly the Company's parent
prior to October 17, 1995. At December 31, 1997, ARTRA owned less than 20%
of the Company's stock. ARTRA owned its shares of common stock in the
Company principally through a wholly-owned subsidiary, Fill-Mor Holding,
Inc. ("Fill-Mor").
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of COMFORCE,
COI and their subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
Revenue for providing staffing services is recognized at the time such
services are rendered.
F-10
<PAGE>
Notes to Consolidated Financial Statements, Continued
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with an
original maturity of three months or less to be cash and cash equivalents.
Cash equivalents consists primarily of money market funds.
Restricted Cash
At December 31, 1997, the Company had $1,036 of restricted cash which is
being utilized to collateralize a performance bond with the State of New
York.
Accounts Receivable
Accounts receivable consists of those amounts due to the Company for
staffing and related services rendered to various customers. The Company's
allowance for doubtful accounts was approximately $808 and $213 as of
December 31, 1997 and 1996, respectively. Included in accounts receivable
are unbilled receivables which consist of revenues earned and recoverable
costs for which billings have not yet been presented to the customers.
Unbilled accounts receivable were $1,478 and $1,148 as of December 31,
1997 and 1996, respectively.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided
primarily on a straight-line basis over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the shorter of
the life of the lease or of the improvement. Maintenance and repairs are
charged to expense as incurred and betterments that extend the useful life
are capitalized. Upon retirement or sale, the cost and accumulated
depreciation are removed from the respective accounts, and the gain or
loss, if any, is reflected in earnings.
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.
Intangible Assets
The net assets of a purchased business are recorded at their fair value at
the date of acquisition. Goodwill represents the excess of purchase price
over the fair value of identifiable net assets of companies acquired.
Goodwill is amortized on a straight-line basis over periods of 20 to 40
years. (See Note 6.)
The Company assesses the recoverability of this 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. During
fiscal 1995, the Company recorded an impairment loss of approximately
$12,930 relating to its discontinued operations (see Note 10).
F-11
<PAGE>
Notes to Consolidated Financial Statements, Continued
Income Taxes
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each
year-end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense consists of the tax payable for the period and the change during
the period in deferred tax assets and liabilities.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates relate to the
realizability of accounts receivable, long-lived assets and deferred tax
assets. Actual results could differ from those estimates.
Fair Values of Financial Instruments
Cash and cash equivalents and fixed rate debt obligations are reflected in
the accompanying consolidated balance sheets at amounts considered by
management to reasonably approximate fair value.
Management is not aware of any factors that would significantly affect the
value of these amounts.
Deferred Licensee Acquisition Costs
In connection with the Uniforce acquisition (see Note 3), the Company
acquired executed contracts for affiliations with existing supplemental
staffing service companies. Such contracts required the payment of
affiliation fees which are being amortized on a straight-line method over
the minimum terms of the affiliation agreements which are generally five
or ten years. Amortization of deferred licensee acquisition costs were not
significant for fiscal 1997.
Deferred Financing Costs
Deferred financing costs consist of costs associated with the issuance of
the Company's New Credit Facilities (see Note 9). Such costs are being
amortized on a straight-line basis over the life of each financing source,
which ranges from 5 to 12 years. The current portion of deferred financing
costs are included in other current assets at December 31, 1997.
Earnings Per Share
In 1997, the Financial Accounting Standards Board adopted Statement No.
128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Earnings per share amounts for all periods
have been restated to conform to the SFAS No. 128 requirements.
F-12
<PAGE>
Notes to Consolidated Financial Statements, Continued
Newly Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("SFAS No. 129"), in
1997, which requires that descriptive information about securities be
shown in the financial statements. Management believes adoption of this
statement did not have any impact on the Company's disclosures in the
financial statements for the year ending December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which requires that changes in comprehensive income be
shown in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 becomes effective in fiscal
year 1998. Management believes that additional disclosure required by this
statement will not materially differ from that currently presented.
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS No. 131"), which changes the way public
companies report information about segments. SFAS 131, which is based on
the management approach to segment reporting, includes requirements to
report selected segment information quarterly and entity-wide disclosures
about products and services, major customers, and the material countries
in which the entity holds and reports revenues. SFAS 131 becomes effective
in fiscal year 1998. Management has not yet evaluated the effect of this
change on the Company's financial statements.
Reclassification
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
3. Acquisitions:
On February 28, 1997, the Company purchased all of the stock of RHO
Company, Incorporated ("Rhotech") for $14,800 in cash, plus a contingent
payout to be paid over three years on future earnings of Rhotech payable
in stock in an aggregate amount not to exceed $3,300. The maximum number
of shares issuable under the contingent payout is 386,249 shares. The
acquisition has been accounted for under the purchase method and,
accordingly, the results of operations are included in the financial
statements from the date of acquisition. The cash portion of the purchase
price paid at closing was principally funded through the Company's
offering of Subordinated Convertible Debentures (see Note 9). Rhotech
provides specialists primarily in the technical services and information
technology sectors.
F-13
<PAGE>
Notes to Consolidated Financial Statements, Continued
On December 3, 1997, the Company completed the acquisition of Uniforce
Services, Inc. and subsidiaries ("Uniforce"). The Company purchased
Uniforce for $93,600 in cash and 1,585,000 of its common shares with a
value of approximately $12,200. The acquisition has been accounted for
under the purchase method and, accordingly, the results of operations are
included in the financial statements from the date of acquisition. The
cash portion of the purchase price paid at closing was principally funded
through the Company's offering of 12% Senior Notes, Series B, and 15%
Senior Secured PIK Debentures, Series B (see Note 9). Uniforce is a
leading provider of staffing and consulting solutions for the information
technology, professional and office support markets.
In the year ended December 31, 1996, the Company completed the
acquisitions of the following businesses which have been accounted for
under the purchase method of accounting: Williams Communication
Services, Inc. ("Williams"); Project Staffing Support Team, Inc., RRA,
Inc., and Datatech Technical Services, Inc. (collectively, "RRA");
Force Five, Inc. ("Force Five"); Azatar Computer Systems, Inc.,
("Azatar"); and Continental Field Services Corporation and its affiliate,
and Progressive Telecom, Inc. (collectively "Continental"). The aggregate
purchase price of the acquisitions in the year ended December 31, 1996
was approximately $21,029, comprised of $15,834 in cash and $5,195 in
common stock of the Company. In addition, certain of the acquisitions
contain contingent payout provisions based on the attainment of specified
earnings.
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisitions had occurred on January 1,
1996 and does not purport to be an indication of what would have occurred
had the acquisitions been made as of that date. In addition, they are not
intended to be projections of future results and do not reflect any
synergies that might be achieved from combined operations.
Year Ended December 31,
----------------------------------
1997 1996
(Unaudited) (Unaudited)
Revenue $ 397,914 $ 329,063
Net loss (16,354) (6,835)
-------------- -------------
Net loss per share (diluted) $ (1.09) $ (0.51)
============== =============
The above pro forma data assume the issuance of Series F preferred stock,
the borrowing under the revolving line of credit and the offering of
Subordinated Convertible Debentures to finance these transactions. Pro
forma adjustments include an interest cost increase of $10,550 and $16,502
in 1997 and 1996, respectively, additional goodwill amortization of $1,900
and $2,034 in the 1997 and 1996 periods, respectively, and the related
income tax effect.
4. Restructuring Charges:
During 1997, the Company recorded merger, integration and other
non-recurring charges of $1,600. These non-recurring charges before
taxes consist of merger and integration charges resulting from the
acquisition of Uniforce, and include severance costs of $690, asset
write-downs of $210, and integration costs of $700.
F-14
<PAGE>
Notes to Consolidated Financial Statements, Continued
5. Fixed Assets:
Fixed assets consist of (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful Lives
in Years 1997 1996
<S> <C> <C> <C>
Office equipment 3-8 $ 3,413 $ 225
Furniture, fixtures and vehicles 3-7 1,324 592
Leasehold improvements 3-7 162 73
------- -------
4,899 890
Less, accumulated depreciation and amortization (628) (146)
------- -------
$ 4,271 $ 744
======= =======
</TABLE>
Depreciation expense was $482, $139 and $101 for the years ended December
31, 1997, 1996 and 1995, respectively.
6. Intangibles:
Intangibles as of December 31, 1997 and 1996 consisted of (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful Lives
in Years 1997 1996
<S> <C> <C> <C>
Goodwill 20-40 $ 135,828 $ 24,547
Non-compete covenants 5 737 730
Other 5 49 5
--------- ---------
136,614 25,282
Less accumulated amortization (1,927) (526)
--------- ---------
$ 134,687 $ 24,756
========= =========
</TABLE>
Amortization expense was $1,401, $475 and $261 in the years ended December
31, 1997, 1996 and 1995, respectively.
F-15
<PAGE>
Notes to Consolidated Financial Statements, Continued
7. Accrued Expenses:
Accrued expenses consist of the following (in thousands):
1997 1996
Payroll and payroll taxes $ 9,228 $ 969
Pension plan 306 660
Vacation 1,471 324
Professional fees 510 288
Medical insurance 219 171
Interest 1,902
Restructuring 1,600
Other 4,411 518
------- -------
$19,647 $ 2,930
======= =======
8. Income Taxes:
The provision (benefit) for income taxes as of December 31, 1997, 1996 and
1995 consists of (in thousands):
1997 1996 1995
Current:
Federal $ (695) $ 867
State (78) 222 $ 35
Deferred (578) (189)
------- ------- -------
$(1,351) $ 900 $ 35
======= ======= =======
The 1995 extraordinary credit represents net gains from discharge of bank
indebtedness under the loan agreements of Lori and its discontinued
fashion costume jewelry subsidiaries. No income tax expense is reflected
in the Company's financial statements resulting from the extraordinary
credits due to the utilization of tax loss carryforwards.
The difference between the statutory Federal income tax rate and the
effective income tax rate is reconciled as follows:
1997 1996 1995
% % %
Statutory Federal tax rate provision (benefit) (34.0) 34.0 (34.0)
State and local taxes, net of Federal benefit (3.8) 5.0 .3
Change in deffered tax rates 2.3
Current year tax loss not utilized 4.7
Goodwill impairment 30.0
Goodwill amortization 4.6 .9 .6
Alternative minimum tax .9
Other, individually less than 5% 3.3
---- ---- ----
(26.7) 39.9 1.6
==== ==== ====
F-16
<PAGE>
Notes to Consolidated Financial Statements, Continued
The component of deferred tax assets and deferred tax liabilities and
deferred tax assets at December 31, 1997 and 1996 (in thousands) are as
follows:
1997 1996
Deferred tax assets:
Reserves and allowances $1,417 $ 89
Accrued liabilities and other 672 189
Net operating loss 1,474
Fixed asset 327
Accrued severance 283
------ ------
Total deferred tax assets 4,173 278
------ ------
Deferred tax liability:
Noncurrent deductible intangibles 344 90
------ ------
Total deferred tax liabilities 344 90
------ ------
Net deferred tax asset $3,829 $ 188
====== ======
The net deferred income tax assets are reflected in the accompanying
balance sheets as follows:
1997 1996
Net deferred income tax assets - current $1,710 $ 278
Net deferred income tax assets - noncurrent 2,119
------ ------
Total deferred tax assets 3,829 278
------ ------
Net deferred income tax liability - noncurrent 90
------ ------
$3,829 $ 188
====== ======
At December 31, 1997, the Company's net federal operating loss
carryforwards of approximately $1,474 will begin to expire during fiscal
year end 2012.
Management has determined that, based on the history of prior taxable
earnings and its expectations for the future, taxable income will more
likely than not be sufficient to fully realize deferred tax assets and,
accordingly, has not reduced deferred tax assets by a valuation allowance.
F-17
<PAGE>
Notes to Consolidated Financial Statements, Continued
9. Debt:
Notes payable and long-term debt at December 31, 1997 and 1996 (in
thousands) consisted of the following:
1997 1996
Revolving line of credit, due June 30, 1998,
with interest payable at the bank's prime
rate. At December 31, 1996, the bank's prime
rate was 9.25% (a) $ 3,850
12% Senior Notes, due 2007, (b) $110,000
15% Senior Secured PIK Debentures, due 2009, (c) 20,000
Revolving line of credit, due in November 26,
2002, with interest payable monthly at the
bank's prime rate plus up to .50%. At
December 31, 1997, the bank's prime rate
was 8.5% (d) 41,038
-------- --------
171,038 3,850
Less, current portion 5,038 3,850
-------- --------
Total long-term debt $166,000 $ --
======== ========
(a) On July 22, 1996, the Company entered into a $10,000 Revolving
Credit Agreement (the "Credit Agreement") with the Chase Manhattan
Bank ("Chase") to provide working capital for the Company's
operations. The Credit Agreement, bears interest, at the Company's
election, of either (i) a variable rate at Chase's prime rate (8.25%
at December 31, 1996), or (ii) LIBOR plus 2% per annum. The Company
repaid the line during March 1997.
(b) On November 26, 1997, COI issued $110,000, 12% Senior Notes due
2007, Series A (the "Series A Notes"). The proceeds were utilized to
pay for the acquisition and related costs of Uniforce (see Note 3).
As required under the indenture agreement governing the Series A
Notes, in March 1998, COI exchanged the Series A Notes, which are
unregistered, for 12% Senior Notes due 2007, Series B, which are
identical to the Series A Notes except they are registered for
resale (collectively, the "Notes"). The Notes are senior
uncollateralized obligations of COI and rank equal in right of
payment with all existing and future senior indebtedness of COI and
senior in right of payment to all existing and future subordinated
indebtedness of COI. The Notes provide for the payment of interest
semi-annually at the rate of 12% per annum and mature on December 1,
2007.
COI may redeem the Notes, in whole or in part, at any time on or
after December 1, 2002 at redemption prices of 106% for the 12
months commencing December 1, 2002, 104% for the 12 months
commencing December 1, 2003, 102% for the 12 months commencing
December 1, 2004 and 100% at any time on or after December 1, 2005,
together with accrued and unpaid interest to the date of redemption.
In addition, at any time prior to December 1, 2000, COI may, subject
to certain requirements, redeem up to 35% of the aggregate principal
amount of the Notes with the cash proceeds received from one or more
equity offerings at a redemption price equal to 112% of the
principal amount to be redeemed, together with accrued and unpaid
interest to the date of redemption, provided that at least 65% of
the aggregate principal amount of the
F-18
<PAGE>
Notes to Consolidated Financial Statements, Continued
Notes issued through the date of redemption remains outstanding
immediately after each such redemption.
Upon the occurrence of certain specified events deemed to result in
a change of control, COI will be required to make an offer to
repurchase the Notes at a price equal to 101% of the principal
amount thereof, together with accrued and unpaid interest to the
date of repurchase.
Subject to certain qualifications and exceptions, the indenture
governing the Notes limits, (i) the incurrence of additional
indebtedness by COI and its subsidiaries, (ii) the payment of
dividends on, and redemption of, capital stock of COI and the
redemption of certain subordinated obligations of COI, (iii)
investments, (iv) sales of assets and subsidiary stock, (v)
transactions with affiliates, (vi) consolidations, mergers and
transfers of all or substantially all the assets of COI, and (vii)
restrictions on distributions from subsidiaries.
(c) The Company completed a private placement of 20,000 Units ("Units")
each consisting of $1 thousand principal amount of 15% Senior
Secured PIK Debentures, Series A (the "Series A Senior Debentures")
and 8.45 Warrants ("Warrants") (see Note 13), each to purchase one
share of Common Stock, representing, in the aggregate, $20 million
Series A Senior Debentures and Warrants to purchase 169,000 shares
of the Company's Common Stock. Proceeds from the issuance of Series
A Senior Debentures were used to repay the Company's existing credit
facility with Fleet National Bank, as lender and agent, and U.S.
Bank, Washington, as lender, in the outstanding principal amount of
$38,100, and Uniforce's then existing credit facility with Heller
Financial, Inc. in the outstanding principal amount of $36,100.
As required under the indenture agreement governing the Series A
Senior Debentures, in March 1998, the Company exchanged the Series A
Senior Debentures, which are unregistered, for 15% Senior Secured
PIK Debentures, Series B, which are identical to the Series A Senior
Debentures except they are registered for resale (collectively with
the Series B Senior Debentures, the "Senior Debentures").
The Senior Debentures constitute direct and unconditional senior
obligations of the Company and are collateralized by a pledge by the
Company of all of the issued and outstanding common stock of COI.
The payment obligations of the Company under the Senior Debentures
must at all times rank at least equal in priority of payment with
all existing and future indebtedness of the Company. The Senior
Debentures are structurally subordinated to all indebtedness of the
Company's direct and indirect subsidiaries and effectively
subordinated to all future secured indebtedness of the Company.
The Senior Debentures bear interest at the rate of 15% per annum,
subject to increases in certain circumstances, payable
semi-annually, and mature on December 1, 2009. Prior to December 1,
2002, interest is payable in cash or in additional Senior Debentures
on each interest payment date, at the option of the Company.
Thereafter, interest is payable only in cash. To the extent that the
Company is prohibited pursuant to the terms of any credit facility
or the indenture governing the Notes from paying interest in cash
subsequent to December 1, 2002, the Company is required to pay
interest equal to the interest rate then applicable to the Senior
Debentures plus 2%.
F-19
<PAGE>
Notes to Consolidated Financial Statements, Continued
Subject to certain requirements, the Company may at any time redeem
up to 100% of the aggregate principal amount of the Senior
Debentures at the redemption prices of 103% for the 12 months
commencing December 1, 1997 and 107.5% at any time on or after
December 1, 1998, together with accrued and unpaid interest to the
date of redemption.
Upon the occurrence of certain specified events deemed to result in
a change of control, COI will be required to make an offer to
repurchase the Notes at a price equal to 101% of the principal
amount thereof, together with accrued and unpaid interest, if any,
to the date of repurchase.
Subject to certain qualifications and exceptions, the indenture
governing the Senior Debentures limits, (i) the incurrence of
additional indebtedness by the Company and its subsidiaries, (ii)
the payment of dividends on, and redemption of, capital stock of the
Company and the redemption of certain subordinated obligations of
the Company, (iii) investments, (iv) sales of assets and subsidiary
stock, (v) transactions with affiliates, (vi) consolidations,
mergers and transfers of all or substantially all the assets of the
Company and (vii) restrictions on distributions from subsidiaries.
Each Warrant entitles the holder to acquire, at any time prior to
December 1, 2009, one share of Common Stock at a price per share
equal to $7.55 (based on a 10% premium above the average closing
price for the Company's Common Stock the five trading days ended
November 18, 1997), subject to adjustment from time to time upon the
occurrence of certain events which are deemed dilutive to the
holders of the Warrants.
(d) Concurrent with the issuance of the Notes and the Series B Senior
Debentures, COMFORCE Corporation and COI, entered into a Loan and
Security Agreement with Heller Financial, Inc., as lender and agent
for other participating lenders (collectively, "Heller"), to provide
to the Company a secured revolving credit facility (the "New Credit
Facility") providing for borrowings of up to $75,000 based on a
specified percentage of the Company's eligible accounts receivable.
At the closing, the Company borrowed $37,300 under the New Credit
Facility. The proceeds from the New Credit Facility borrowings along
with certain proceeds from the Notes were used to repay the $40,000
Fleet Credit Facility ("Fleet Facility") which was outstanding from
June 1997 to November 1997. The proceeds from the Fleet Facility
entered into in June 1997 were used to repay the Subordinated
Convertible Debentures ("Old Debentures") issued in February 1997
which were utilized to fund the purchase of Rhotech and the
repurchase of 2,750 shares of Series F Preferred Stock. (See Note
3.)
From the date of the closing until Heller receives the Company's
audited financial statements for the year ended December 31, 1998
(the "Margin Date"), borrowings under the New Credit Facility bear
interest, at the Company's option, at a per annum rate equal to
either (i) the base rate as announced from time to time by the Board
of Governors of the Federal Reserve System as the "Bank Prime Loan"
rate (the "Base Rate") plus 0.50% or (ii) LIBOR plus 2.25%.
Following the Margin Date, the interest rate is subject to
adjustment quarterly by a percentage equal to or in excess of the
Base Rate (ranging from 0% to 0.75%) or LIBOR (ranging from 1.75% to
2.50%) based upon specified leverage ratios.
The obligations evidenced by the New Credit Facility are
collateralized by a pledge of the capital stock of the Company and
its subsidiaries security interests in substantially all of the
assets of the
F-20
<PAGE>
Notes to Consolidated Financial Statements, Continued
Company. In addition, John Fanning, a former shareholder of Uniforce
and the current holder of approximately 5.9% of the issued and
outstanding Common Stock of the Company, personally provided cash
collateral to Heller in the amount of $5,000 at the closing, which
collateral was released in February 1998. As consideration for
agreeing to make this collateral available, the Company paid to Mr.
Fanning approximately $85 representing a 12% per annum yield on his
cash collateral, less the actual return on the investment.
The agreements evidencing the New Credit Facility contain various
financial and other covenants and conditions, including, but not
limited to, limitations on paying dividends, engaging in affiliate
transactions, making acquisitions and incurring additional
indebtedness. The Company expects to maintain minimum borrowings
of $36,000. In 1998 under this Credit Facility. The scheduled
maturity date of the New Credit Facility is November 26, 2002.
Required principal payments of debt are as follows:
2002 $ 41,038
Thereafter 130,000
------------
$ 171,038
============
10. Discontinued Operations:
In September 1995, the Company adopted a plan to discontinue its Jewelry
Business. A provision of $1,000 was recorded in September 1995 and an
additional provision of $600 was recorded during the fourth quarter of
1995 for the estimated costs to complete the disposal of the Jewelry
Business. The Jewelry Business was disposed of in 1996 with no cost to the
Company.
The Company's 1995 consolidated financial statements have been adjusted to
report separately the results of operations of the discontinued Jewelry
Business.
F-21
<PAGE>
Notes to Consolidated Financial Statements, Continued
The operating results of the discontinued Jewelry Business for the years
ended December 31, 1995 (in thousands) consists of:
Net sales $ 10,588
========
Loss from operations before income taxes $(15,606)
Provision for income taxes (5)
--------
Loss from operations (15,611)
--------
Provision for disposal of business (1,600)
Provisions for income taxes
--------
Loss on disposal of business (1,600)
--------
Loss from discontinued operations $(17,211)
========
11. Extraordinary Gains Related to Discontinued Operations:
Borrowings due a bank under the loan agreements, plus amounts due the bank
for accrued interest and fees, were reduced to $10,500 (of which $7,855
pertained to Lori's obligation to the bank and $2,645 pertained to
Fill-Mor's obligation to the bank). Upon the satisfaction of certain
conditions of the Amended Settlement Agreement in March 1995, the balance
of this indebtedness was discharged.
On March 31, 1995, the $750 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 ($1.45 per share)
in the first quarter of 1995. The $750 note payment was funded with the
proceeds of a $850 short-term loan from a former director of the Company.
As consideration for assisting in the debt restructuring, the former
director received 150 shares of the Company's common stock valued at $337
($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-22
<PAGE>
Notes to Consolidated Financial Statements, Continued
12. Related Party Transactions:
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 $208 and $104 in fees during fiscal 1997 and 1996,
respectively, for tax-related advisory services.
As a condition to the funding of the Fleet Facility (see Note 9) the
Lenders required James L. Paterek, the Company's Chairman, Christopher P.
Franco, the Company's Chief Executive Officer, and Michael Ferrentino, the
Company's President, to each pledge as additional collateral to secure the
Company's obligations under the Fleet Facility 500,000 shares of the
Company's common stock owned by them and all of the options to purchase
common stock held by them (281,250 shares in the case of Messrs. Paterek
and Ferrentino and 112,500 shares in the case of Mr. Franco), which shares
had a current market value in excess of $12,000 at the approximate time of
the transaction. The board of directors of the Company engaged an
independent valuation firm to value these pledges by the principals.
In recognition of both the substantial benefits afforded to the Company
by the pledges and the cost to the principals of making the pledges, the
board of directors authorized the issuance of an aggregate consideration
of approximately $650 to these principals, which amount was utilized to
repay outstanding loans due to the Company aggregating $367 and related
payroll withholding taxes. The board of directors has deemed such
consideration reasonable based on the valuation of the pledges as
determined by the appraisal performed by the independent valuation firm.
The aggregate amount of this consideration, approximately $650, is
included as a part of the fees and expenses incurred in connection with
the Fleet Facility (see Note 9).
Yield Industries, Inc., a corporation wholly-owned by Messrs. Paterek and
Ferrentino, earned a delivery fee of $750 in connection with the Company's
acquisition of COMFORCE Telecom, $250 of which was paid in 1995 and the
balance of which was paid in 1996.
Effective July 4, 1995, Lori's management agreed to issue up to a 35%
common stock interest in the Company to certain individuals to manage the
Company's entry into the technical staffing business (approximately
3,888,000 after certain anti-dilutive provisions). In October 1995, the
Company issued approximately 3,100,000 shares of its common stock to such
individuals. The remaining common shares due these individuals were issued
in 1996 after shareholder approval of an increase in the Company's
authorized common shares. The Company recognized a non-recurring
compensation charge of $3,425 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.
In the fourth quarter of 1995, ARTRA agreed to exchange its interest in
the entire issue of the Company's Series C cumulative preferred stock for
100,000 newly issued shares of the Company's common stock.
Michael Madden, a Director of the Company, received options under
the Company's Stock Option Plan to purchase 90,000 Shares of the
company's Common Stock at an exercise price of $7.375 for agreeing to
provide consulting services to the Company.
F-23
<PAGE>
Notes to Consolidated Financial Statements, Continued
13. Equity:
During 1997, options to purchase 124,000 shares of Common Stock at a price
of $1.125 per share were exercised.
During 1997, warrants to purchase 80,000 shares of Common Stock were
exercised at prices ranging from $2.00 to $3.375 per share.
During 1997, 7,002 shares of Series D Preferred Stock which was issued in
May 1996 for $7,002 were converted into 671,250 shares of common stock
under the conversion terms. Such common shares included 87,750 shares with
a market value of $493 given to induce certain conversions. These
additional shares have been accounted for as a preferred stock dividend.
In November 1997, the Company issued 1,585,208 shares of common stock in
connection with the Uniforce acquisition. (See Note 3.)
In June 1997, 118,145 shares of common stock were issued in consideration
for interest of $633 owed on the Old Debenture financing.
In December 1996, the Company sold 460,000 shares of its common stock,
together with a related payment right requiring the Company to make a
payment to the investors in either cash or common stock, at the Company's
option, equal to the amount by which $10.00 per share exceeded the average
closing bid price for the five trading days prior to April 1, 1997. In
addition, in December 1996, the Company sold 350,000 shares of its common
stock, together with a related payment right requiring the Company to make
a payment to the investors in either cash or common stock, at the
Company's option, equal to the amount by which $12.05 per share exceeded
the average closing bid price for the five trading days prior to April 1,
1997. On April 1, 1997, the Company satisfied these payment rights.
In February 1997, in connection with its sale of its Old Debentures to the
investors who purchased 460,000 shares of the Company's common stock in
December 1996, described above, the Company granted to such investors put
options under which the Company agreed to repurchase 115,000 of the shares
on each of April 28, 1997, May 28, 1997, June 27, 1997 and July 27, 1997
made in satisfaction of the payment right described above, subject to
termination of such put options upon earlier repayment of the Old
Debentures. In the case of cash payments under the payment right, this
adjustment is effected through a reduction of the put option price by the
amount of the cash payment. In the case of payments in stock under the
payment right, this adjustment is effected through an increase in the
aggregate number of shares subject to the put option, without adjustment
of the aggregate put option price. On April 28 and May 28, 1997, the
investors elected to exercise the put option. As a result of the Company's
satisfaction of the payment right through its issuance of shares of common
stock, the number of shares the Company was required to repurchase was
increased by 80,782 shares. Consequently, the Company repurchased 310,782
shares of its common stock for $2,300. The put options for June 27, 1997
and July 27, 1997 terminated by their terms by reason of the Company's
repayment of the Old Debentures on June 25, 1997.
In connection with the February 1997 sale of the Old Debentures, the
Company issued warrants to purchase 198,928 shares of Common Stock at $19
per share which expire on December 26, 1999. In addition, the Company paid
a placement fee of 8,000 shares of Common Stock and warrants to
F-24
<PAGE>
Notes to Consolidated Financial Statements, Continued
purchase 25,000 shares of Common Stock at $14.25 per share (market price)
which expire on December 26, 1999.
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. Effective as of
October 28, 1996, each share of Series E Preferred Stock was automatically
converted into 100 shares of common stock.
In May 1996, 16,667 warrants were exercised at an average price of $3.38
per share.
In July 1996, the Company issued 137,500 shares of common stock to pay
certain liabilities.
In August 1996, 20,000 warrants were exercised at an average price of
$2.00 per share.
In September 1996, 27,398 common shares were issued as partial
consideration for the purchase of Force Five. (See Note 3.)
On October 25, 1996, the Board authorized the issuance of up to 10,000
shares of Preferred Stock, par value $0.01 per share, designated the
Series F Convertible Preferred Stock ("Series F Preferred Stock"). As
subsequently modified by agreement of the Company and the holders, each
share of Series F Preferred Stock will, (i) at the option of the holder or
(ii) automatically on the second anniversary of the date of issuance, be
converted into such number of shares of Common Stock determined by
dividing $1,000 plus all accrued, unpaid dividends thereon by the per
share conversion price. The conversion price is 83% of the average closing
bid price of the Common Stock for the five trading days immediately
preceding the conversion date, subject to certain limitations. Holders of
shares of Series F Preferred Stock are entitled to cumulative dividends of
5% per annum, payable quarterly on the first day of March, June,
September, and December in each year, payable in cash or Common Stock
(valued at the closing price on the date of declaration), at the Company's
election. The Series F Preferred Stock has a liquidation preference over
the Common Stock in the event of any liquidation or sale of the Company.
Except as otherwise provided by law, the holders of Series F Preferred
Stock will not be entitled to vote. As of December 31, 1996, there were
3,250 shares of Series F Preferred Stock outstanding. The Company recorded
an accretive dividend on Series F Preferred Stock related to the discount
noted above of $665. During 1997, the Company effected the repurchase
of 2,750 of the 3,250 outstanding shares of its Series F Preferred Stock
with a value of $3,162 through the issuance of its Old Debentures.
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-25
<PAGE>
Notes to Consolidated Financial Statements, Continued
The Company's stockholders ratified 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 (see Note 15),
(b) the grant of options to non-employee directors, and (c) in various
other respects, principally designed to permit the Plan administrator
additional flexibility in structuring option grants.
In November 1996, 111,111 warrants were exercised at a price of $9 per
share.
In November 1996, the Company issued 243,211 shares and 36,800 shares as
partial consideration for the purchase of Azatar Computer Systems, Inc.
and Continental Field Services, Inc.
14. Earnings Per Share:
Basic earnings (loss) per common share is computed by dividing net
earnings (losses) available for common shareholders, by the weighted
average number of shares of common stock outstanding during each period.
Diluted earnings (loss) per share is computed assuming the conversion of
stock options and warrants with a market value greater than the exercise
price.
The following represents a reconciliation of the numerators and
denominators of the basic and diluted earnings (loss) per share
computations:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Numerator:
Income (loss) from continuing operations $ (3,700) $ 1,352 $ (4,332)
Loss from discontinued operations (17,211)
Extraordinary credit, net of discharge of 6,657
indebtedness
-------- -------- --------
Net income (loss) (3,700) 1,352 (14,886)
Preferred stock dividends (737) (325)
Accretive dividend on Series F preferred stock (665)
-------- -------- --------
Numerator for basic and diluted earnings (loss)
per share - income available to common
stockholders after assumed conversions $ (4,437) $ 362 $(14,886)
======== ======== ========
Denominator:
Denominator for basic earnings (loss) per share -
weighted-average shares 13,493 11,049 4,596
Effect of dilutive securities:
Employee stock options 1,180
Contingent stock - acquisition 78
Warrants 726
-------- -------- --------
1,984
-------- -------- --------
Dilutive potential common shares
Denominator for diluted earnings (loss)
per share - adjusted weighted-average
shares and assumed conversions 13,493 13,033 4,596
======== ======== ========
</TABLE>
F-26
<PAGE>
Notes to Consolidated Financial Statements, Continued
Options, warrants, contingently issuable shares and convertible preferred
stock to purchase 4,826,818, 583,477 and 2,725,961 shares of common stock
were outstanding for the years ended 1997, 1996 and 1995, respectively,
but were not included in the computation of diluted earnings (loss) per
share because their effect would be anti-dilutive.
15. Stock Options and Warrants:
Long-Term Stock Investment Plan
Effective December 16, 1993, the Company's Board of Directors approved the
Long-Term Stock Investment Plan (the "1993 Plan"), which provided for the
granting of options for the purchase of 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. All options have generally
been granted at a price equal or greater than to the fair market value of
the Company's common stock at the date of grant. Generally, options are
granted with a vesting period of up to 4 years and expire 10 years from
the date of grant. In October 1996, the Stock Option Plan was amended to
allow for the issuance of an additional 2,500,000 options under the plan
for a total of 4,000,000 shares.
A summary of stock option transactions for the years ended December 31,
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
---------------------------- ------------------------------ ------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ----------------- ------------ ---------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 2,091,525 $1.125 to 22.75 1,541,378 $1.125 to 6.75 959,378 $ 1.125 to 5.00
Granted 184,750 5.88 to 10.00 1,120,275 6.75 to 27.00 601,250 6.00 to 6.75
Exercised (124,000) 1.125 (4,500) 5.00
Forfeited/expired (16,500) 7.625 to 9.00 (565,628) 1.125 (18,250) 1.25 to 5.20
---------- ------------ ----------
Options outstanding, end of year 2,135,775 1.125 to 18.38 2,091,525 1.125 to 22.75 1,542,378 1.125 to 6.75
========== ============ ==========
Options exercisable, end of year 1,896,293 1,537,500 945,128
========== ============ ==========
Options available, for grant
end of year 1,577,209 1,745,559
========== ============
Weighted average fair value of
options granted during the year $ 4.13 $ 4.37
========== ============
</TABLE>
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the
following weighted average assumptions used for grants in 1997, 1996 and
1995, respectively: no dividend yield; expected volatility of 60%;
risk-free interest rate (ranging from 5.25% - 6.73%); and expected lives
ranging from approximately 4.5 to 5.5 years. Weighted averages are used
because of varying assumed exercise dates.
F-27
<PAGE>
Notes to Consolidated Financial Statements, Continued
In 1996, the Company adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting
for Stock Based Compensation." Accordingly, no compensation cost has been
recognized under the stock option plan. Had compensation cost been
determined based on the fair value at the grant date consistent with the
provisions of SFAS 123, the Company's net income (loss) and earnings
(loss) per share would have been reduced to the pro forma amounts
indicated below for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C>
Net income (loss) attributable to common
shareholders as reported $ (4,437) $ 362 $ (14,886)
================ ================ ================
Pro forma (loss) $ (5,053) $ (1,898) $ (16,010)
================ ================ ================
Basic earnings (loss) per share as reported $ (.33) $ .03 $ (3.24)
================ ================ ================
Pro forma $ (.37) $ (.17) $ (3.48)
================ ================ ================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997
<TABLE>
<CAPTION>
Weighted
average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercisable
Prices Outstanding Life Price Exercisable Price
(Years)
<S> <C> <C> <C> <C> <C>
$1 252,000 5 1 252,000 1
$5 - $7 1,589,500 8 7 1,527,500 7
$8 - $12 96,335 8 10 13,250 12
$14 - $17 41,990 8 16 10,500 16
$18 - $19 151,950 8 18 92,043 18
$22 - $27 4,000 9 26 1,000 26
--------------- ----------------- ---------------- -------------- ---------------
$1 - $27 2,135,775 7.7 7.4 1,896,293 7.4
=============== ================= ================ ============== ===============
</TABLE>
Warrants
During February and March 1997, the Company issued warrants to purchase
302,400 shares of common stock at prices ranging from $6.35 to $7.65 per
share in connection with the issuance of the Old Debentures. The warrants
expire in September 2000.
On April 9, 1997, the Company issued warrants to purchase 100,000 shares
of common stock at a price of $7.625 per share in connection with a
short-term loan made to the Company. These warrants expire April 9, 1998.
On June 25, 1997, the Company issued warrants to purchase 100,000 shares
of common stock at a price of $7.30 per share in connection with the Fleet
Credit Facility. These warrants expire June 25, 2000.
On November 25, 1997, the Company issued warrants to purchase 169,000
shares of common stock at a price of $7.55 per share in connection with
the issuance of the Senior Secured PIK Debentures. These warrants expire
November 25, 2009.
F-28
<PAGE>
Notes to Consolidated Financial Statements, Continued
On November 27, 1997, the Company issued warrants to purchase 50,000
shares of common stock at a price of $7.428 in connection with the
acquisition of Uniforce Services, Inc.
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) plus detachable
warrants to purchase 973,333 Lori common shares at $3.375 per share. In
1996, 36,667 warrants were exercised for $98,751. The warrants expire five
years from the date of issue.
In April 1996, the Company amended the warrants included above held by two
stockholders to purchase 301,667 shares of the Company's Common Stock at
exercise prices ranging from $2.125 to $3.375 per share to permit
immediate exercise and to provide for the issuance of supplemental
warrants to purchase 301,667 at an exercise price of $9.00 per share
(market value) for each warrant exercised on or before April 12, 1996.
Warrants to purchase all 301,667 shares were exercised in April 1996. The
Company used the proceeds from the exercise of the warrants for working
capital purposes.
In connection with the sale of the Series F Preferred Stock, the Company
issued warrants to purchase 15,000 shares of Common Stock at an exercise
price of $24.00 per share as a placement fee, which expire in October
1998.
On December 26, 1996, the Company sold 810,000 shares through a private
placement. In connection with this private placement of common stock, the
Company issued warrants to purchase 198,928 shares of common stock at $19
per share which expire on December 26, 1999 In addition, the Company paid
a placement fee of 8,000 shares of common stock and warrants to purchase
25,000 shares of common stock at $14.25 per share (market price) which
expire on December 26, 1999.
At December 31, 1997 and 1996, total warrants were outstanding to purchase
a total of 2,127,794 and 1,371,844 of the Company's common shares at
prices ranging from $2.00 per share to $24.00 per share. The warrants
expire three to five years from the date of issue at various dates through
1999.
16. Litigation:
In January 1997, Austin A. Iodice, who served as the Company's Chief
Executive Officer, President and Vice Chairman while the Company was
engaged in the jewelry business, and Anthony Giglio, who performed the
functions of the Company's Chief Operating Officer while the Company was
engaged in the jewelry business, filed separate suits against the Company
in the Connecticut Superior Court alleging that the Company had breached
the terms of management agreements entered into with them by failing to
honor options to purchase common stock awarded to them in connection with
the management of the Jewelry business under the terms of such management
agreements and the Company's long-term stock investment plan. The suits
allege that the plaintiffs are entitled to an unspecified amount of
damages. The Company believes that the option to purchase 370,419 shares
granted to Mr. Iodice (through Nitsua, Ltd., a corporation wholly-owned by
him) and the option to purchase 185,210 shares granted to Mr. Giglio, each
having an exercise
F-29
<PAGE>
price of $1.125 per share, expired in 1996, three months after Messrs.
Giglio and Iodice ceased to be employed by the Company in accordance
with the terms of the plan (see Note 15). Messrs. Giglio and Iodice
maintain that they were agents and not employees of the Company and that
the options continue to be exercisable under the plan. Management
believes that the suits are without substantial merit and intends to
vigorously defend them.
In a case filed in U.S. District Court, Central District of California,
against Rhotech and Technical Staff Associates, Inc. ("TSA"), which was
acquired by Rhotech in 1992, TSA's former insurance carrier has alleged
that TSA and Rhotech are obligated to repay to it approximately $1,600
that it was required to pay in connection with an injury and death that
occurred in November 1992 to a temporary employee of TSA. The action has
been referred to Rhotech's insurance carrier, which is defending it with a
reservation of rights. Rhotech has been granted summary judgment with
respect to all claims made in the action, which judgment is the subject of
an appeal by the plaintiff. Management believes that the case is without
substantial merit and intends to vigorously defend it.
The Company is a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are
believed by management to be material to the business, results of
operations or financial condition of the Company.
17. Savings Incentive and Profit Sharing Plan:
The Company participates in a savings incentive and profit sharing plan
(the "Plan"). All eligible employees may make contributions to the Plan on
a pre-tax salary reduction basis in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. No contributions were made by
the Company in 1997 and 1996.
Certain employees who work for governmental agencies are required to be
covered under a separate pension plan. During 1997 and 1996, the Company
recorded approximately $1,332 and $700 respectively, of expense
related to these benefits.
18. Lease Commitments:
The Company leases certain office space and equipment in its
telecommunications and computer staffing service business. Rent expense
for all operating leases in 1997, 1996 and 1995 approximated $969, $200
and $17, respectively.
F-30
<PAGE>
Notes to Consolidated Financial Statements, Continued
As of December 31, 1997, future minimum rent payments due under the terms
of noncancelable operating leases excluding any amount that will be paid
for operating costs are:
Year ending Total
December (in thousands)
1998 $ 2,192
1999 1,636
2000 1,220
2001 891
2002 607
Thereafter 2,041
-----------
$ 8,587
===========
The aggregate commitment for future salaries at December 31, 1997,
excluding bonuses, during the remaining term of all management and
employment agreements, are approximately:
Year ending Total
December (in thousands)
1998 $ 1,389
1999 1,147
2000 677
----------
$ 3,213
==========
19. Concentration of Credit Risk:
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash and cash equivalents and trade receivables.
The Company maintains cash in bank accounts which at times may exceed
federally insured limits. The Company has not experienced any losses in
such accounts and believes they are not exposed to any significant credit
risk on their cash balances. The Company believes it mitigates such risk
by investing its cash through major financial institutions.
At December 31, 1997, the Company had one customer, and at December 31,
1996, the Company had four customers with accounts receivable balances
that aggregated 7% and 23% of the Company's total accounts receivable,
respectively. Percentages of total revenues from significant customers for
the years ended December 31, 1997, December 31, 1996 and from October 17,
1995 (entry into staffing business) to December 31, 1995 are summarized as
follows:
December 31, December 31, December 31
1997 1996 1995
------------ ------------ ------------
Customer 1 14.5% 19.0% 17.3%
Customer 2 11.6% * 12.6%
Customer 3 * * 10.1%
*Less than 10%.
F-31
<PAGE>
COMFORCE CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------- ------------ ---------------------------- ------------ ------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
DESCRIPTION BEGINNING COSTS AND OTHER DEDUCTIONS END OF
OF PERIOD EXPENSES ACCOUNTS (DESCRIBE) PERIOD
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1997
Deducted from assets to which they apply:
Allowance for inventory valuation $ - $ - $ - $ - $ -
============ ============ ============ ============ ============
Allowance for markdowns $ - $ - $ - $ - $ -
Allowance for doubtful accounts $ 213 80 $ 515 - $ 808
------------ ------------ ------------ ------------ ------------
$ - $ 80 $ 515 $ - $ -
============ ============ ============ ============ ============
For the year ended December 31, 1996
Deducted from assets to which they apply:
Allowance for inventory valuation $ - $ - $ - $ -
============ ============ ============ ============
Allowance for markdowns $ - $ - $ - $ -
Allowance for doubtful accounts - 213 - 213
------------ ------------ ------------ ------------
$ - $ 213 $ - $ 213
============ ============ ============ ============
For the year ended December 31, 1995
Deducted from assets to which they apply:
Allowance for inventory valuation $ 207 $ 25 $ 232(A) $ -
============ ============ ============ ============
Allowance for markdowns $ 835 $ 291 $ 1,126(A) $ -
Allowance for doubtful accounts 503 424 927(A) -
------------ ------------ ------------ ------------
$ 1,328 $ 715 $ 2,052 $ -
============ ============ ============ ============
</TABLE>
(A) Principally amounts reclassified to discontinued operations.
F-32
<PAGE>
EXHIBIT INDEX
2.1 Stock Purchase Agreement dated September 11, 1995 among Spectrum
Technologies, Inc., the Company, COMFORCE Corporation, ARTRA Group
Incorporated, Peter R. Harvey, Marc L. Werner, James L. Paterek, Michael
Ferrentino and Christopher P. Franco (included as an exhibit to the
Company's Current Report on Form 8-K dated September 11, 1995 and
incorporated herein by reference).
2.2 Purchase Agreement among COMFORCE Telecom, Inc., Williams Communications
Services, Inc. and Bruce Anderson (included as an exhibit to the
Company's Current Report on Form 8-K dated March 13, 1996 and
incorporated herein by reference).
2.3 Stock Purchase Agreement effective as of May 13, 1996 among the Company,
COMFORCE Technical Services, Inc., Project Staffing Support Team, Inc.,
Raphael Rashkin and Stanley Rashkin (included as an exhibit to the
Company's Amended Quarterly Report on Form 10-Q/A for the quarter ended
March 31, 1996 filed May 16, 1996 and incorporated herein by reference).
2.4 Asset Purchase Agreement effective as of May 13, 1996 among the Company,
COMFORCE Technical Services, Inc., DataTech Technical Services, Inc.,
Raphael Rashkin and Stanley Rashkin (included as an exhibit to the
Company's Amended Quarterly Report on Form 10-Q/A for the quarter ended
March 31, 1996 filed May 16, 1996 and incorporated herein by reference).
2.5 Asset Purchase Agreement effective as of May 13, 1996 among the Company,
COMFORCE Technical Services, Inc., RRA, Inc., Raphael Rashkin and
Stanley Rashkin (included as an exhibit to the Company's Amended
Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1996
filed May 16, 1996 and incorporated herein by reference).
2.6 Letter Agreement dated May 6, 1996 amending Asset Purchase Agreement
effective as of May 13, 1996 among the Company, COMFORCE Technical
Services, Inc., RRA, Inc., Raphael Rashkin and Stanley Rashkin (included
as an exhibit to the Company's Amended Quarterly Report on Form 10-Q/A
for the quarter ended March 31, 1996 filed May 16, 1996 and incorporated
herein by reference).
2.7 Letter Agreement dated April 19, 1996 among CTS Acquisition Co. I,
COMFORCE Technical Services, Inc., Project Staffing Support Team, Inc.
and RRA, Inc. (included as an exhibit to the Company's Amended Quarterly
Report on Form 10-Q/A for the quarter ended March 31, 1996 filed May 16,
1996 and incorporated herein by reference).
2.8 Agreement and Plan of Reorganization dated October 22, 1996 between
AZATAR Computer Systems, Inc. and the Company (included as an exhibit to
the Company's Current Report on Form 8-K dated November 8, 1996 and
incorporated herein by reference).
2.9 Asset Purchase Agreement dated October 25, 1996 by and among Continental
Field Services Corporation, Michael Hill, Roy Hill and COMFORCE Telecom,
Inc. (included as an exhibit to the Company's Current Report on Form 8-K
dated November 19, 1996 and incorporated herein by reference).
2.10 Asset Purchase Agreement dated October 25, 1996 between Progressive
Telecom, Inc., Beth Wilson Hill and COMFORCE Telecom, Inc. (included as
an exhibit to the Company's Current Report on Form 8-K dated November
19, 1996 and incorporated herein by reference).
2.11 Amendment to Escrow Agreement and Purchase Agreements dated November 8,
1996 by and among Continental Field Service Corporation, Progressive
Telecom, Inc., Michael Hill, Roy Hill, Beth Wilson Hill,
E-1
<PAGE>
McCarthy, Fingar, Donovan, Drazen & Smith, and COMFORCE Telecom, Inc.
(included as an exhibit to the Company's Current Report on Form 8-K
dated November 19, 1996 and incorporated herein by reference).
2.12 Subscription Agreement dated October 28, 1996 by and among RHO Company,
Inc., J. Scott Erbe, COMFORCE Corporation and COMFORCE Technical
Services, Inc. (included as an exhibit to the Company's Current Report
on Form 8-K dated November 19, 1996 and incorporated herein by
reference).
2.13 Stock Sale and Termination Agreement dated October 28, 1996 by and
between James R. Ratcliff and RHO Company, Inc. (included as an exhibit
to the Company's Current Report on Form 8-K dated November 19, 1996 and
incorporated herein by reference).
2.14 Letter Agreement dated November 4, 1996 amending Stock Sale and
Termination Agreement between RHO Company, Inc. and James R. Ratcliff
(included as an exhibit to the Company's Current Report on Form 8-K
dated November 19, 1996 and incorporated herein by reference).
2.15 Agreement and Plan of Merger, dated as of August 13, 1997, by and among
COMFORCE Corporation, COMFORCE Columbus, Inc. and Uniforce Services,
Inc. (included as an exhibit to the Company's Current Report on Form 8-K
dated August 20, 1997 and incorporated herein by reference).
2.16 Stockholders Agreement, dated as of August 13, 1997, by and among
COMFORCE Corporation, COMFORCE Columbus, Inc., John Fanning and Fanning
Limited Partnership, L.P. (included as an exhibit to the Company's
Current Report on Form 8-K dated August 20, 1997 and incorporated herein
by reference).
2.17 Registration Rights Agreement dated as of August 13, 1997 by and among
the Company, John Fanning and Fanning Asset Partners, L.P., a Georgia
limited partnership (included as an exhibit to Amendment No. 2 to the
Registration Statement on Form S-4 of the Company filed with the
Commission on October 24, 1997 and incorporated herein by reference).
3.1 Restated Certificate of Incorporation of the Company, as amended by
Certificates of Amendment filed with the Delaware Secretary of State on
June 14, 1987 and February 12, 1991 (included as an exhibit to Amendment
No. 1 to the Registration Statement on Form S-1 of the Company filed
with the Commission on May 10, 1996 and incorporated herein by
reference).
3.2 Certificate of Ownership (Merger) of COMFORCE Corporation into the
Company (included as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by
reference).
3.3 Bylaws of the Company, as amended and restated effective as of February
26, 1997 (included as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and incorporated herein by
reference)
3.4 Designation of Rights and Preferences of Series F Preferred Stock
(included as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated herein by reference).
3.5 Certificate of Ownership (Merger) of AZATAR into the Company (included
as an exhibit to the Company's Current Report on Form 8-K dated November
8, 1996 and incorporated herein by reference).
4.1 Indenture dated as of November 26, 1997 with respect to 12% Senior Notes
due 2007 between COMFORCE Operating, Inc., as issuer, and Wilmington
Trust Company, as trustee (included as an exhibit to the Company's
Current Report on Form 8-K dated December 9, 1997 and incorporated
herein by reference).
E-2
<PAGE>
4.2 Indenture dated as of November 26, 1997 with respect to 15% Senior
Secured PIK Debentures due 2009 between COMFORCE Corporation, as issuer,
and The Bank of New York, as trustee (included as an exhibit to the
Company's Current Report on Form 8-K dated December 9, 1997 and
incorporated herein by reference).
10.1 Management Agreement dated as of April 9, 1993 between the Company and
Nitsua, Ltd. (a corporation wholly-owned by Austin Iodice, formerly
Lori's Chairman and Chief Executive Officer) (included as an exhibit to
the Company's Annual Report on Form 10-K for the year ended December 31,
1992 and incorporated herein by reference).
10.2 Asset Purchase Agreement dated as of April 11, 1996 among Lawrence
Jewelry Corporation, ARTRA GROUP Incorporated, the Company and Hanover
Advisors, Inc. respecting the disposition of the assets of the Company's
jewelry business (included as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.3 Loan and Security Agreement dated as of November 26, 1997 among COMFORCE
Corporation and specified subsidiaries thereof and Heller Financial,
Inc., as lender and agent for other lenders (included as an exhibit to
the Company's Current Report on Form 8-K dated December 9, 1997 and
incorporated herein by reference).
10.4 Purchase Agreement, dated as of November 19, 1997, by and between
COMFORCE Operating, Inc. and NatWest Capital Markets Limited, as Initial
Purchaser (included as an exhibit to the Registration Statement on Form
S-4 of the Company filed with the Commission on December 24, 1997 and
incorporated herein by reference).
10.5 Purchase Agreement, dated as of November 19, 1997, by and between dated
as of November 26, 1997, by and between the Company and NatWest Capital
Markets Limited, as Initial Purchaser (included as an exhibit to the
Registration Statement on Form S-4 of the Company filed with the
Commission on December 24, 1997 and incorporated herein by reference).
10.6 Warrant Agreement dated November 26, 1997 by and between the Company and
The Bank of New York, as Warrant Agent (included as an exhibit to the
Registration Statement on Form S-4 of the Company filed with the
Commission on December 24, 1997 and incorporated herein by reference).
10.7 Pledge Agreement dated November 26, 1997 by and between the Company and
The Bank of New York, as Collateral Agent (included as an exhibit to the
Registration Statement on Form S-4 of the Company filed with the
Commission on December 24, 1997 and incorporated herein by reference).
10.8 Employment Agreement dated December 1, 1997 between the Company,
COMFORCE Operating, Inc. and Christopher Franco (included as an exhibit
to the Registration Statement on Form S-4 of the Company filed with the
Commission on December 24, 1997 and incorporated herein by reference).
10.9 Employment Agreement dated December 1, 1997 between the Company,
COMFORCE Operating, Inc. and James L. Paterek (included as an exhibit to
the Registration Statement on Form S-4 of the Company filed with the
Commission on December 24, 1997 and incorporated herein by reference).
10.10 Employment Agreement dated December 1, 1997 between the Company,
COMFORCE Operating, Inc. and Michael Ferrentino (included as an exhibit
to the Registration Statement on Form S-4 of the Company filed with the
Commission on December 24, 1997 and incorporated herein by reference).
21.1* List of Subsidiaries.
23.1* Consent of Coopers & Lybrand L.L.P.
27.1* Financial Data Schedule.
- ----------
* Filed herewith.
E-3
<PAGE>
Exhibit 21.1
Subsidiaries of COMFORCE Corporation
The following is a complete list of all of the subsidiaries of COMFORCE
Corporation.
1. COMFORCE Operating, Inc.
2. COMFORCE Technical Services, Inc.
3. COMFORCE Information Technologies, Inc.
4. COMFORCE Telecom, Inc.
5. Project Staffing Support Team, Inc.
6. RHO Acquisition Company
7. RHO Company Incorporated
8. COMFORCE IT Acquisition Corp., Inc.
9. Force Five, Inc.
10. SUMTEC Corporation
11. Uniforce Services, Inc.
12. PrO Unlimited, Inc.
13. E.O. Operations Corp.
14. E.O. Servicing Co., Inc.
15. Uniforce Staffing Services, Inc.
16. PrO N.E., Inc.
17. USSI-N.E. Corp.
18. Uniforce Information Services, Inc.
19. Uniforce Payrolling Services, Inc.
20. USI Inc. of California
21. UTS Corp. of Minnesota
22. UTS of Delaware, Inc.
23. LabForce of America, Inc.
24. Uniforce MIS Services of Georgia, Inc.
d/b/a Brannon & Tully, Inc.
25. Uniforce Medical Office Support, Inc.
26. Uniforce Information Services of Texas, Inc.
27. Temporary Help Industry Servicing Co., Inc.
28. Montare International, Inc.
29. Brannon & Tully, Inc.
30. Staffing Industry Funding & Support, Inc.
31. Professional Staffing Funding & Support, Inc.
32. Brentwood Service Group, Inc.
33. Tempfunds International, Inc.
34. Computer Consultants Funding & Support, Inc.
35. Thisco of Canada, Inc.
36. Camelot Consulting Group, Inc.
37. Camelot Communications Group, Inc.
38. Camelot Control Group, Inc.
39. Camelot Group, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
COMFORCE Corporation on Form S-3 (Registration Nos. 333-60403, 333-31167,
333-43321, 333-44351 and 333-47941) and Form S-8 (Registration Nos. 333-32271
and 333-46787) of our report dated February 23, 1998 on our audits of the
consolidated financial statements and financial statement schedules of COMFORCE
Corporation and Subsidiaries as of December 31, 1997 and 1996 and for the years
ended December 31, 1997, 1996 and 1995, which report is included in this Annual
Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Melville, New York
February 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000006814
<NAME> COMFORCE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,512
<SECURITIES> 0
<RECEIVABLES> 73,924
<ALLOWANCES> 808
<INVENTORY> 0
<CURRENT-ASSETS> 88,922
<PP&E> 4,899
<DEPRECIATION> 628
<TOTAL-ASSETS> 236,185
<CURRENT-LIABILITIES> 0
<BONDS> 0
1
0
<COMMON> 153
<OTHER-SE> 39,248
<TOTAL-LIABILITY-AND-EQUITY> 236,185
<SALES> 216,521
<TOTAL-REVENUES> 216,521
<CGS> 186,455
<TOTAL-COSTS> 19,718
<OTHER-EXPENSES> 3,483
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,916
<INCOME-PRETAX> (5,051)
<INCOME-TAX> (1,351)
<INCOME-CONTINUING> 3,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,437)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
